The soaring cost of shipping is lifting the price of oil for consumers

The price of oil is only part of what determines the cost to supply the world with fuel. Crude oil and the products refined from it must travel – often thousands of kilometres by specialised marine tankers – from producing regions and refining centres to the places where they are consumed. Typically, transport makes up a small proportion of the overall price of oil, but when shipping becomes more expensive, costs can mount across the supply chain.

That pressure is now building across global oil markets, which have been repeatedly roiled by the war in the Middle East since February. While attention has focused on the availability of Gulf crude oil and the re-opening of trade routes through the Strait of Hormuz, freight costs have also soared in recent weeks – making it far more expensive to move crude and oil products around the world.

In September, tanker rates surged to historic highs. By mid-October, the cost of shipping crude from the Middle East Gulf to Asia on a large tanker had climbed to over $37 per barrel, more than five times its level before the war began.

For some refiners, especially those in Asia, these soaring transport costs can mean the difference between a profitable operation and a loss-making one. For economies heavily reliant on imports, higher freight rates add further upwards pressure on energy costs.

Since the outbreak of the conflict, vessel congestion around the Strait of Hormuz, the rerouting of trade flows and growing use of ship-to-ship transfers have lengthened cargo delivery times and reduced fleet efficiency, driving freight rates higher.

Under normal conditions, tankers travel between producers and consumers along established trade routes. The faster these journeys can be completed, the more oil the global fleet can transport. But rerouting cargoes or transferring them between ships ties up vessels for longer and reduces the number available for hire, causing freight rates to rise sharply.

Shipping costs had already risen following Russia’s full-scale invasion of Ukraine, which triggered a reshuffling of global crude and oil product trade. The rerouting of vessels following the European and G7 ban on Russian oil disrupted established trade flows. The increase in the number of vessels operating outside conventional shipping arrangements – the so-called shadow fleet, used to circumvent sanctions and carry Russian and Iranian oil – has reduced the pool of ships available to the wider market.

The latest rally in freight rates followed a series of drone attacks on Saudi Arabia’s East-West crude oil pipeline on 11 September 2026. The pipeline has provided a critical bypass route for Saudi crude exports during the crisis, allowing oil to reach the Red Sea without having to pass through Hormuz.

The temporary suspension of pipeline flows coincided with a ramp-up in Chinese buying, resulting in more Saudi oil moving through the Strait of Hormuz and pushing up demand for tankers. At the same time, the temporary loss of pipeline crude from the Saudi west coast left very large crude carriers (VLCCs) positioned at Sidi Kerir, off the coast of Egypt in the Mediterranean, without expected cargoes, forcing ship charterers to scramble for alternative crude supplies and vessels to transport them. This compounded an already tight freight market following the Houthis’ maritime blockade of Saudi navigation through the Bab el-Mandeb Strait, which had lengthened voyage times and reduced fleet efficiency.

Saudi Arabia moved swiftly and effectively to repair and reopen the East-West Pipeline within a matter of days. However, these recent disruptions, combined with severely curtailed Saudi exports through the Bab el-Mandeb Strait, mean that the repercussions are being felt at both ends of the oil trade. Importers face higher costs to receive crude and oil products, while exporters face downward pressure on the prices they receive for their oil.

As vessels spend longer on disrupted routes, demand has spilled over into smaller tankers. Instead of using VLCCs, charterers have been splitting crude cargoes across smaller Suezmax and Aframax vessels, driving up demand for both.

In the third quarter of 2026, demand for these two tanker classes, measured on a tonne-mile basis – which accounts for both the volume of cargo transported and the distance it travels – was around 20% higher than a year earlier. By mid-October, shipping crude from West Africa to Europe on a Suezmax vessel cost over $22 per barrel, more than four times pre-conflict levels. North Sea Aframax rates also tripled, reaching over $6 per barrel.

The impact has extended into the product tanker market. Exceptionally high earnings in crude shipping have encouraged some owners to use Long Range 2 (LR2) vessels – the largest tankers commonly used for long-haul shipments of oil products – to transport crude instead. As a result, oil product cargoes have been redistributed across the fleet of smaller vessels, tightening shipping capacity throughout the product tanker market. Freight rates for Long Range 1 (LR1) tankers travelling from the Middle East Gulf to Japan were nearly $27 per barrel in mid-October, five times higher than before the conflict.

Further disruptions to global oil trade could tighten tanker markets even more. The prospect of a US diesel export ban added to concerns of further trade dislocation in September. Such a measure would have reduced demand for tankers in the Atlantic Basin but increased the need for longer-distance shipments from Asia to Europe and Latin America.

The most significant impact of record-high freight rates on refining profitability has been in Asia, where refiners depend heavily on Middle Eastern crude. They have faced some of the highest transport costs as cargoes are shuttled through the Strait of Hormuz to secondary tankers for onward delivery to Asia.

By mid-October, charter rates for VLCCs on the Middle East Gulf-to-Asia route had soared to over $1.3 million a day. At such high levels, shipping costs can erode the value refiners would otherwise earn from processing crude into oil products. In September, this surge in delivered crude costs pushed margins for Asian refiners processing crude from the Middle East into negative territory.

Until recently, robust refining margins in Europe allowed refiners to absorb substantially higher transport costs. However, the rise in crude prices during the second half of September also started to strain their profitability.

Refiners can try to limit their exposure by buying alternative crude grades, including lighter, lower-sulphur oil from the United States. But shipping costs have risen on those routes too. By mid-October, transporting crude from the US Gulf Coast to Singapore cost around $33 per barrel, while the cost to move crude to Europe was $24 per barrel, over four times pre-conflict levels.

This leaves many refiners facing difficult choices: accept sharply higher costs for the crude they process, switch to less optimal crude grades that may reduce product yields, or cut operating rates. The last option could further tighten global supplies of diesel, kerosene and other oil products, adding upward pressure to prices and hence on consumers.

Restoring oil production and a full reopening of the Strait of Hormuz will be essential to easing the disruption to oil markets. However, even if security conditions in the Gulf improve, high export volumes, efforts to rebuild depleted crude oil and oil product stocks and persistent inefficiencies in shipping routes could continue to constrain tanker availability and keep shipping rates elevated for some time.