Backup supply cuts Hormuz crude costs 34% as disruption risk rises

Backup supply arrangements can cut crude procurement costs through the Strait of Hormuz by up to 34 percent, with savings widening from $5.4 million to $7.8 million as disruption risk rises, according to a new model. The study, published in Frontiers in Marine Science, compares sole reliance on a primary Persian Gulf supplier against a dual-supplier strategy that pre-reserves capacity with a backup source.

"The higher the disruption risk, the more significant the cost-saving effect of the backup strategy," said Yanbin Yang, professor at Fudan University's School of Management and corresponding author of the study. "Backup sourcing provides an insurance-like effect, with marginal benefits greatest when primary supply becomes most unreliable."

The model, validated on a European refinery sourcing 90 percent of its crude from the Persian Gulf, found that introducing a backup supplier reduced total expected costs from $19.2 million to $12.6 million at a 20 percent disruption probability. As disruption risk climbed from 0.1 to 0.5, the optimal order from the primary supplier fell from 276,000 to 100,000 barrels while backup reservations rose from 112,000 to 140,000 barrels. At a 20 percent disruption probability, the backup reservation of 150,000 barrels covers 75 percent of average monthly demand.

The findings carry immediate relevance as Brent crude trades at $82.55 a barrel after rising 3.9 percent this week, with Saudi crude exports to the U.S. at zero and the Strait of Hormuz — which handles over 20 percent of global seaborne oil and roughly 20 million barrels per day — at the center of the U.S.-Iran conflict. President Donald Trump said Friday he would "soon" declare the strait U.S. territory, while Iran has positioned control of the waterway as a bargaining chip in negotiations to end the war that began Feb. 28.

The risk-transfer mechanism behind the savings

The cost reduction stems from a structural difference between two cost types: the fixed reservation cost of the backup supplier is incurred upfront, while the high shortage cost is avoided when disruption occurs. The model shows that as shortage costs rise, buyers reduce orders from the primary supplier and increase backup reservations — a rational transfer of risk away from the unreliable source toward the more secure, though more expensive, option.

This substitution effect mirrors real-world behavior. A German chemical company maintained 75 percent of its production during the 2024 Strait of Hormuz crisis by relying on a Canadian backup supplier, avoiding major order losses. Tesla's Berlin plant, by contrast, halted production for 19 days during the 2023 Red Sea crisis with no backup arrangement in place. Saudi Arabia and the UAE operate pipelines that bypass the strait, providing up to 2.6 million barrels per day of unused capacity.

What backup capacity means for buyers and policymakers

The study's sensitivity analysis shows the cost-saving percentage rises from 32.1 percent to 34.4 percent as disruption probability increases from 0.1 to 0.3, confirming that backup sourcing becomes more valuable precisely when primary supply becomes most unreliable. The authors recommend that firms operating near chokepoints such as Hormuz, Bab el-Mandeb, or the South China Sea regularly assess disruption probability based on geopolitical and climate indicators and adjust primary and backup order quantities accordingly.

For policymakers, the quantified cost reduction offers a justification for supporting backup capacity arrangements. Governments could share part of the reservation cost for strategic goods like crude oil, LNG, or grain, reducing national exposure to chokepoint blockades. The study also suggests publishing transparent disruption probability indices for chokepoints — similar to the World Bank's logistics performance indicators — to help firms calibrate risk assumptions in procurement models.

The model has limitations, including assumptions of predictable demand distribution and continuous backup availability, which may not hold in extreme crises. The authors note that true cost savings in real-world scenarios could be higher than estimated because spot market prices often surge beyond linear assumptions during extreme events. Future research could extend the framework to multiple backup suppliers, dynamic demand patterns, and network-wide interactions among supply chain nodes.

This article is for informational purposes only and does not constitute investment advice.