The Strait of Hormuz Is Exposing a Blind Spot in the Energy Transition — Time

RESOLVING THE LEDGER

The Strait of Hormuz Is Exposing a Blind Spot in the Energy Transition — Time | AIPROPX

Vessels are pictured anchored in the Strait of Hormuz off Bandar Abbas in southern Iran on May 4. —Amirhossein KHORGOOEI / ISNA / AFP—Getty Images

Every week brings more twists and turns to the war in Iran and the crisis that has kept the Strait of Hormuz , a key lane for fuel shipments, mostly closed. As the crisis has continued, electrification and non-fossil fuel power has received more and more attention. In the long run, electric vehicles can displace the oil that is refined into fuel for the internal combustion engine. And renewables can displace natural gas in the power sector. Largely missing from the public discussion is the opportunity to catalyze a broader shift to alternative fuels across sectors that can’t be electrified easily.

The closure of the Strait of Hormuz hasn’t just stopped the flow of natural gas and crude oil but has also simultaneously made it more difficult to get refined products—everything from jet fuel to cooking fuel—to market. In theory, both the rapid price increases and the present volatility should provide a strong incentive to invest in alternative fuels. The reality is more complicated. The same forces that make the case for alternative fuels also make it hard to invest right now.

There’s perhaps no better example to illustrate the challenge than jet fuel. Hundreds of thousands of barrels of jet fuel left the Strait of Hormuz every day before the crisis. In some places, including Europe, that supply had been central to keeping planes in the air. More than 40% of the continent’s jet fuel imports originated from the Persian Gulf last year, according to data from S&P Global.

Alternatives are already on the market. Sustainable Aviation Fuel (SAF), an umbrella term for a wide range of fuel sources including everything from recycled cooking fuel to plant-based fuels, is blended with jet fuel in many parts of the world, bringing down carbon emissions from flying. But in recent years SAF has been anywhere from 3 to 5 times more expensive than conventional jet fuel. The closure of the Strait of Hormuz has closed some of that gap leaving SAF prices closer to 1.5 to 2 times as expensive.

But, with higher fuel prices eating into airline profits, companies are now poorly positioned to take advantage of the moment. To facilitate SAF production, airlines typically agree to long-term agreements to purchase the fuel. With high levels of geopolitical uncertainty, this is not the moment for executives to commit to a price premium without a regulatory mandate. SAF may sound nice, but it remains unaffordable.

The refiners who make SAF, on the other hand, are enjoying record profit margins. But they, too, see too much uncertainty as prices fluctuate wildly. On earnings calls this summer they say they are more focused on improving operations and executing existing plans than investing in new projects.

At a national level, the thinking should be different. SAF is more expensive, but a government can now clearly see the differential as an energy security premium as well as a sustainability advantage. It’s well worth paying to protect the country’s economy in the event of a Hormuz-like situation.

The industry already sees this opportunity. Last year, a SAF executive corrected me when I used the word “sustainable.” It’s “synthetic aviation fuel.” Better optics, he said.

Even still, response from governments around the world has thus far been uneven. This moment has strengthened policymakers’ resolve in the European Union, where an airline SAF mandate has faced pushback from industry since it was signed into law in 2023. In the U.S., the SAF debate remains at a standstill. Last year, a tax incentive for SAF survived the gutting of the Inflation Reduction Act albeit at a reduced rate. Tax incentives may help move the market, but they’re not enough; governments can help coordinate the necessary infrastructure.

Even amid the uncertainty, the clever businesses—whether that’s airlines, refiners, fuel transport companies, or commodity traders—will be the ones that figure out how to deploy alternative fuels while mitigating risk.

SAF, of course, is just one example. Fuels represent nearly 80% of final energy consumption, and not everything can be electrified. “We have not had anything like the success in producing affordable, scalable, low-carbon fuels to displace oil,” says Ernie Moniz, a former U.S. Secretary of Energy who now runs the Energy Futures Initiative. “We need a lot of innovation on the fuel side.”

After decades of success innovating and deploying clean power alternatives, more work needs to be done on molecules. Today’s volatility is making the business case.