The Strait of Hormuz crisis is creating a volatile cost-push trap for Saudi Arabia’s construction sector, threatening to upend the economic calculus that fueled the Kingdom’s recent construction boom with a nasty mix of surging oil prices and choked logistics. Since the strait’s closure, oil briefly touched USD 120 / bbl on Monday — the highest since June 2022 — before easing to USD 87.8 on hints of US de-escalation, leaving the industry on edge.

Why it matters

Oil is a primary construction driver, comprising 80% of input costs, affecting the cost of materials like steel, cement, and aluminum, as well as transport, Construction Week reports. “The impact would likely be felt through higher logistics costs, longer delivery times, and potential material shortages,” Craig Finlayson, regional senior director at Currie & Brown, tells EnterpriseAM.

The core issue, however, is volatility. “When energy markets become unstable it becomes much harder for contractors and clients to forecast costs and price projects with confidence,” Finlayson said. This shift moves the industry away from a demand-driven boom toward a period of supply uncertainty that is already resulting in contract delay notices as the chokepoint at Hormuz restricts the movement of both crude and construction materials, he said.

Even with the Red Sea, the Kingdom’s projects will feel the pinch: While projects like Neom and Red Sea Global utilize direct Suez Canal routes, developments in Riyadh and the Eastern Province rely on just-in-time deliveries through the Strait. The ports of Dammam and Jubail — critical entry points for Asian steel and MEP equipment — sit on the wrong side of the chokepoint, and even a temporary disruption creates lead-time uncertainty that is nearly impossible to price into active contracts, Construction Week said.

Looking back

Haven’t we seen this before? Not really. Unlike the 2022 windfall where USD 120 oil fueled an 8.7% GDP growth and accelerated giga-projects, the current physical chokepoint at the Strait of Hormuz has flipped the economic equation. “The difference now is that the key risk is supply chain disruption rather than simply higher oil revenues,” Finlayson said.

What this means: This leaves the Kingdom facing rising inflationary costs without the assured export revenue to offset the bill. For contractors, this means absorbing oil volatility — which drives 80% of input costs — without the trickle-down liquidity typical of a standard oil boom.

At USD 80 per barrel, the market is anxious — at USD 100, it shakes. Based on the 2022 precedent, analysts at Wood Mackenzie warned Construction Week that a breach of the USD 100 mark — highly possible if Hormuz remains contested — would trigger a 22% spike in structural steel and a 12% rise in cement prices. For now, Oxford Economics expects Brent crude to average USD 79 / bbl in 2Q 2026 — a USD 15 upward revision from February estimates — before potentially retreating if supply conditions normalize.

How contractors might react

For new contracts, contractors are “likely to begin pricing higher risk premiums” and adjust bids to hedge against the volatility, Finlayson said. This is “particularly challenging” for fixed-price agreements as the full weight of energy hikes and logistics disruptions has yet to filter through the supply chain, leaving contractors wary of cost risks they cannot confidently forecast.

For projects already underway, the impact will depend heavily on commercial terms. Those with escalation or fluctuation clauses may survive, but contracts without those mechanisms “could come under pressure if exceptional price increases materialize,” Finlayson noted. Where supply chain disruption leads to significant cost increases or delays, contractors are expected to rely on contractual relief provisions such as force majeure or exceptional event clauses, he said.

Find something certain and hold it tight: Finlayson advises clients to “protect certainty wherever possible.” He suggests “reviewing procurement strategies, diversifying supply chains and ensuring contracts include appropriate mechanisms to manage potential cost volatility.”

Our take? The industry may need to shift logistics to bypass the Strait of Hormuz entirely. By diverting materials to Red Sea ports like Jeddah or Yanbu, developers can prioritize certainty over immediate cost, despite higher inland trucking expenses to reach places like Riyadh. MSC has already begun offering inland alternatives to Hormuz, connecting King Abdullah and Jeddah ports to ports in the Arabian Gulf.

Tags: