The proposed canal would allow oil tankers to bypass the Strait of Hormuz, where roughly 40 percent of the world's oil passes each day.
The massive project would have to accommodate oil tankers weighing more than 330,000 tons through mountains in Dubai to the Indian Ocean, The Times of London reported.
Iran has the ability to affect the transportation of some 17 million barrels of oil a day through the waterway linking the Persian Gulf to the Indian Ocean.
Other regional oil suppliers, such as Iraq and Kuwait, would benefit from an alternative energy transportation route, as Iran has said it would close the waterway if Western nations launched a military attack on the Islamic Republic.
The proposal includes a series of locks and canals from the port of Fajairah in the Indian Ocean across the Hajar Mountains.
Abu Dhabi has started work on an oil pipeline from Fajairah to bypass the Strait of Hormuz as well.