Isfahan Refinery, one of the largest refineries in Iran. – Fatemeh Bahrami/Anadolu/Getty Images
As instability in Iran’s authoritarian regime intensifies, the United States is considering whether to strike at Iran.
Iran’s government is at its weakest in years, and less than two weeks after the United States overthrew Venezuela’s government, another OPEC country has been thrown into instability.
Protests have erupted in the streets across Iran, with the government’s deadly crackdown on protesters crossing a red line drawn by President Donald Trump. Trump has said his administration is considering an attack – although he said on Wednesday the United States would continue to “watch developments” to determine whether to take action against Iran.
Iran controls the third largest proven oil reserves on Earth and one of the world’s most important oil transportation corridors. These factors will shape the country’s future regardless of U.S. intervention.
According to OPEC data, Iran produces an average of about 3.2 million barrels of oil per day, accounting for about 4% of global crude oil production. That makes Iran the world’s sixth-largest oil producer – an impressive feat as the country faces heavy global sanctions that severely limit its potential customers. To circumvent sanctions, Iran operates a shadow fleet that exports oil at steep discounts.
But Iran’s potential far exceeds its actual output. The country has 209 million barrels of oil reserves, second only to Venezuela and Saudi Arabia. Its daily output is less than half of the 6.5 million barrels per day Iran produced before revolutionaries overthrew the shah in the mid-1970s.
Along with Venezuela, China is by far Iran’s largest customer: it buys 89% of Iran’s oil, according to the U.S. Energy Information Administration. The similarities don’t end there: Iran has also nationalized the country’s energy infrastructure after confiscating the assets of foreign oil companies over the past few decades.
“The 8th International Oil, Gas, Refining and Petrochemicals Exhibition was held in Tehran. – Fatemeh Bahrami/Anadolu/Getty Images
But Iran is far more important to global energy than Venezuela.
“Iran’s oil market is significantly larger than Venezuela’s,” said Luisa Palacios, former chairwoman of Citgo and now managing director of Columbia University’s Center on Global Energy Policy. “Developments in Iran are more important to oil markets in the short term due to the risk of oil supply disruptions.”
Oil prices have risen sharply amid threats of disruption to Iranian oil supplies. Crude prices rose to more than $61 a barrel on Wednesday amid threats of an attack on Iran, having fallen to $56 a barrel just a week after Trump promised U.S. oil companies to boost production in Venezuela.
If the US attacks Iran, oil prices could rise sharply – but that could depend on the extent of a possible attack and Iran’s response.
For example, as tensions between Israel and Iran escalated, crude oil prices surged 7% and topped $74 a barrel in early June. But after a historic U.S. attack on three Iranian nuclear facilities later that month, oil prices actually fell sharply as the U.S. avoided attacking the country’s oil infrastructure, while an Iranian missile attack on U.S. bases was intercepted and widely seen as symbolic.
However, Iran has the ability to inflict serious damage on oil markets if it chooses: The country controls the northern side of the Strait of Hormuz, a key point for other oil producers, through which 20 million barrels of crude oil (about a fifth of global daily production) flows. The strait is the only way to transport crude oil from the Persian Gulf to the rest of the world.
“If Iran chooses to strike back hard, their ability to cause chaos in the oil market is significant,” said Dan Pickering, founder and chief investment officer of Pickering Energy Partners.
This is why oil markets are getting nervous.
“Oil traders are effectively betting on chaos,” said Nigel Green, chief executive of deVere Group, a global financial advisory giant. “Traders appear to be bracing for a scenario in which the Strait of Hormuz transforms from a shipping route into a strategic pressure point capable of curbing global supply.”
Iran’s economy is surprisingly diverse for a sanctioned country, with oil accounting for only about 10% to 15% of the country’s gross domestic product. But the Iranian government’s finances rely heavily on the oil industry, with half of its revenue coming from crude oil exports.
“Oil plays a vital role in the current regime and will continue to do so if the regime changes,” Pickering said.
Iran also has an advantage over Venezuela, whose authoritarian regime has caused the country’s oil infrastructure to collapse over the past few decades. In contrast, Iran’s infrastructure is in good shape.
“The government of the future is not going to start from scratch,” Green said. “This will start with limited capabilities that, in the most likely scenario, can be unlocked.”
Helima Croft, head of global commodity strategy at Royal Bank of Canada Capital Markets, pointed out that of course, the premise is that Iran’s new government is friendly to the West and convinces countries around the world to abandon sanctions.
“It all depends on what happens next and what regime emerges after Khamenei,” Croft said.
In the short term, a regime change could push oil prices higher, as uncertainty over the political transition – including determining who will control the state-run oil industry – will increase risks in global crude markets. But in the long run, Iran’s new government could help stabilize and lower oil prices, especially if it adds the kind of transparency that Iran’s authoritarian government has blocked for decades.
Matt McManus, a former State Department official and visiting fellow at the National Center for Energy Analysis, said that could lead to a flood of oil entering global markets.
However, as with Venezuela, U.S. oil companies may have limited interest in entering Iran, at least initially.
Political stability and security will be required before any major U.S. oil company can become involved in Iran. With crude oil prices still quite low, oil companies are not rushing to seize new opportunities with dubious profits.
“As for Iran, it has a lot of resources,” said Mike Sommers, chief executive of the American Petroleum Institute, an oil industry trade group. “But any discussion about investment depends on political stability.”
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