Isfahan Refinery, one of the largest refineries in Iran. – Fatemeh Bahrami/Anadolu/Getty Images
The United States is considering whether to strike Iran as turmoil intensifies the country’s authoritarian regime.
The Iranian government is at its weakest point in years, destabilizing another OPEC nation less than two weeks after the United States toppled the Venezuelan government.
Protests erupted in the streets across Iran, and the government’s deadly crackdown on protesters crossed President Donald Trump’s red line. Trump has indicated that his administration is weighing an attack – although on Wednesday, Trump said the US would continue to “watch and see what the process is” to determine whether to take action against Iran.
Iran controls the third largest proven oil reserves on Earth and one of the most important oil shipping lines in the world. Those factors will shape the country’s future, regardless of whether the United States intervenes.
Iran produces about 3.2 million barrels of oil per day, on average, according to OPEC, accounting for about 4% of global crude production. This makes Iran the sixth largest oil producer in the world – an impressive feat, considering that Iran faces onerous sanctions around the world that have severely limited its potential customers. To overcome the sanctions, Iran operates a shadow fleet of vessels to export oil at a deep discount.
But Iran’s potential far exceeds its current production. The country is on 209 billion barrels of oil in reserve, behind only Venezuela and Saudi Arabia. And its daily output is less than half of the 6.5 million barrels a day that Iran produced in the mid-1970s before the revolutionaries overthrew the Shah.
Like Venezuela, China is by far Iran’s biggest customer: It will buy 97% of Iran’s oil in 2024, according to the US Energy Information Administration. The similarities don’t end there: Iran also nationalized the country’s energy infrastructure after expropriating the assets of foreign oil companies in past decades.
The 8th International Exhibition of Oil, Natural Gas, Refineries and Petrochemical organized in Tehran. – Fatemeh Bahrami/Anadolu/Getty Images
But Iran is far more important to global energy than Venezuela.
“Iran is significantly bigger than Venezuela for oil markets,” said Luisa Palacios, former president of Citgo and current managing director of Columbia University’s Global Energy Policy Center. “Developments for Iran are far more important for oil markets in the near future, given the risk of oil supply disruptions.”
The price of oil has already risen sharply due to the threat of disruption to Iran’s oil. Crude rose above $61 a barrel on Wednesday in response to threats of an attack on Iran – just a week after oil fell to $56 a barrel when Trump promised US oil companies to increase production in Venezuela. Oil fell 4%, back below $60, on Thursday morning after Trump suggested an attack was not imminent.
Oil could rise significantly more if the US strikes Iran – but that probably depends on the extent of the possible attack and Iran’s response.
For example, crude prices rose 7% and rose above $74 a barrel in early June as tensions rose between Israel and Iran. But prices actually fell sharply after the historic US attack on three Iranian nuclear facilities later that month because the US avoided attacking the country’s oil infrastructure – and Iran’s missile strikes on US bases were intercepted and widely seen as symbolic.
Iran has the power to inflict serious damage on the oil market, however, if it wants to: The country controls the northern side of the Strait of Hormuz, a pinch point for other oil-producing countries through which 20 million barrels of crude oil pass – about one-fifth of global daily production. The strait is the only way to transport crude oil from the Persian Gulf to the rest of the world.
“Iran’s ability to cause chaos in the oil markets is significant if they choose to comply,” said Dan Pickering, founder and chief investment officer at Pickering Energy Partners.
This is why the oil market is crashing.
“Oil traders are effectively betting on chaos,” said Nigel Green, CEO of global financial advisory giant deVere Group. “Traders appear to be positioning for a scenario where the Strait of Hormuz is transformed from a shipping route to a strategic pressure point capable of suffocating global supply.”
Iran has a surprisingly diversified economy for a sanctioned nation, with oil making up only about 10% to 15% of the country’s overall gross domestic product. But Iran’s government relies heavily on the oil industry for its finances, deriving half of its revenue from crude exports.
“Oil plays a critical 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 allowed the country’s oil infrastructure to crumble in recent decades. In contrast, Iran’s infrastructure is in decent shape.
“A future government would not be starting from scratch,” said Green. “It would start from a restricted capacity that could, in the most likely scenarios, be unlocked.”
Of course, this is if a new government in Iran is pro-Western, and persuades countries around the world to drop their sanctions, noted Helima Croft, head of global commodity strategy at RBC Capital Markets.
“It all depends on what comes next and what regime emerges after Khamenei,” Croft said.
In the near future, regime change could send oil prices higher, as the uncertainty of a political transition – including the determination of who will control the state-run oil industry – increases the risk to the global crude market. But a new government in Iran could help stabilize and reduce oil prices in the long term, especially if it increases the transparency that the current authoritarian Iranian government has maintained for decades.
That could put a significant amount of oil on the global market, according to Matt McManus, a former State Department official and visiting fellow at the National Center for Energy Analysis.
Like Venezuela, however, the interest of US oil companies in entering Iran may be limited, at least at first.
Political stability and security guarantees would have to precede the involvement of any major US oil company in Iran. And with crude prices still quite low, oil companies aren’t exactly chasing new opportunities with questionable profits.
“As for Iran, it has significant resources,” said Mike Sommers, CEO of the American Petroleum Institute, the oil industry trade group. “But any discussion of investment would depend on political stability.”
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