Iran’s entry into open conflict in the Middle East presents many possibilities for the evolution of this conflict. The most immediate and concerning economic consequence would be if Israel were to target critical infrastructure within Iran’s oil export network. This possibility was highlighted on Wednesday by the American digital media outlet Axios. Such an attack would not only threaten the regime’s main source of revenue: it would also increase the pressure on oil prices, which have already risen for five consecutive days.. In response, other major producing nations in the Gulf may be compelled to increase their oil supply to the market to make up for the potential loss, and likely provoke Tehran into a far more severe reaction than the limited attack carried out on Tuesday, which resulted in one death and minimal damage.
The Iranian oil industry constitutes approximately 20% of the nation’s gross domestic product and serves as its largest reserve source. According to Viktor Katona, head of oil analysis at the Kpler consulting firm, it is also the “most fragile” link in Iran’s economic structure. “Therefore, it could be a target for Israel, particularly the ports,” he emphasized in an email. Most of the country’s fossil exports flow through a single maritime terminal: Jark Island in the Persian Gulf. “An attack on the refineries, however, is unlikely to have significant effects,” Katona believes.
The majority of Iran’s oil wells are situated in the southwestern region, near the borders with Iraq and Kuwait, which is one of the most oil-rich subregions in the world and close to Masjed Suleiman, the first discovered oil field in the country over a century ago. The refineries, by contrast, are spread across its vast territory (1.6 million square kilometers, three times the size of Spain), with major facilities located near the capital, Tehran, and the Caspian Sea.
Recent Recovery
Despite being hindered by sanctions and a long-standing shortage of investment, Iran’s presence in the global oil market (nearly 4%) has regained momentum in recent years, especially following the Russian invasion of Ukraine, which opened up a significant market for its production. Today, despite enduring Western sanctions that remain in place, its exports hover around 3.2 million barrels per day, which is just half a million barrels short of its potential capacity. In short, it ranks as the third-largest producer in the Organization of Petroleum Exporting Countries (OPEC), following Saudi Arabia and Iraq, and is the seventh-largest in the world.
Iran’s oil sector heavily depends on purchases from countries that do not enforce US sanctions, with China being its largest partner, accounting for nearly 95% of its total trade. “An Israeli attack would infuriate China,” Katona stresses. This would not only be due to China importing one-sixth of its foreign crude oil from Iran but also because the crude oil supplied by Iran is offered at substantially lower prices compared to the market rate. “Any reduction in Iranian oil volumes would impact the global market, especially in Asia,” the Kpler analyst adds.
Iran possesses the third-largest oil reserves in the world (over 200 billion barrels, constituting 12% of the global total), surpassed only by Venezuela and Saudi Arabia. This positions it significantly ahead of other oil superpowers like Canada (the fourth-largest producer globally), Iraq (the fifth-largest), and far ahead of the United States (which produces the most crude oil daily but whose reserves exceed 50 billion barrels), or Russia (the second-largest producer but eighth in reserves, with about 80 billion barrels).
Vast Gas Reserves
While oil remains Iran’s primary source of income, with exports, according to official figures, exceeding 35 billion dollars (about 32 billion euros) annually, it is not the only crucial energy resource for its economy. Iran’s influence in the gas market is even greater: last year, it was the third-largest producer in the world, according to data from the Energy Institute, following the United States— which has increased production pace in recent months to fill the gap left by Russia in Europe— and Russia itself. Iran has the largest gas reserves in OPEC—almost half of the cartel’s gas is in Iran—and the second largest globally, surpassed only by Russia.
Iran’s energy dominance also stems from its geographical location. It wields nearly absolute control over the Strait of Hormuz, which connects the Persian and Oman Gulfs and through which one-fifth of the world’s daily traded crude oil passes, involving around a thousand tankers daily. This strait is also the route for nearly all cargoes arriving in Europe, including liquefied natural gas (LNG) from Saudi Arabia, the UAE, or Qatar, which is essential to replace the fuel previously supplied by Russia.
The potential closure of Hormuz—an extreme scenario that few analysts consider likely in the short term—would escalate the economic conflict to a whole new level. First, within the region itself: “Iraq, Qatar, Bahrain, and Kuwait would find themselves unable to export their oil,” says Katona. “Moreover, both Saudi Arabia and the United Arab Emirates would have their export capacities severely limited.” Second, concerning prices, Iranian retaliation against Israel has already set the stage: the price of oil has increased by seven dollars this week, approaching nearly 78 dollars per barrel, still far from the over 120 dollars seen in the summer of 2022 during the peak of the Russian invasion of Ukraine.
Iran’s Oil Industry: Geopolitical Implications and Market Dynamics
The Iranian oil industry plays a crucial role in the global energy market, contributing to approximately 20% of the country’s Gross Domestic Product (GDP). Given the current geopolitical environment and the ongoing tensions in the Middle East, understanding the vulnerabilities and dynamics of Iran’s oil sector is essential.
Impact of Geopolitical Tensions on Oil Exports
Recent developments indicate that an escalation in military actions around Iran could lead to significant disruptions in oil exports. An attack by Israel on Iranian oil infrastructure may severely impact Iran’s capacity to export its crude oil, which currently amounts to around 3.2 million barrels a day. This scenario could further strain global oil supplies, potentially increasing prices at the pump.
Key Infrastructure Vulnerabilities
The vulnerability of Iran’s oil infrastructure cannot be overstated. Most of Iran’s oil exports are channeled through a single maritime terminal, Jark Island, located in the Persian Gulf. Here’s a brief overview of Iran’s oil infrastructure:
- Key Oil Fields: Majority located in the southwestern region, near borders with Iraq and Kuwait.
- Refineries: Distributed across the country, among important locations like Tehran and near the Caspian Sea.
Iran’s Oil Production and Export Capacity
Despite enduring years of sanctions and investment deficits, Iran regained a foothold in the global oil market, particularly after the onset of the Russian invasion of Ukraine. The country has effectively re-established itself as a significant player among OPEC nations.
| Country | Oil Production (Million Barrels/Day) | Global Ranking |
|---|---|---|
| Saudi Arabia | 10.0 | 1 |
| Iraq | 4.5 | 2 |
| Iran | 3.2 | 3 |
| United States | 11.5 | 4 |
Strategic Importance of Iran’s Geographic Location
Iran’s geographic position gives it a strategic advantage over critical maritime routes, particularly the Strait of Hormuz, which connects the Persian and Oman Gulfs. Approximately 20% of the world’s daily oil trade passes through this strait, emphasizing Iran’s significance in the global energy supply chain. A potential conflict affecting this region could drastically impact not only Iran’s oil exports but also those of other Gulf countries.
The Economic Ramifications of A Conflict
If Iran’s oil exports were disrupted significantly, the ramifications would extend beyond its borders:
- Regional Economies: Countries like Iraq, Saudi Arabia, and the UAE would struggle to maintain their export levels.
- Global Oil Prices: Any decline in Iranian oil volumes would likely lead to spikes in global oil prices, affecting economies worldwide.
Iran’s Gas Reserves and Production
In addition to oil, Iran boasts considerable gas reserves. It is the third-largest producer of natural gas globally, providing further leverage in energy markets. With the largest gas reserves within OPEC, almost half of the cartel’s gas supply originates from Iran. This dominance complements its oil wealth and solidifies its position as a key energy supplier.
Global Natural Gas Landscape
| Rank | Country | Natural Gas Production (Billion Cubic Meters) |
|---|---|---|
| 1 | United States | 934 |
| 2 | Russia | 698 |
| 3 | Iran | 250 |
Challenges Facing the Iranian Oil Sector
- Sanctions: Ongoing sanctions hinder foreign investment and technological advancement in Iran’s oil industry.
- Market Dependence: A significant portion of Iran’s oil is sold under reduced prices to countries like China, which could retaliate to any military confrontation.
- Environmental Issues: Aging infrastructure and regional conflicts raise concerns about the sustainability of oil production in Iran.
Potential Scenarios Moving Forward
As geopolitical tensions continue to rise, scenarios involving direct confrontations, economic sanctions, and market shifts will emerge. Key factors will likely include:
- Responses from China: Any military action by Israel could severely impact relations and trade dynamics with China.
- Effect on Global Oil Prices: Further sanctions or military actions could push prices higher, driving the need for alternative energy sources.
