Isfahan Refinery, one of the largest refineries in Iran. – Fatemeh Bahrami/Anadolu/Getty Images
The US is considering whether to attack Iran as unrest grows for the country’s authoritarian regime.
Less than two weeks after the United States toppled Venezuela’s government, destabilizing another OPEC nation, Iran’s government is at its weakest in years.
Protests are taking to the streets across Iran, and the government’s deadly crackdown on protesters has crossed a red line drawn by President Donald Trump. Trump has signaled that his administration is weighing an attack — although on Wednesday, Trump said the United States 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 the world’s most important oil shipping routes. Those factors will shape the country’s future, regardless of US intervention.
According to OPEC, Iran produces about 3.2 million barrels of oil per day, about 4 percent of global crude production. This makes Iran the world’s sixth largest oil producer – an impressive feat, given that Iran faces burdensome global sanctions that have severely limited its potential customers. To circumvent sanctions, Iran operates a shadow fleet of vessels to export oil at a deep discount.
But Iran’s potential far exceeds its actual output. The country is sitting on 209 million barrels of oil reserves, behind only Venezuela and Saudi Arabia. And its daily output of 6.5 million barrels per day is less than half of what Iran produced before revolutionaries overthrew the Shah in the mid-1970s.
Like Venezuela, China is Iran’s biggest customer: it buys 89% of Iran’s oil, according to the US Energy Information Administration. The similarities don’t end there: Iran also nationalized the country’s energy infrastructure after seizing the assets of foreign oil companies over the past decades.
8th International Oil, Natural Gas, Refinery and Petrochemical Exhibition held in Tehran. – Fatemeh Bahrami/Anadolu/Getty Images
But Iran is more important to global energy than Venezuela.
“Iran is a much bigger oil market than Venezuela,” said Luisa Palacios, former Citgo president and current managing director of Columbia University’s Center for Global Energy Policy. “The development of Iran is very important for the oil market in the near term, because of the risk of oil supply disruption.”
Oil prices have already skyrocketed due to the threat of Iranian oil disruptions. Crude oil rose above $61 a barrel on Wednesday, a week after oil fell to $56 a barrel after Trump promised U.S. oil companies to increase output in Venezuela — in response to threats to attack Iran.
If the United States were to attack Iran, oil could go much higher – but that would likely depend on the extent of the attack and Iran’s response.
For example, crude oil prices surged 7% to above $74 a barrel in early June as tensions between Israel and Iran escalated. But prices actually fell sharply after the U.S.’s historic attacks on three Iranian nuclear facilities later that month as the U.S. avoided attacking the country’s oil infrastructure — and Iran’s missile strikes on U.S. bases were halted and widely seen as symbolic.
Iran has the power to inflict serious damage on the oil market, however, if it so chooses: The country controls the northern part of the Strait of Hormuz, a pinch point for other oil-producing countries through which 20 million barrels of crude oil – one-fifth of global production – flow daily. 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 market is significant if they choose to strike,” said Dan Pickering, founder and chief investment officer of Pickering Energy Partners.
Because of this, the oil market is falling.
“Oil traders are effectively betting on chaos,” said Nigel Green, CEO of global financial advisory giant Devereux Group. “Traders appear to be positioning for a scenario where the Strait of Hormuz changes from a shipping route to a strategic pressure point capable of choking off global supplies.”
Iran has a surprisingly diverse economy for an embargoed nation, with oil accounting for only 10% to 15% of the country’s gross domestic product. But Iran’s government is heavily dependent on the oil industry for its finances, bringing in half of its revenue from crude exports.
“Oil plays an important role in the current regime and will continue to do so if the regime changes,” Pickering said.
Iran also has a foothold in Venezuela, whose authoritarian regime has allowed the destruction of the country’s oil infrastructure over the past two decades. In contrast, Iran’s infrastructure is in good shape.
“The government of the future is not going to start from scratch,” Green said. “It will start with a limited capacity that may, in possible scenarios, be unlocked.”
Of course, if the new government in Iran is friendly to the West, it will convince countries around the world to lift their sanctions, noted Helima Croft, head of global commodity strategy at RBC Capital Markets.
“It all depends on what happens next and what kind of regime comes after Khamenei,” Croft said.
In the near term, regime change could push oil prices higher, as the uncertainty of the political transition — including determining who will control the state-run oil industry — will add risk to global crude markets. But a new government in Iran could help stabilize and lower oil prices in the long run, especially if it adds transparency that the current authoritarian Iranian government has blocked for decades.
That could bring significant amounts of oil to the global market, according to Matt McManus, a former State Department official and visiting fellow at the National Center for Energy Analysis.
As with Venezuela, however, the interest of US oil companies in moving into Iran may be limited, at least initially.
Guarantees of political stability and security are essential before any major US oil company involvement in Iran. And with crude prices still very low, oil companies are not rushing to new opportunities with questionable profits.
“For Iran, it has significant resources,” said Mike Sommers, CEO of the American Petroleum Institute, an oil industry trade group. But any discussion of investment depends on political stability.
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