Iran’s oil production is just around 3.3 million barrels per day (bpd), less than its OPEC quota. It exports between 1.6 and 1.8 million bpd of crude and refined products. Compared to over 100 million bpd in global oil markets, this is an insignificant amount: if Iran’s oil all disappeared the market would be unaffected.
Yet global energy markets have been on edge since the exchange of fire began between Israel and Iran on Friday morning. Initially oil prices shot up by more than ten per cent before moderating to around 70 USD a barrel. That is the kind of rise caused by “a psychological effect” in times of crisis, when traders anticipate disruption of supply or demand.
But energy market fundamentals are so far sound, with oil supply in abundance to meet global demand and a surplus of around a million bpd. Even if the whole of Iran’s energy output is cut out of global markets due to being targeted by Israel, the supply side can cope. In fact, some OPEC members have enough spare capacity to produce up to four million bpd easily. Global demand is not growing at pace with the current slowdown of economic activity in major energy-consuming economies, either.
Due to its meagre oil output, Iran along with Libya is exempt from the OPEC production ceiling quota. As a result of decades of sanctions and economic siege, Iranian oil production dropped by almost half from more than six million bpd since the 1970s. Western sanctions because of Iran’s nuclear programme have curbed its oil exports. Only a few refineries in Asia import Iranian crude, though Tehran uses so-called Dark Fleets to circumvent sanctions and export more to their destinations. But all this would not account for more than half a million bpd.
It is therefore not the lack of Iranian oil that energy markets fear. The worry is rather about escalation of conflict leading to supply disruption from the Gulf and through the Strait of Hormuz, where almost a quarter of global oil supplies and a third of global Liquefied Natural Gas (LNG) pass. If Israel attacked the Iranian export terminals at Kharg Island, where almost ninety per cent of oil and refined products are shipped out of Iran, it might trigger unexpected retaliation.
A worst-case scenario would be that Iran blocks the Strait of Hormuz. Tehran threatened to do that before, but never followed through. Even during the so-called Tanker War of the 1980s, part of the years-long war between Iran and Iraq, the waterway was kept free. At the time, more than 200 oil tankers were bombed, and still shipments through Hormuz were not blocked.
Both the Gulf and Hormuz itself are very important to Iran, not only for energy exports but for most of its trade. By blocking its own main maritime outlet it would be hurting itself. Another reason that makes that possibility far-fetched is that the American fifth fleet, headquartered in Bahrain, wouldn’t stand idle in response to that development. The American president wants oil prices to stay low, so that petrol prices at the pumps in the US do not rise. China too relies heavily on maritime trade through the Gulf, whether to export manufactured goods to the re-export hub of Jebel Ali near Dubai or to import energy from the region.
That is why some analysts are not taking this week’s threat from Tehran to blockade Hormuz at face value. But the anxiety in the energy markets is not going away any time soon. On Saturday, the Financial Times quoted the CEO of the world’s largest publicly listed oil tanker company, Frontline, as saying that his company is refusing new contracts to sail into the Gulf through the Strait of Hormuz following Israel’s attack on Iran. Many other shippers are following suit, especially with rockets and bombers flying in the region.
Disruption of maritime transport in the Gulf is still possible even without the blockade of Hormuz. Iran can harass and intimidate what it considers enemy ships in the Gulf. In April last year, Iran’s Revolutionary Guards Corps (IRGC) seized the MSC Aries, a container ship controlled by Israel’s Ofer family, near the Strait of Hormuz, and forced the crew to sail it into Iranian waters.
The Iran-backed Yemeni Houthi militia has been targeting Israeli and Israel-bound ships in the Red Sea, disrupting maritime transport through Strait of Bab Al-Mandeb. It is not yet clear if the Houthis are stepping up their attacks on ships in support of Iran as they have done since the war on Gaza started. If Iran decided to escalate by disruption of maritime transport of oil, gas, and goods it can easily seek the Houthis’ support for maximum impact.
With oil supply exceeding demand in comfortable quantities, markets can absorb the initial shock of Friday’s Israeli attacks and subsequent Iranian retaliation. But if the war escalates, oil and gas prices will keep going up. That would be disastrous, not only for energy consumers worldwide but also for the global economy in its current, fragile state.
No doubt the Iranian leadership is aware of such an impact, and even though its rhetoric against the US is intensifying, they are pragmatic enough to keep a window open for a settlement. They might not be ready to lose their main trading partners in Asia, including China.
* A version of this article appears in print in the 19 June, 2025 edition of Al-Ahram Weekly
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