US-Israel Attacks on Iran Threaten Global Oil Prices Approaching US$100

Attacks by the United States and Israel against Iran could severely disrupt global crude oil supplies and cause prices to surge to levels not seen in recent years, according to analysis by major energy analysts.

Iran remains one of the world’s ten largest oil producers despite a sharp decline in production since the 1970s, largely due to US sanctions. According to Arne Lohmann Rasmussen, head analyst at Global Risk Management, Iran was the world’s third-largest producer in 1974, after the United States and Saudi Arabia and ahead of Russia, producing approximately six million barrels per day.

Currently, Iran produces around 3.1 million barrels per day, according to OPEC, the oil-producing cartel of which Iran is a member. This remains a significant volume. The Islamic Republic is believed to possess the world’s third-largest crude oil reserves, reinforcing its strategic importance. Moreover, Iran’s oil industry is considerably more viable than that of Venezuela, another nation that has faced US sanctions for years.

The primary risk to oil markets remains a potential blockade of the Strait of Hormuz, frequently threatened by Iran. This waterway is the main shipping route connecting oil-rich Middle Eastern producers with the rest of the world. Approximately 20 million barrels of crude oil pass through it daily in 2024, equivalent to nearly 20 percent of global liquid oil consumption, according to the US Energy Information Administration (EIA).

The strait is particularly vulnerable because of its narrow width of approximately 50 kilometres and shallow depth not exceeding 60 metres. Even doubt about security in the strait would force many vessels to face transit difficulties for insurance reasons, as premiums would rise sharply, Rasmussen noted. According to Saxo Bank analyst Ole Hansen, only Saudi Arabia and the United Arab Emirates possess meaningful alternative pipeline infrastructure. Such routes can transport a maximum of 2.6 million barrels daily, the EIA noted.

Iranian crude oil is relatively easy and inexpensive to extract. Production costs are as low as US$10 per barrel, making it highly profitable, according to Rasmussen. Only Saudi Arabia, Iraq, Kuwait, and the United Arab Emirates enjoy similarly low production costs. By comparison, major Western producers such as Canada and the United States typically face costs of US$40 to US$60 per barrel.

With extremely low costs, Iran gains disproportionate benefits from elevated global prices, a crucial factor for an economy heavily dependent on oil revenues. US sanctions imposed since the 1979 Islamic Revolution have left Iran with few export options, particularly after President Trump revived his maximum pressure policy against Teheran upon returning to the White House.

Last year, Washington targeted China’s independent “teapot” refineries with accusations that they purchase Iranian crude oil. However, China continues buying Iranian oil at below-market prices. Iran exports between 1.3 and 1.5 million barrels daily, with more than 80 percent destined for Chinese refineries due to US sanctions, according to Hansen.

Iran’s neighbouring countries, from Gulf states to Turkey and Pakistan, are concerned about potential Iranian retaliation, as the presence of US military sites in these nations places them within striking distance. They are aware that they remain vulnerable because Iran possesses sufficient medium-range missiles enabling attacks on vital points, in a worst-case scenario, according to Pierre Razoux, director of studies at the Mediterranean Foundation for Strategic Studies. At-risk infrastructure includes hydrocarbon centres as well as power plants and seawater desalination facilities.

Meanwhile, surging oil prices risk causing global inflation to escalate again, harming the global economy. Crude oil prices reaching US$100 per barrel for the first time since Russia’s invasion of Ukraine began in February 2022 could also damage Trump politically ahead of year-end midterm elections, particularly as he has promised cheap energy to American voters.