As Iran grapples with internal unrest and an authoritarian government weakened to its lowest point in years, the United States is weighing the option of a military strike against the country. This development follows closely on the heels of U.S. actions in Venezuela, another oil-rich nation whose government was recently toppled.
The unrest in Iran has manifested in widespread protests met by a government crackdown that President Donald Trump indicated crossed previously established red lines. While the administration has not committed to immediate military action, President Trump remarked on Wednesday that the U.S. would monitor ongoing developments carefully before deciding whether to proceed with any strike.
Iran's significance on the global energy stage derives from its vast oil reserves and critical maritime geography. With proven reserves ranked third worldwide and control over a major oil shipping pathway, Iran plays a crucial role in the global supply chain for crude oil.
Iran’s Oil Production and Market Role
According to OPEC data, Iran produces approximately 3.2 million barrels of oil daily, accounting for around 4% of global crude output. This positions Iran as the sixth-largest oil producer globally, an achievement made despite severe international sanctions that have curtailed its access to many customers. To circumvent these restrictions, Iran maintains a fleet of clandestine vessels exporting oil at discounted rates.
Despite these outputs, Iran’s actual production significantly undershoots its potential capacity. The country sits atop reserves of about 209 billion barrels—second only to Venezuela and Saudi Arabia. Its current daily production is less than half of the 6.5 million barrels per day exported during the mid-1970s prior to the overthrow of the Shah.
Iran’s main oil client is China, purchasing roughly 89% of its crude, data from the U.S. Energy Information Administration indicates. Both Iran and Venezuela have notably nationalized their oil industries following past expropriations of foreign company assets, yet Iran's role in the global oil market considerably surpasses Venezuela's.
Luisa Palacios, a former Citgo chairwoman and managing director at Columbia University’s Center on Global Energy Policy, emphasized Iran’s critical role, stating that developments involving Iran have a more immediate impact on oil markets due to the risk of supply disruptions.
Potential Impacts on Oil Prices
Crude oil prices have already experienced volatility in response to the heightened tensions and threats of U.S. military action in Iran. On Wednesday, crude futures surpassed $61 a barrel, rising from a recent low near $56 following commitments from President Trump that American oil producers would boost output in Venezuela.
Should the U.S. proceed with strikes on Iran, oil prices could climb substantially; however, the exact magnitude would depend on the nature and extent of the military engagement as well as Iran’s counteractions.
Historical precedents demonstrate this volatility: tensions between Israel and Iran in early June caused oil prices to jump 7%, surpassing $74 a barrel. Conversely, Oil prices dropped sharply following a U.S. attack on Iranian nuclear facilities the same month, mainly because the assault avoided impacting Iran’s oil infrastructure, and retaliatory strikes were intercepted and viewed largely as symbolic.
The strategic importance of the Strait of Hormuz, controlled in part by Iran, adds another layer of complexity. Approximately 20 million barrels of crude—around 20% of worldwide daily production—pass through this narrow maritime corridor, connecting Persian Gulf producers to international markets. Its role as a choke point means Iran has the capability to disrupt energy shipments significantly.
Dan Pickering, the founder and CIO of Pickering Energy Partners, commented on Iran's potential to induce significant market disruption if it chooses to escalate hostilities. Similarly, Nigel Green, CEO of deVere Group, noted that oil traders are anticipating possible upheaval, effectively betting on scenarios where the Strait of Hormuz could shift from a shipping route to a strategic tool capable of constricting global oil supply.
Economic and Political Implications of Regime Change
While oil constitutes only about 10% to 15% of Iran’s overall GDP, the government’s revenue depends heavily on crude exports, which make up approximately 50% of its income. This reliance underscores oil’s role as a critical pillar for the current regime.
Unlike Venezuela, where decades of authoritarian mismanagement have severely degraded oil infrastructure, Iran maintains relatively intact petroleum facilities, which could facilitate production ramp-up under future administrations.
Green further explained that any new government would build on an existing, though limited, capacity that could be expanded, rather than starting anew. However, the trajectory of Iran’s oil sector post-Khamenei depends largely on the nature of any regime change and its relations with the West.
Helima Croft, head of global commodity strategy at RBC Capital Markets, highlighted that a future government’s approach to the international community would determine whether sanctions could be lifted, affecting Iran’s reintegration into global oil markets.
In the short term, political transition within Iran could introduce volatility into oil markets, as uncertainties around control of the state-run oil sector and governance persist. Yet, a more transparent administration could potentially increase oil export volumes over time, thus stabilizing and possibly reducing global crude prices.
Matt McManus, a former State Department official and visiting fellow at the National Center for Energy Analytics, underscored this potential for enhanced market contributions if reforms encourage greater transparency and access.
Nevertheless, the eagerness of U.S. oil firms to re-engage with Iran's sector remains cautious. Political stability and security assurances are prerequisites before major investments occur, especially given the current low price environment which constrains profitability.
Mike Sommers, CEO of the American Petroleum Institute, noted that while Iran possesses significant resources, any investment dialogue depends critically on the restoration of political stability.