Consequences of a Possible Israeli Attack on Iran on Global Oil Markets

Following the missile attack by the Islamic Republic of Iran on Israel on the evening of October 1, there has been much speculation about the possibility of Israel retaliating with an attack on Iran's oil facilities. This warning is not only about the disruption of Iran's oil production affecting global markets; at least OPEC and allied countries led by Russia have the capacity to produce twice Iran's oil output. More importantly, if Iran is unable to produce or refine oil in response to Israeli attacks on its oil facilities, it may target the oil facilities of neighboring countries through its proxy groups, a tactic it has previously employed against Saudi oil facilities or tankers in the waters of the UAE and Oman. However, the fundamental issue will be Iran's own situation, which we will discuss further. OPEC statistics indicate that although Iran has the fourth-largest oil reserves in the world, its average share of global oil production over the past five years has been less than 2.5%. Last year, Iran produced 2.86 million barrels of oil, which has now increased to 3.3 million barrels, slightly over three percent of global oil production. Furthermore, OPEC data shows that the decline in Iran's oil production and exports has not led to significant spikes in global oil prices in any year. In this context, Axios reported, citing Israeli officials, that Israel's options for retaliating against Iran's missile attack include targeting its oil production and refinery facilities. Both could lead to an increase in global oil prices and, consequently, enhance Donald Trump's chances against his electoral rival Kamala Harris for leadership of the United States in the upcoming November elections. Reuters, quoting energy experts and consulting firms, states that OPEC and allied countries have reduced their production in recent years to keep oil prices high and currently have an additional daily production capacity of 5.86 million barrels, which is nearly double Iran's crude oil production and 3.5 times Iran's total oil and gas condensate exports. However, the report emphasizes that in 2019, the drone attack by Iranian proxy forces on Saudi oil facilities temporarily eliminated 50% of that country's crude oil production; a scenario that could repeat itself in the future. Iran could also target oil tankers that pass through the Strait of Hormuz, which carries one-fifth of the world's traded oil by sea. While it is plausible that Iran would target Saudi oil facilities, which currently account for 9.7% of global oil production, to disrupt global oil markets, it is unjustifiable given the improving relations between the two countries and would significantly boost Trump's chances in the upcoming U.S. presidential election, where he is strongly opposed to the ambitions of the Islamic Republic. Iran could target oil tankers in the Strait of Hormuz or close the strait; however, even if feasible, this would block a significant portion of its non-oil export and import routes. Iran has twice as much non-oil exports and imports from its southern waters as its oil exports, and if the Strait of Hormuz is blocked, a large part of its economy would come to a standstill. Last year, Iran had $36 billion in oil exports, equivalent to 10% of the country's total GDP. Additionally, nearly one-third of the government budget relies on revenues from domestic oil product sales, which are spent on subsidies and are vital for people's livelihoods. If Israel attacks Iran's refineries, a fuel and livelihood crisis for the people of the country will be inevitable. More importantly, according to a confidential oil ministry document obtained by Radio Farda this spring, Iran had only 1.07 billion liters of strategic gasoline reserves in April, sufficient for just eight days of domestic consumption. The situation was similar throughout the last year. For diesel, this fuel is only enough for two weeks of domestic consumption, and even in winter, when there is a gas shortage, it only meets one week's needs for industries, power plants, and transportation. If Israel targets Iran's refineries, the country will face a fuel crisis in less than a week and will need to import or smuggle fuel from Persian Gulf countries and keep the Strait of Hormuz open to compensate. This could lead to the creation of a black market for fuel in the country, a situation that has previously occurred in Venezuela and Lebanon, where the vast discrepancy between free and state-controlled fuel prices led to astronomical inflation.