The United States is evaluating potential responses to heightened domestic instability and protests in Iran, a situation that has drawn attention to the country's pivotal role in global oil markets, particularly concerning the Strait of Hormuz. Analysts and industry experts are assessing various scenarios, including potential disruptions to the critical waterway, which carries a significant portion of the world's seaborne oil.
Geopolitical Context and US Considerations
U.S. President Donald Trump has indicated that his administration is considering various options regarding Iran as the country experiences domestic protests and the government's response to them. The situation follows a period where the Iranian government is perceived by some as being in a weakened state. President Trump stated the U.S. would monitor the situation before making a decision, following initial indications that a government crackdown on protesters reportedly crossed a threshold previously established by the U.S.
Industry experts have differentiated potential U.S. strategies for Iran from those used in Venezuela. While a Venezuela-style approach involving sanctions and seizures to exert pressure is considered difficult to implement in Iran due to geographical distance and complex geopolitical dynamics, a playbook for Iran would more likely focus on sanctions and enforcement rather than military occupation or direct infrastructure attacks, according to analysts.
Iran's Oil Industry and Global Market Significance
Iran holds the world's third-largest proven oil reserves, estimated at 209 billion barrels, surpassed only by Venezuela and Saudi Arabia. The nation's oil production averages approximately 3.2 million barrels per day, contributing about 4% to global crude output and ranking Iran as the world's sixth-largest producer. Historically, Iran's daily production reached 6.5 million barrels per day in the mid-1970s. Despite international sanctions, Iran's oil sector has shown resilience, recovering from a low of 2 million barrels a day in the 1980s to stabilize around 4 million barrels per day.
Iran is the third-largest producer in OPEC, contributing approximately 4% of global demand and exporting around 2 million barrels per day. This compares to Venezuela, whose output covers about 1% of global demand with exports of around 350,000 barrels per day. This difference leads experts to believe that a destabilized situation in Iran would significantly affect global oil and financial markets, a contrast to reactions observed following developments in Venezuela's oil industry.
Both Iran and Venezuela face international sanctions on their oil industries, which have historically impeded access to modern drilling and extraction technology. Challenges include costly maintenance, a lack of replacement parts, insufficient structural investment, and state control over the industry, complicating foreign investment. Iranian refineries have struggled to produce petroleum products meeting Western quality expectations, partly due to past attacks on the country's midstream sector.
To circumvent sanctions, Iran, similar to Russia, utilizes a "shadow fleet" of oil tankers for discounted oil exports. China is identified as Iran's primary oil customer, acquiring over 90% of its exports in 2024. The National Iranian Tanker Company operates one of the world's largest tanker fleets for this purpose, with many tankers anchored in Southeast Asia near major buyers. Iranian ships reportedly transfer sanctioned oil onto non-Iranian-flagged vessels at sea to facilitate delivery.
Oil constitutes 10% to 15% of Iran's overall gross domestic product, but it accounts for half of the government's revenue. Iran's oil infrastructure is described as being in fair condition, in contrast to Venezuela's deteriorated assets.
The Strait of Hormuz: A Critical Chokepoint
The Strait of Hormuz is a narrow waterway connecting the Persian Gulf and the Arabian Sea, through which a substantial portion of global energy supplies transits. Estimates indicate that the strait facilitates the passage of approximately one-fifth (or about 20 million barrels per day) of daily global oil production, and between 25% to nearly one-third of the world's seaborne crude flows. In 2025, approximately 13 million barrels per day of crude oil transited the Strait of Hormuz, representing about 31% of global seaborne crude flows, according to Kpler data. The strait also affects roughly 20% of global liquefied natural gas (LNG) production.
There are warnings that a military confrontation or significant escalation could lead Iran to disrupt the Strait of Hormuz, especially if the Iranian regime perceives its power or existence to be at stake. Such a disruption is projected by some industry experts to trigger a global oil and gas crisis.
However, most analysts consider catastrophic outcomes, such as a full closure, to be low-probability events. Some suggest that Iran may lack the full capability to close the Strait, partly due to the presence of the U.S. Navy in the area. Even a temporary disruption, such as harassing tankers, is anticipated to have limited physical impact on global supply. Any closure attempt would likely be met with a show of force by the U.S. and its allies to restore flows.
Potential Market Impacts and Scenarios
The prospect of disruptions in Iran has influenced global oil prices. Crude prices increased above $61 a barrel following threats of a U.S. attack but later fell below $60 when an attack was suggested to not be imminent. Global benchmark Brent crude was around $63 a barrel, with U.S. West Texas Intermediate futures at $59 per barrel during a period of assessment.
Analysts project that oil prices could surge by $10 to $20 per barrel in an extreme escalation scenario where tankers cannot pass or energy infrastructure is damaged. An immediate oil price spike is anticipated following any U.S. attack, which would likely soften if the disruption appears temporary. Some investment bank estimates suggest that a blockade of the Strait of Hormuz could cause oil prices to rise sharply, potentially reaching $120 a barrel, and could also lead to higher gas prices in Europe due to the impact on LNG. Attacks on oil rigs and refineries in neighboring states are also cited as potential market impacting events.
Historically, market reactions have varied. In one instance in early June, crude prices rose 7% to over $74 a barrel amid escalating tensions between Israel and Iran. Following a U.S. attack on three Iranian nuclear facilities later that month, prices decreased, reportedly because the U.S. avoided targeting oil infrastructure and Iran's retaliatory missile attacks were deemed symbolic.
The oil market is currently observed to be leaning towards oversupply, with estimates suggesting an excess of roughly 2.5 million barrels per day in January and over 3 million barrels per day in February and March. Should Iranian oil production halt, while oil prices would sharply increase in the short term, other producers might eventually compensate for the supply gap. Strategic petroleum reserves from entities like the International Energy Agency could also be utilized to stabilize markets.
Domestic Unrest and Long-Term Implications
The social situation in Iran, marked by poorly maintained oil infrastructure, contributes to national budget strain due to energy subsidies. This situation has been linked to financial crisis, currency devaluation, hyperinflation, and nationwide protests. A significant concern for the Iranian government is the potential for oil sector workers to join protest movements, a factor that some historians attribute to the fall of the Shah in 1978. The impact of current unrest on the oil-rich Khuzestan province and oil exports remains unconfirmed.
The potential for a change in government in Iran carries distinct implications. In the short term, such a transition could lead to higher oil prices due to political uncertainties. However, a new government could potentially stabilize and reduce oil prices in the long term, particularly if it introduces greater transparency to the oil sector. The lifting of international sanctions would likely depend on the emergence of a new government perceived as favorable to Western nations. Investment by U.S. oil companies in Iran would likely require political stability and security assurances, though current lower crude prices may limit the immediate appeal for new investment in regions with perceived higher risk.