The massing of a US military force around Iran has been the primary cause of the 10 per cent rise in the oil price since the beginning of February. Oil traders have no more knowledge of President Trump’s intentions than I do but they anticipate disruption, perhaps to the flow of oil through the Straits of Hormuz, perhaps through retaliation by the Iranians against US allies in the region.

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They are right to be nervous about the short-term risks but the international industry and serious investors will be focused on the longer-term implications of US intervention.

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A regime under strain

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Almost 50 years since the sequence of events which led to the overthrow of the Shah, the Islamic Republic appears to be coming to the end of it’s turbulent life. The authority of the theocracy initiated by Ayatollah Khomeini and led now by the 86 year old Ayatollah Khamenei is falling away. The economy is broken, with Weimar style inflation. As in Venezuela a corrupt military including the Islamic Revolutionary Guard Corps is clinging to power but fear alone is not proving a sufficient deterrent to the overwhelming demand for change. Brave protestors are challenging the regime on the streets despite vicious repression. More and more women are ignoring the dress codes imposed by the Mullahs.

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The regime is now too scared to allow the public to use the internet and the religious leadership is effectively in hiding. Events in Tehran and across the country are a reminder that Iran even with the Ayatollahs in charge has managed to remain an open society. Half of the Iran’s 92 million people are under the age of 35 and as anyone who has been in Iran in recent years will confirm they show no great sign of wanting to live in a country run by octogenarian clerics.

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What would change mean?

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What would change - forced by the threat or perhaps by the hard reality of American armed force – mean for the oil market ?

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The starting point is the Iranian oil industry which has recovered remarkably over the last 5 years. Production has risen by around 50 per cent from the low point of 2021. Precise production figures cannot be independently verified but sit somewhere between 3.2 and 4 million barrels per day if condensates and other liquids are included. That is despite sanctions and without any substantial foreign investment in new technology. Revenue from the sale of that oil – mostly to China and other countries in Asia – is low because of the discounts required to secure sales on the grey market but is still by far the largest source of income for the Government in Tehran.

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Effective mechanisms to disguise the origins of the crude in the UAE and Malaysia mean that trade volumes have been maintained. This is very different to the situation in Venezuela where decades of neglect, underinvestment and the corrupt diversion of revenues have steadily reduced production capacity. Venezuela has lost many of the highly skilled technicians who made the state-owned oil company PDVSA an internationally respected business. Those technicians now work in the US and elsewhere and show no desire to return a country which is still run by Chavistas. In Iran by contrast the main pillars of the professional industry remain in place and have been allowed to operate effectively. Sanctions have limited access to key technologies such as the enhanced recovery techniques necessary to maintain output in the older fields but as the production figures suggest the overall resilience of the industry has been remarkable.

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Resilience and constraint

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There has been no recent independent assessment of the technical state of the industry in Iran but it is clear that the older, larger fields such as Ahvaz and Marun are in decline. New fields are being developed – including the giant Azadegan field and the Yadavaran field which is shared with Iraq. For the moment, however new developments are unlikely to be able to do more than maintain current levels of production as long as sanctions remain in place. The best estimates suggest that if sanctions were removed Iran could add a few hundred thousand barrels per day to current production levels over a period of 12 to 18 months.

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The limits of escalation

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Recent market concern has focused on the notion that an open conflict could cut off substantial supplies of oil to the international market from Iran and from its neighbours.

The war could in theory disrupt output temporarily, but the Iranian regime is unlikely to want to close the Straits of Hormuz given the importance of getting its own exports to market. Attacks on other producers around the Gulf also seem unlikely because the consequences would automatically strengthen the American led coalition against Tehran. Any disruption would need to be huge in scale and sustained for a long period to make any material difference in a global oil market which is currently very fully supplied.

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On the US side, President Trump who repeatedly stresses his desire to see lower oil and gas prices for American consumers is unlikely to attack the Iranian oil fields or the export terminals. The more likely targets are the communications infrastructure, the bases of IRGC and above all any remaining nuclear sites which the Americans have been able to identify. A quick victory particularly on the nuclear agenda seems from the available evidence to be Mr Trump’s desired outcome. Sanctions would then presumably be lifted gradually in return for adherence to the nuclear deal. The idea that there is an emerging Trump doctrine of international relations will provoke mocking laughter among many readers but there is certainly a case for saying that he believes in the combination of using military threats and limited targeted action as sticks balanced against economic carrots as the keys to success.

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The most likely outcome in Iran therefore is not regime change – never an attractive prospect for Washington – but a change of policy under a cloak of continuity.

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Steady in the short term

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On this basis the oil market will be little changed in the short term. Iranian oil exports are unlikely to be cut off and equally unlikely to be dramatically increased in scale in the short to medium term.

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More interesting to the industry is the prospect that the regime in Tehran will, in the interests of its own survival, refocus on the economic agenda. That could lead to a reopening of the country to international investment starting with the oil and gas sector. Large areas of the country remain to be explored using current Western technology.

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The bigger prize beneath the surface

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The life of existing oil fields could be extended but even more important and consequential would be a serious expansion of the natural gas business. In addition to further development of South Pars – the world’s largest gas field which is shared with Qatar, Iran holds some 1,200 trillion cubic feet of undeveloped natural gas both on and offshore. That level of reserves is on a scale matched only by Qatar and Russia. For the moment most of the gas produced goes to the domestic market but a major expansion would be led by export growth. Geographically Iran is ideally placed to become the natural supplier of both oil and gas to India and to the expanding economies of Asia.

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There could in short be something of a gold rush – a view supported by the number of energy companies already watching Iran and building links where they can from offices in the Gulf and Amman.

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Friction and opportunity

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Change will not be instant and could involve resistance from those among the current leadership in Iran who would be liable to lose out. Iran, however, is historically a trading nation and it is reasonable to expect that international engagement will be far more welcome in Tehran and than was the case in Baghdad in 2003.

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There is one more dimension which President Trump has perhaps not taken into account. If Iranian gas were developed in substantial quantities – something which could be done relatively quickly - the global gas market would be severely disrupted. Gas demand is growing but there are clearly more potential suppliers than customers. Iranian gas because of the volumes involved would be relatively low cost and the links by pipelines or LNG facilities to markets such as India could easily be put in place.

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The most likely response to oversupply would be the shutting in of some of the US production and export capacity which has grown rapidly over the last few years as the latest phase in the US shale revolution. This year alone seven major new LNG export facilities with a combined capacity of over 10 bcf/day are due to come into operation in Texas and Louisiana. Over the last decade US gas exports have risen from zero to some 13.7 bcf/day in 2025 and on some predictions could rise to 26 bcf by 2030.

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A lesson closer to home

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Events in Iran, and even possibly in Russia – another gas producer which would be delighted to restore its trade with Europe in the event of a settlement in Ukraine could pose a direct threat to those exports. With the US gas market more than fully supplied any constraint in export growth would damage the shale industry as a whole. The shale sector is highly price sensitive and, in many cases, production can be temporarily shut in if the short-term economics do not work.

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The US is more than self sufficient in energy - which means that exports and therefore the volumes of production required are vulnerable to changes in the global market. Mr Trump knows the property business – he may now be about to get a lesson in how the energy industry works.

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Nick Butler,
Energy Expert and Visiting Professor, King's College, London

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