What if Israel Targets Iranian Oil Facilities?

Anticipation is building around Israel’s potential response to the Iranian missile strike that targeted dozens of Israeli sites. According to U.S. and Israeli officials, Iranian oil installations could be a possible target, raising concerns about the impact on global oil prices and the countries that would bear the brunt of such actions.

In a press statement, U.S. President Joe Biden revealed ongoing discussions with Israeli officials about the possibility of Tel Aviv launching strikes against Iran’s oil facilities.

Former Israeli Prime Minister Ehud Barak speculated that Tel Aviv is likely to carry out a large-scale airstrike on Iran’s oil infrastructure, possibly accompanied by a symbolic attack on a military target linked to its nuclear program.

Iran’s Role in the Global Oil Market

As a key member of OPEC, Iran plays a significant role in the global oil market. Any Israeli attack that disrupts Tehran’s oil exports—currently at 1.7 million barrels per day—would have repercussions on global energy markets. Moreover, any Iranian retaliation targeting rival oil exporters in the Middle East could further destabilize the region, according to the Financial Times.

Iran’s Major Oil Facilities

Iran possesses a number of crucial oil facilities, including fields, refineries, and ports dedicated to export. The country produces around 4 million barrels of oil daily, accounting for about 4% of the world’s oil supply, and boasts one of the largest refining sectors in the Middle East, spread across 10 major locations.

Its three largest refineries are Esfahan Refinery, producing approximately 370,000 barrels per day, Abadan Refinery with 360,000 barrels per day, and Bandar Abbas Refinery, which produces 320,000 barrels per day, according to Standard & Poor’s.

Iran’s National Iranian Oil Refining and Distribution Company (NIORDC), a state-owned enterprise, holds full control over the transportation, storage, marketing, and distribution of oil products within Iran.

Kharg Island: Iran’s Oil Nerve Center

One of the most important oil export ports is Kharg Island, located in the southwest of Iran on the Persian Gulf. This port is the backbone of Iran’s oil exports, handling approximately 90% of the country’s crude shipments.

During the Iran-Iraq war, Kharg Island was frequently bombed by the Iraqi air force, with oil tanks being a primary target.

According to Financial Times, Samir Madani, CEO of TankerTrackers.com, reported that empty oil tankers near the island’s oil export station withdrew from the area following the Iranian missile attack on Israel.

Potential Losses from an Israeli Strike

Estimates from U.S. financial group Citigroup suggest that an Israeli strike on Iran’s smaller oil infrastructure could result in temporary disruptions in the country’s oil production.

However, an attack on Kharg Island could lead to more significant and long-term losses, potentially cutting production by 1.5 million barrels per day—roughly 1.4% of global oil consumption.

A report by Bloomberg suggests that any disruption to Iran’s oil industry would have severe economic consequences, particularly if refineries or export facilities—vital to Iran’s economy—are targeted.

According to energy and geopolitics expert Thomas O’Donnell, an attack on Iran’s refineries, a move supported by Washington, would deprive Iran of gasoline and diesel, preventing it from refining its crude oil and supplying its domestic market with essential products. This, in turn, would “cripple Iran’s internal economy.”

However, Iran’s oil exports to China, worth around $2 billion monthly, are a critical source of revenue, representing at least 5% of Iran’s total economic output. These exports fund the Iranian government, providing much-needed cash to pay for imports, according to The New York Times.

Impact of an Oil Disruption on China

China is the most affected nation by any potential Israeli strike on Iran’s oil infrastructure, purchasing 90% of Iran’s oil exports. Approximately 15% of China’s oil imports come from Iran, with the rest primarily sourced from Russia, Iraq, Kuwait, Saudi Arabia, and Angola. Beijing relies on global imports to meet nearly three-quarters of its oil consumption.

Roger Fouquet, an energy specialist at the National University of Singapore, said that any interruption in Iranian oil supplies could be swiftly replaced by increases in other supply sources for China.

In recent years, China has also expanded its oil reserves and built storage facilities, preparing for potential conflicts, such as a possible confrontation with Taiwan.

Thus, according to experts, any long-term impact on the Chinese economy due to Iranian oil disruptions would likely be minimal, provided that other countries ramp up their shipments.

How Would a Strike Affect Global Oil Prices?

O’Donnell suggests that targeting Iranian refineries could positively impact global markets, as Iran would likely send more crude oil into the market if it cannot refine its own. This could lead to a drop in oil prices.

Amid concerns over a potential Israeli strike on Iran’s oil industry, U.S. crude oil futures surged by around 5% last Thursday.

Dan Struyven, co-head of global commodities research at Goldman Sachs, told CNBC that “if you see a sustained decrease of a million barrels per day in Iranian production, we could witness a sharp rise in oil prices by about $20 per barrel next year.”

However, Struyven added that if key OPEC+ members like Saudi Arabia and the UAE can compensate for some of the lost production, the oil market might experience a smaller boost of around $10 per barrel.

O’Donnell explained that OPEC has the capacity to offset the shortfall, given that it is currently withholding at least five to six million barrels of oil per day from the market.

There is also capacity in the Western Hemisphere to contribute, so a crisis is unlikely, although there may be a temporary price spike, according to O’Donnell.

While some analysts believe OPEC+ has enough spare capacity to compensate for any disruption in Iranian exports, the world’s spare oil capacity remains heavily concentrated in the Middle East, especially among Gulf states, which may be at risk if the conflict escalates further.

The Real Risk to Global Oil Markets

Analysts suggest that the true danger lies not in a “limited escalation” between Iran and Israel but in the potential expansion of the conflict into a “regional oil war” in the Middle East, driven by Iran’s response to an Israeli attack.

Experts fear that Iran and its proxies could target energy operations across the region, including U.S. companies or allies of the United States.

Iran and its affiliates may also intensify attacks on oil tankers, causing supply disruptions and forcing shipping traffic to reroute.

Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy, warns that the most serious threat is an Iranian move to block the Strait of Hormuz, the maritime corridor through which one in five barrels of global oil passes every day.

On average, around 2,500 commercial ships pass through the Strait of Hormuz each month, according to Marine Traffic data. During the Iran-Iraq war in the 1980s, Iran mined the strait, igniting what became known as the “Tanker War.”

According to Financial Times, any move to close the strait would affect Iran’s own exports, making it an unlikely scenario. Bordoff commented, “I think the chances of this event are slim, and its execution would be challenging, even if Iran wished to pursue it.”

However, analysts at Citigroup note that if the Strait of Hormuz were closed, oil prices would surge “far beyond their previous record levels,” with Brent crude’s all-time high reaching $147.50 per barrel in 2008.