What Stable Oil Prices Say About Israel’s War With Iran

Iran has warned that it could close the Strait of Hormuz, one of the world’s most critical oil transit chokepoints, after the United States joined Israel’s attack on the Islamic Republic’s nuclear program. So far, however, markets aren’t buying it. This is because Iran is effectively threatening a self-blockade, which would hurt Iran and its ally China more than it would harm the United States.  

The Threat

A serious disruption in the Strait of Hormuz — the narrow mouth of the Persian Gulf through which nearly 20-30 percent of the world’s oil passes — could drive international oil prices up significantly. One analysis concluded that if Iran were able to close the strait for two months, prices could reach $120 per barrel. For now, however, oil prices are at around $77 per barrel (Brent crude), well below this year’s peak price of $82 dollars per barrel in January and down roughly 3 percent year-to-date.

Who Is the Most Vulnerable?

Iran is unlikely to attack global oil supply chains because it is highly exposed to retaliation. Iranian oil exports have grown rapidly (now up to 1.7 million barrels per day, or 2 percent of global demand), but more than 90 percent of its oil exports ship through the Strait of Hormuz from a single terminal — tiny Kharg Island — to China. The revenue from these exports makes up roughly a quarter to a third of Iran’s budget. The regime in Tehran is slowly building an alternate terminal on the Gulf of Oman, which would bypass the strait. However, U.S. sanctions, technical problems, and crude theft have slowed progress, with only modest exports to show for the $2 billion in construction costs. For now, Iran is highly dependent on Kharg Island, the Strait of Hormuz, and China.

To support this trade, China and Iran have established a complex network of barter deals in electronics, machinery, and chemicals (including chemicals for missile fuel) and renminbi payments to avoid U.S. sanctions. Iran cannot use the renminbi it earns from these sales in the global market because the currency is not freely tradeable, which means that Iran is locked into Chinese goods in exchange for oil. China, in turn, depends on the strait for 40 percent of its oil supply, with about 15 percent coming from Iran. If the strait were to close, China would face oil shortages in the near term and Iran could not buy products from China. Iran’s threat to block the strait is effectively a threat of self-blockade — preventing Iran from earning revenue and receiving materials and goods from China.  

By contrast, the United States is the world’s largest oil producer. Saudi Arabia, the second-largest producer, has built pipelines to export oil to the Red Sea, bypassing the strait. Russia, as China’s single-largest provider of oil and the third-largest global producer, however, would also benefit from higher prices, furthering Russia’s ability to wage war on Ukraine. 

Prepared and Protected

Although Iran’s threats to close the Strait of Hormuz are likely hollow, the United States should be ready to prevent price shocks as we approach the summer driving season. This includes preparing to release oil from the Strategic Petroleum Reserve if needed and expanding naval and intelligence operations near the Strait of Hormuz. The United States should also coordinate with oil-producing allies to temper potential price spikes, which could enrich Russia and fund its military aggression in Ukraine.

Daniel Swift is a senior research analyst for economics, finance, and trade for the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD). For more analysis from the author and FDD, please subscribe HERE. Follow FDD on X @FDD. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.