Key information
- OPEC has enough spare capacity to compensate for a complete shutdown of Iranian oil exports if Israel targets its facilities.
- However, the organization would face difficulties if Iran retaliates against Gulf countries’ facilities, which could significantly reduce effective reserve capacity.
- Wider conflict in the Middle East, accompanied by significant production disruptions, could lead to higher oil prices and fuel costs.
OPEC has enough spare capacity to compensate for a complete shutdown of Iranian oil exports if Israel targets its facilities. However, the organization would face difficulties if Iran retaliates against the Gulf countries’ facilities. Recent events include hundreds of missiles launched by Iran towards Israel in response to Israeli attacks and airstrikes. While tensions remain high and threats arise from both sides, OPEC+ has sufficient reserve capacity to potentially compensate for a loss of Iranian oil production.
OPEC+, which includes OPEC members and allies like Russia and Kazakhstan, is currently implementing production cuts to support prices amid weak global demand. This strategy sets aside millions of barrels of spare capacity. Saudi Arabia is estimated to be able to increase production by 3 million barrels per day, while the UAE could add 1.4 million barrels per day. At their recent meeting, OPEC+ members discussed respecting existing production cuts, but did not directly address the Israeli-Iranian conflict.
Regional vulnerability
Although OPEC has the capacity to absorb a potential loss of Iranian oil, a significant portion of that capacity resides in the Gulf region of the Middle East, making it vulnerable to escalation. Analysts suggest that effective reserve capacity could be significantly reduced if attacks on energy infrastructure in the region intensify. In such a scenario, the West could consider using its strategic reserves.
Israel has so far refrained from targeting Iranian oil facilities, but experts say it could eventually strike Iranian oil refining sites and the oil port on Kharg island, responsible for around 90 million hundred of the country’s crude exports. During the Iran-Iraq War in the 1980s, Iraq frequently targeted oil tankers around Kharg Island and threatened to destroy the oil terminal.
Expanded conflict
There are fears that Iran or its proxies could target energy operations in other regions to expand the impact of the conflict. In 2019, Iranian proxies carried out a drone attack on Saudi oil facilities, temporarily halting 50 percent of the kingdom’s crude production. Analysts predict that if tensions escalate further, Iran’s proxies could launch attacks on Middle Eastern oil producers, particularly Saudi Arabia. Although Saudi Arabia and Iran have seen some political rapprochement since 2019, relations remain strained.
Despite ongoing geopolitical events, such as the war in Ukraine and the conflict in the Middle East, oil prices have remained relatively stable in the range of $70 to $90 per barrel. The increase in U.S. production has helped ease fears of supply disruptions in the market. The United States produces 13 percent of the world’s crude oil and nearly 20 percent of the world’s liquid oil production, compared to 25 percent for OPEC and 40 percent for OPEC+.
Market Resilience
This diversification of supply from U.S. sources, combined with significant reserve capacity within OPEC, has resulted in a market that appears to be resilient to major supply shocks, despite regional tensions. However, a wider conflict in the Middle East, accompanied by significant production disruptions, would inevitably lead to higher oil prices and fuel costs. This potential price spike could impact the US presidential election campaign, particularly for Vice President Kamala Harris.
The United States is expected to encourage Israel to adopt a more measured response to the situation, in order to avoid a significant escalation of tensions.
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