The Israel-Iran Conflict and the Oil Market: Strategic Consequences

The strategic importance of the Strait of Hormuz is well worn. Roughly 15 million bbls/day crude oil pass through the strait and another 5 million bbls/day of petroleum products: 20% of global petroleum liquids consumption. While Saudi Arabia and the UAE have limited alternative pipeline routes, much of this oil could not be exported if the strait was closed.

There has been some stability in oil markets since an initial spike following Russia’s invasion of Ukraine. Depressed global economic growth has reduced oil demand and voluntary production cuts by OPEC+ countries, including Russia, mean that there is significant spare capacity. This has helped the market weather the Red Sea crisis, restrictions to the Panama Canal and the Russia-Ukraine war itself.

However, much of this spare production is in Saudi Arabia and to a lesser extent the UAE and can only be exported through the Strait of Hormuz. The other large source of near-term spare production is Russia. This makes the Strait a uniquely challenging chokepoint: closure would cut off not only current oil exports but also alternative sources of oil production.

The oil industry has long viewed Iranian threats to the Strait of Hormuz as a key geopolitical risk. In 2011, economic projections of the likely impact of sudden sanctions on Iranian oil exports caused President Barack Obama’s administration to hesitate when Congress pushed for tougher measures. The market remains sensitive to news out of Iran and the price of Brent crude oil increased by 7% overnight following Israel’s attacks. It will be one of the central factors as the US considers whether to join Israel in attacks on Iran’s nuclear facilities.

Iran’s capability to close the Strait appears intact, but at present is most useful as a deterrent. The regime is under pressure, has lost domestic air dominance and has limited conventional options, potentially leading Iranian leaders to resort to other levers. But this weakness has emboldened hawks in the region and the US to push harder for an end to Iran’s nuclear programme and to weaken the regime. Iran will not want to give them an excuse to act.

Should the US begin attacks on Iran this calculus could rapidly change. Disruption of oil exports through the Strait would put pressure on the US and Israel to end the conflict, both from within the US and internationally. But closure of the Straits would bring further international condemnation of Iran and damage its relationships with China, which imports much of its oil through the Strait. Israel and the US may respond by increasing the intensity of strikes.

As Iran’s strategic position weakens, perceptions of the threat diminish and the potential for miscalculation increases. Attacks by the Houthis on ships in the Red Sea show that asymmetric tactics can be effective in deterring commercial traffic. The risks of such an escalation for all sides are substantial.

Wider Strategic Implications

The threat to shipping in the Strait of Hormuz adds to the challenges faced by advocates of tougher sanctions on Russian oil exports. Russian oil exports remain the most effective remaining lever to target its economy: oil is the biggest foreign exchange earner as well as the largest single contributor to government revenue. Viable sanctions options exist, such as holding oil payments to Russia in escrow accounts, and might be politically palatable even in a tight oil market. But even these increase risk. To avoid damaging oil price shocks, any reduction in Russian oil imports would require other producers to fill the gap. But most alternative producers export through the Strait of Hormuz. As long as the Strait remains at risk, political appetite for additional sanctions on Russian oil will remain low.

However, should the Israel-Iran conflict end with an agreement or should Iran’s ability to disrupt oil exports prove less effective than anticipated, it could open a window for targeted sanctions on Russian oil. Not only is the oil market in a reasonable position to cope with disruption to Russian oil exports, but the threat of closing the Strait would have been exposed as hollow while Iran’s military position remains weak.

The Israel-Iran conflict highlights the growing risk of compounding crises impacting the oil market. With Iran and Russia – two major oil producers – in open conflict, the Houthis disrupting shipping in the Red Sea, the Panama Canal exposed to weather and climate-related risks and smaller oil producers struggling to attract investment, there is increasing potential for volatility and shocks. Future shocks could be more frequent and more difficult to mitigate.

© RUSI, 2025.

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