The Israel-Iran conflict is once again casting a shadow over global energy markets, as the possibility of US military action against Iran looms large.
According to JPMorgan, direct military involvement of the US that leads to regime change in Iran, a founding member of OPEC and one of its top producers, could send oil prices soaring.
While the market has so far remained relatively calm, history shows that geopolitical turbulence involving major oil exporters rarely passes without economic consequences.
US attack on Iran could disrupt oil supply
Should the US join Israel in a full-scale military strike on Iranian nuclear facilities, the immediate risk is disruption to the West Asian country’s oil production and exports.
Iran currently produces about 3.3 million barrels of oil per day and exports as much as half of it. But this output could take a major hit in the event of sustained conflict or a change in regime, as it did during the 1979 Iranian revolution, when exports fell by nearly 5 mbd within months.
“Regime change in oil-producing nations such as Iran can have a profound impact on the country’s oil policy, production, and global prices in the short and long-term,” said Natasha Kaneva, the head of global commodities at JPM.
Investors should also note that even temporary disruptions, if the US attacks Iran, could jolt global supply chains.
That said, some risks remain less likely. Despite concerns, JPMorgan sees the probability of Iran attempting to close the Strait of Hormuz, through which roughly 20% of the world’s oil flows, as “very low,” given the overwhelming US naval presence in the area.
How high could oil prices go if Iran conflict escalates
If the US executes recently disclosed plans of bombing Iran, a short-term price spike in crude oil is all but guaranteed.
Based on past examples, including eight major regime changes in oil-rich nations since 1979, crude prices have historically jumped up to 76% at their peak compared to pre-crisis levels.
Over time, those prices tend to stabilise – but still settle around 30% higher on average than before the conflict, according to JPM’s senior expert Natasha Kaneva.
Oil soared from under $20 to over $34 per barrel during the last major upheaval in Iran in 1979, leading to a global recession.
Although global oil dynamics have changed since then, Iran’s role in the market remains significant.
While the market reaction so far has been muted, with Brent crude gaining just 10% since Israel launched air strikes last week, further escalation could change that overnight.
If conflict spreads or targets shift to vital energy infrastructure, price volatility could intensify sharply.
For now, energy traders and policymakers are watching the situation with caution.
Much will depend on whether rhetoric turns into action, and how long any potential conflict lasts. But one thing is clear: a U.S. strike on Iran would inject considerable uncertainty into an already fragile oil market.
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