Why Iran's fate means more to oil markets than Venezuela's

Energy and resources experts agree — if the situation in Iran gets out of control it will have a massive impact on global oil and financial markets. That was not the case after the removal of Nicolas Maduro in Venezuela. Then again, Iran produces four times as much oil.

"Iran is the third-largest producer in OPEC. Its output covers roughly 4% of global demand. Venezuela only produces about 1%," says Andreas Goldthau, director of the Willy Brandt School of Public Policy at Germany's University of Erfurt. "Iran is estimated to export about 2 million barrels a day, in Venezuela it's only 350,000," the energy expert continues. "Global markets would feel it far more intensely if Iranian production stopped."

Moreover, fear of regional conflict in the Gulf weighs heavy in Iran's case. "Roughly half of the world's oil reserves and a third of global oil production is in the Middle East. Political developments in Iran impact markets far more significantly than those in Venezuela," says Goldthau.

OPEC statistics calculate Venezuela's estimated 303-billion-barrel reserves as the world's largest (1 barrel = 159 liters, 55 gallons). But those reserves are full of heavy crude that can only be pumped and refined with specialized technology. A large percentage of that oil is also located in the remote Orinoco Belt.

Iran, like Venezuela, suffers from international sanctions on its oil industry. It doesn't have access to modern drilling and extraction technology, and maintenance is costly due to lack of replacement parts and inadequate structural investment. Furthermore, the state controls the industry, making foreign investment more difficult, says Andreas Goldthau. The same goes for processing. "Their refineries are not producing petroleum products of the quality that Western buyers expect. That, beyond sanctions, is the result of Israeli and US attacks on Iran's 'midstream' sector."

In the oil and gas sector that means transport, storage and initial processing of crude and natural gas after extraction. The US-based GPA Midstream Association defines the work of midstream companies as providing logistics efficiency and dependable delivery regardless of production swings in countries like Iran or Venezuela.

Despite all of its problem's, Iran's oil sector has proven astonishingly resilient, says Goldthau — at least in terms of how much is being pumped out of the ground, though volume has never matched the 6 million barrel mark the country was humming at before the Islamic Revolution of 1979. "Production ultimately recovered and stabilized at around 4 million barrels a day after falling to 2 million a day in the 1980s. Still, state coffers are taking a beating because Iran has for years been forced to sell its oil at a discount to secure buyers. And that has kept much-needed investments from being made."

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As is the case with Russia, Iran's shadow fleet of oil tankers plays a key role in sanctions evasion. "The Western sanctions regime has forced Iran to store part of its production. Increasingly, tankers have been employed to compensate for limited capacity on land," explains Andreas Goldthau.

These floating storage sites are mostly anchored in southeast Asia, close to buyers like China, which purchases more than 90% of all Iranian oil production. "There are significant amounts of Iranian oil on the high sees off the coast of Malaysia," says Goldthau. Tehran "is using its National Iranian Tanker Company for the operation. It has one of the biggest tanker fleets in the world."

In order to evade sanctions, Iranian ships operate much as Russia's do, transferring sanctioned Iranian oil onto non-Iranian-flagged vessels at sea to facilitate delivery.

The social situation in Iran is also similar to that of Venezuela, in that poorly maintained oil infrastructure has led to growing problems as energy subsidies devour the national budget and it becomes increasingly difficult for government to provide affordable energy to the people. The result? Financial crisis, currency devaluation, hyperinflation and nationwide protests.

One scenario in particular could pose a grave threat to Tehran's ruling mullahs — if workers in the oil sector join the protest movement it could spell the end for Iran's theocrats. It remains unclear whether unrest has hit Khuzestan province, Iran's most important oil region. US-based Fortune Magazine has reported that it has seen no indication that oil exports have gone down.

Still, it is impossible to predict what could happen if oil workers were to heed the call of Reza Pahlavi, the exiled son of Iran's last shah, and strike. It was oil strikes that ultimately toppled the shah in 1978. Pressure on him became so intense that within a few months, the monarchy had collapsed and he had been replaced by hardline Shiite cleric Ayatollah Khomeini.

Should the Islamic Republic of Iran collapse, it would fundamentally change the balance of power in the region. "The best result would be total regime change. The worst would be ongoing internal conflict and a continuation of the current regime," warns Mark Mobius, an investment pioneer in developing countries in Asia.

If Iranian production stalls, oil prices would shoot up in the short term. But eventually other producers would fill the gaps left by Iran. The International Energy Agency's (IEA) strategic petroleum reserves could also be tapped to calm markets, says energy expert Goldthau.

But he adds that the bigger problem could be if "Iranian actors drag the conflict into the region." An Iranian blockade of the Strait of Hormuz — a narrow waterway through which roughly 25% of the world's oil passes — could catapult oil prices to as much as $120 (€103) a barrel, according to estimates from investment banks such as JPMorgan Chase.

Lastly, oil rigs and refineries in neighboring states could become the target of attack, which would also impact oil markets. And, warns expert Goldthau, with some 20% of global LNG production transported through the strait, too, such a situation could lead to higher gas prices in Europe.