Iran war (part 2), The calm before the storm ?
In my last article I had speculated on three options the US had
when a ceasefire was first declared. Of those, they exercised the second option
- `The Blockades and negotiations
continue’. I had stated: This will be
an endurance test between the ability of Iran’s economy to survive without oil
revenues and price rises in the rest of the world
Iran war 2026 - Part 1
The US assumption behind their counter blockade, was based
on two assumptions:
1. Iran will be deprived of oil revenue which will collapse their economy.
2. If Iran cannot store the oil they are extracting, they have to stop
extraction, which will render their oil wells unusable for months (in some
cases longer).
These assumptions have been amplified by President Trump’s
tweets saying for e.g. that `in three days, the Iranian oil industry will blow
up’ referring presumably to the collapse of oil wells, if production is
stopped. There have also been several statements about Iran `being broke’,
specifically on the loss of $ 4.8 billion in oil revenue since the blockade
started.
Both assumptions are incorrect for Iran, but hold good for the other Gulf
states.
Iran’s oil industry is different from the Gulf states. In
2025, Iran produced an average of 3.2-3.3 million barrels /day (bpd). Of that a
minimum of 1.9 mil bpd went towards domestic consumption.
Thus close to 60% of production was consumed locally. Adding some cross border
sales to Afghanistan and Pakistan (around 50-100,000 bpd), over 60% of
production is not exported.
Of the three major oil fields – Ahwaz, Marun and Gachsaran, the minimum stable
flow rate (MSFR)
the lowest production rate at which oil flows uninterrupted, is an output of
30-40% of current levels,
at Ahwaz and Marun, while at the smallest and least productive field
(Gachsaran) the MSFR requires
an output half of current levels. However, domestic consumption accounts for
60% of output, so even at zero exports, there is no danger of damage to
oilfields. This was proven in the period 2019 (when the US abrogated the JCPOA
agreement and imposed tough sanctions on oil) to 2021, when there was both a
fall in domestic demand and exports. In 2020, Iran’s oil production was under 2
mil bpd with no damage to oil fields.
In contrast, the GCC countries export between 70% (Saudi),
75% (UAE) to 85-90% (Iraq-Kuwait-Qatar-Bahrain) of their oil production.
Among the biggest fields in the Gulf countries, Ghawar in Saudi has a MSFR of
40-50% (min amount of oil that has to be pumped), Rumalia in Iraq is 50%,
Burgan in Kuwait and Upper Zakum in UAE are closer to 60% (damage to the field
starts at an output level 5-10% hjgher than this).
Thus, with a sharp drop in exports following the strait of Hormuz closure and
with storage capacities already reached in all Gulf countries (except Saudi)
the MSFR is far higher than total domestic and export consumption. Kuwait, Iraq
and Qatar had exports of under 0.25 mil bpd in April. The region is believed to
have exported less in April than I had estimated in my previous article. The
problem for the Gulf countries can be seen in the following table.
|
|
Avg daily
output 2025 mil b/d |
Domestic
consumption |
Export |
Export |
MSFR for |
|
Iraq |
4.4 |
1.0 |
0.3 |
3.2 |
2.0 -
2.5 |
|
Kuwait |
2.6 |
0.5 |
0.2 |
2.2 |
1.2
- 1.6 |
|
Qatar |
1.0 |
0.2 |
0.2 |
0.7 |
0.5
- 0.7 |
|
UAE |
3.8 |
0.8 |
1.8 |
3.0 |
1.5 - 1.7 |
|
Saudi |
10.4 |
2.5 |
4.0 |
7.0 |
4.0 - 5.0 |
|
Iran |
3.3 |
1.9 |
0.6 |
1.4 |
1.5 - 1.6 |
*MSFR is based on capacity and not average output in
2025. Saudi output in Feb 2026 was
3 MBD below peak capacity. For all other countries capacity was upto 0.5 MBD
more than actual output.
MSFR is a crude average of several oil fields, which in turn
comprise several oil wells of different efficiency. If there is a several
production cutback, the least profitable wells get closed first.
Saudi and UAE export output can fall further if a concerted
attack is made against their pipelines diverting oil from the strait of Hormuz,
or (for Saudi) if the Bab El Mandeb strait is closed by the Houthis.
Iraq, Kuwait and Qatar are already suffering long term
oilfield damage. For Qatar the more important gas production also has long term
damage.
Revenue loss from oil exports
Energy exports as a percentage of GDP is a more relevant
criteria than the absolute loss of revenue from lost exports.
|
|
Oil and gas
exports |
|
Saudi |
25-30% |
|
UAE |
15-20 % |
|
Kuwait |
40-50% |
|
Qatar |
40-50% |
|
Iraq |
35-40% |
|
Bahrain* |
30-40% |
|
Iran |
12-15 % |
Among the oil exporters, the Iranian economy is least dependent on oil &
gas exports.
*Another 12% of Bahrain’s exports are from Aluminium, the
export of which is dependent on the Strait of Hormuz opening.
Iran is also the least dependent on foreign trade.
|
|
Foreign trade |
|
Saudi |
60% |
|
UAE |
200 % |
|
Kuwait |
90% |
|
Qatar |
100% |
|
Iraq |
70% |
|
Bahrain |
150% |
|
Iran |
45% |
The closure of the strait for export of oil and gas, also implies its closure
for imports. Iran’s imports are least impacted by a blockade partly because of
their relatively low volume and also because sanctions have created well
established road networks for trade – via Pakistan. Afghanistan or Iraq.
Countries like UAE which had relatively lower dependence on
oil exports have a high dependence on foreign trade and services. Stopping
imports (incl. for e.g. transhipment at Dubai) can collapse the business
environment in the UAE and Bahrain. Both countries have spent decades building
a reputation as a safe place for business. A second round of missile and drone
attacks, exacerbated by the continued closure of the Strait of Hormuz can
damage that reputation in weeks.
In absolute terms, of the countries shipping through the
Strait of Hormuz, Iran was impacted last, as it continued exporting till the US
blockade of Iranian ports on 13th April, whereas other countries had
to stop shipping through the Strait from 1st March. On 13th April,
it is estimated that Iran had the equivalent of 2 months of oil exports at sea,
almost all of which have now reached their destination and were paid for.
During the blockade, it’s estimated that half the ships that attempted to run
the blockade have done so. IEA’s estimate is that Iran’s oil exports (from the
terminal at Kharg Island to a ship) were at least 0.5 MBD. It is only from
mid-June that Iran will feel a revenue loss from a drop in oil sales (which
will be marginal, if the average price of oil has almost doubled from Feb to
June.
The US: I had suggested in the last article, that
President Trump will disregard the need to approach Congress to continue the
war, 60 days after initiating it (by 1st May). He has done that by
disingenuously suggesting that the war ended with the ceasefire of 13th
Apr – and can presumably start again for 60 days when the ceasefire ends.
The three carrier battle groups of the US Navy to enforce
the blockade (one aircraft carrier and its escorts are due to return after a
year at sea) can collectively muster a total of 11 ships to enforce the
blockade. None can venture closer to 200 km of the Iranian coast (so far they
have not been within 300 km) and with Iran having a 2000 km coastline, it is
not possible to enforce a blockade fully. Iran has a much easier job enforcing
their blockade.
The weather between May and July is very unfavourable to any
`boots on ground’ operation. Not only is it very hot and humid – even providing
water is difficult logistically, but sandstorms reduce the effectiveness of
drones, or air operations.
The US has been releasing stock from the strategic oil
reserve, which is now down to 397 million
barrels (24th Apr) from their authorised level of 714 million
barrels.
Thus the US has a President, capable of impulsive and
irrational acts, with no checks on his power and with a large military build up
that cannot stay in place indefinitely. Those are factors that may lead the US
to an immediate resumption of the war.
China: I had speculated in my previous article that
China could defy the US blockade by escorting their ships to Iranian ports to
load oil. I believe the Chinese govt, officially instructing their companies to
disregard US sanctions on their refineries buying Iranian oil, is a first step.
China may have decided not to escalate as yet, as there was a possibility of a
diplomatic solution and because of the forthcoming summit between Trump and Xi.
If China defies the blockade, it will be a huge loss of face
to the US. Since China is Iran’s only significant oil export customer, it would
render the US blockade meaningless. In those circumstances the only US response
to avoid loss of face, would be to attack, or occupy Iran’s oil export terminal
at Kharg island, irrespective of the risk. That will invite an Iranian response
which will hit oil infrastructure across the region, causing a global recession
from a long term drop in oil output and consequent rise in prices. It will
affect China as much as anyone else and hurt China’s equation with the other
Gulf countries it imports oil from (though not as much as their ties with the
US, whom the Gulf states had hitherto regarded as a guarantor of the security
of their security)
It is possible that China may have a tacit understanding
with the US to not intercept China bound ships, enabling both parties to avoid
a confrontation with unpredictable consequences. However, it cannot do so
indefinitely, as the Gulf states will suffer a loss to their economies,
including a longer term loss from damaged oilfields.
Iran: Iran will start facing real financial damage to their economy from Mid June when the revenue loss from falling oil exports will register. Weather Iran will be able to take more pain because they have faced sanctions for 47 years, or they will collapse before the Gulf states and US feel the pain ,because Iran is already in poor shape is anyone's guess and making the latter assumption (which is what the US seems to have done) is having a strategy based on hope.
Iran will be able to rebuild their missile and drone capability during this ceasefire, more than the Americans can. It will take months for a new US missile to be produced and days for Iran to
have more drones, or repair missile damage.
The only effect of regime change in Iran so far, is that power is now consolidated behind a more hardline leadership, with Mujtaba Khamenei notionally in charge. All those in the Iranian leadership are veterans of the Iran-Iraq war of the 1980. All have built the institutions they represent. They will not be more conciliatory in negotiations than the previous leadership, not get bullied by threats on truth social. Like every country in the past, which has bene subjected to bombing designed to break their will to fight (or destroy their civilization) the Iranian people have also rallied around their leadership, though they might dislike it in normal times.
Iran's terms for a peace deal have changed only marginally in the last month.
Israel: Israel will not be able to accept the ceasefire either in Iran or Lebanon, as their pre war aims have not been met (the end of the Iranian regime and any nuclear or missile capability they have) and the expulsion of Hezbollah from South Lebanon and ending their influence in Lebanon's government.
My sense is Israel will prevail on Trump to resume a `short and sharp' air campaign against Iran to force them to accept US terms in a negotiation.
Implications for India: India imported 2 MBD (out of 5 MBD daily requirement) of il through the strait of Hormuz. Russia has made up roughly 1 MBD of the 2 MBD shortfall. Venezuela - with heavy crude which can be refined in Jamnagar (one of the few refineries which can process it) supplied 0.3 MBD and incremental output from other sources have us 0.2 MBD. Thus we have a 0.5 MBD shortfall.
This shortfall was not apparent so far, because we had `oil at sea' (shipped but not delivered) and we bought some Iranian crude which was de-sanctioned. The shortage will start affecting us from May
and we will be paying for our entire imported quantity at the current prices of over $ 100/ barrel. There is a double whammy in the form of a depreciating Rupee. We will have to have a combination of higher fuel (and gas) prices and lower Central and State govt taxes on fuel.
Further reading:
https://williamusher.substack.com/p/why-june-is-the-oil-markets-point
https://economicshelp.substack.com/p/oil-shortages-become-more-serious
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