Iranian uprisings put upward pressure on oil prices

The new year opened with oil trading at its highest price since 2015. In parallel, an exceptional wave of protests emerged in Iran that will most likely continue to challenge the stability of the regime in coming months and reinforce the rise in oil prices.

Economic growth seems also to be picking up in a number of major oil consumers, such as China, indicating that oil demand will also support the new, higher oil prices.

{mosads}The revolt in Iran emerged as global supply and demand are closely aligned. When the oil market is tight, geopolitical events in oil-producing and -transit regions impact the oil price. When the market is liquid, as it was for most of the last three years, major geopolitical turmoil can occur without major impacts on oil prices for a significant period of time.

However, in the last quarter of 2017, the global oil market tightened, amplifying the impact of the current developments in Iran on the global oil price. 

Events in Iran will continue to create instability in coming months, regardless of whether the regime succeeds in subduing the protests, and thus continue to affect the oil price. The revolt in Iran is exceptional in its geographic scope within the country and in protesters’ demands for the end of the Islamic Republic and not just a change in its policies.

The protests are strongest in Iran’s border provinces and have a large geographic spread, creating a greater challenge for Tehran to control the multiple locations and to count on full cooperation of local-based police and military, who may be hesitant to act against members of their communities.

In addition, some of the protests have an ethnic element, since most of the residents of Iran’s border provinces are non-Persians and members of Iran’s ethnic minorities. In some of the protests, ethnic-based demands have been voiced.

As a result, these protests will be difficult to subdue, and even if the regime gets the upper hand in coming days, it is likely that they will resurface in a new round of confrontation with the regime.

Up until now, the protests have reportedly not disrupted production at Iran’s main oil fields, pipelines or oil export ports. However, that may change soon.

Iran’s oil production is centered in the Khuzestan province, which is populated mainly by ethnic Arabs. The protests in this province have been especially fierce in the past week. In December 2017, the regime reportedly rounded up and jailed a large number of activists from this region, and in November, the leader of the Ahwaz Arabs based outside Iran was gunned down outside his home in Amsterdam.

In February 2017, mass demonstrations took place in the Khuzestan province, following dust storms that knocked out power and water to the province. Many locals blamed environmental damage from Tehran’s oil production policies in the province for facilitating the dust storms. 

Given current tensions, Tehran will cancel planned fuel price increases and even increase subsidies, leading to rising domestic consumption, and thus, increased demand for oil. At the same time, Tehran will most likely pump as much oil as possible, in order to increase revenue for public spending. 

The current instability in Iran, together with the likelihood of additional U.S. sanctions (human rights and democracy sanctions), will most likely put a chill on major foreign investment in Iran. Many European companies that struck tentative deals with Tehran are likely to hold off on moving forward at this stage.

The events in Iran and the Gulf region will have a higher impact on the Brent oil price indicator than the U.S.-based West Texas Intermediate. Thus, it is most likely that the spread and different trends of the two indicators will continue to be meaningful. 

Additional hotspots in the Persian/Arab Gulf may reignite as well in coming months, adding further geopolitical uncertainty to the Persian/Arab Gulf region — oil’s motherlode. The proxy war between Saudi Arabia and Iran in Yemen and beyond will continue and may create events that rattle the oil price as well.

U.S. oil production, while certainly a game changer economically and geopolitically, has not eliminated the centrality of the Persian/Arab Gulf production for developments in the global oil market.

Brenda Shaffer is a specialist on energy and foreign policy. She is a visiting researcher and professor at Georgetown University’s Center for Eurasian, Russian and East European Studies, and a senior fellow at the Atlantic Council’s Global Energy Center. She is the author of  several books, including “Partners in Need: the Strategic Relationship  of Russia and Iran” and “Energy Politics.”