Why does Iran unrest trigger oil price swings?

This file photo shows a natural gas refinery at the South Pars gas field on the northern coast of the Persian Gulf, in Asaluyeh, Iran. (AP Photo/Vahid Salemi, File)

Political instability in Iran, a major oil producer, together with U.S. President Donald Trump’s recent threats against the country have reignited fears of disruptions to crude supplies, sparking price volatility on global markets.

AFP explains what’s at stake.

Major producer

Iran remains one of the world’s top ten oil producers even though its output has fallen sharply since the 1970s, hit in particular by rounds of US sanctions.

“In 1974, Iran was the third-biggest producer in the world after the US and Saudi Arabia, and ahead of Russia, producing some six million barrels per day,” Arne Lohmann Rasmussen, chief analyst at Global Risk Management, told AFP.

Today, Iran produces around 3.2 million barrels per day, according to OPEC.

This remains a significant amount, and Iran is believed to hold the world’s third-largest crude reserves, cementing its strategic importance.

Additionally, Iran’s oil industry is in far better shape than that of Venezuela, another country hit by years of US sanctions.

Highly profitable oil

Iranian crude is relatively easy and cheap to extract, with production costs as little as $10 per barrel, making it particularly profitable, Rasmussen said.

Only Saudi Arabia, Iraq, Kuwait and the United Arab Emirates enjoy similarly low production costs.

By comparison, major Western producers like Canada and the United States typically face costs of US$40 to $60 per barrel.

With such low costs, Iran gains disproportionately from high global prices, a crucial factor for an economy heavily reliant on oil revenues.

Dependence on China

U.S. sanctions imposed since the 1979 Islamic Revolution have left Iran with few export options -- especially after Trump revived a “maximum pressure” policy on Tehran upon his return to the White House.

Last year, Washington targeted Chinese “teapot” refineries, which operate independently of state-owned oil companies, accusing them of buying Iranian crude.

China, however, continues to buy Iranian oil at below-market prices.

Iran exported an average of 1.74 million barrels a day in the fourth quarter of 2025, all of it bound for Chinese refineries, according to the markets data firm Kpler.

Rasmussen noted that Iran produces roughly equal amounts of light and cheaper heavy crude, making it even more valuable to Beijing, which has lost access to Venezuela’s very heavy crude since the US intervention in Caracas on January 3.

What might Trump do?

Rising tensions in Iran had pushed the international benchmark Brent crude price to $66 per barrel, its highest level since October.

But oil prices tumbled after Trump said Wednesday that the killings of protesters in Iran had been halted, easing fears of instability and potential US military action.

He said the U.S. would “watch it and see” about military strikes.

If Washington were to attack Iran, “prices could quickly jump to around $80-$85”, similar to the spike seen during the twelve-day conflict between Iran and Israel in June, said Kpler analyst Homayoun Falakshahi.

“What happens next will depend on the nature of the attack and the regime’s response,” he said.

Tehran has issued strong statements but responded cautiously to Trump’s comments to avoid escalation with Washington.

But if the government’s survival is at stake, the market reaction could be far more dramatic.

Falakshahi warned that the biggest risks are that “Iran targets oil facilities in other Gulf countries” or attempts to block the Strait of Hormuz, the chokepoint through which 20 percent of the world’s oil supply flows.