U.S. Considerations for Military Action Against Iran: Geopolitical Maneuvering and the Fragile Balance of the Global Energy Market
19/01/2026
On this Wednesday in January 2025, the Brent crude oil price curve traced a steep arc on the electronic screens of the London trading floor. When U.S. President Trump hinted on social media about potential action against Iran, oil prices surged to $66 per barrel, marking the highest level since last October. Yet, merely overnight, as the White House subtly softened its tone, the same curve plummeted sharply. This near-reflexive market volatility reveals a reality far more complex than it appears: the unrest on Tehran's streets, Washington's brinkmanship, Beijing's strategic calculations, and the fragile nerves of the global energy supply chain are now intertwined in an unprecedented manner.
Iran: An Energy Giant Reshaped by Sanctions
Open any contemporary textbook on energy geopolitics, and Iran is an unavoidable chapter. The country's oil narrative is filled with historical paradoxes—it is both one of the founders of the modern petroleum industry and the most resilient survivor under international sanctions.
From Peak to Sanctions: The Forty Years Behind the Production Curve
In 1974, Iran stood at the center of the world's oil landscape. With a daily crude oil production of 6 million barrels, this Persian Gulf nation firmly held the position as the world's third-largest oil producer, trailing only the United States and Saudi Arabia, and even surpassing the later energy giant, Russia. This set of data, provided by Arne Lohmann Rasmussen, an analyst at Global Risk Management, to AFP, sketches a golden era that has long since faded away.
The dual impact of the Islamic Revolution and U.S. sanctions changed all of this. According to the latest statistics from OPEC, Iran's current daily production remains around 3.2 million barrels, less than half of its historical peak. However, this figure itself is deceptive—unlike Venezuela, which also suffers from U.S. sanctions, Iran's oil industry infrastructure remains relatively intact, and its technical capabilities are still operational. More crucially, the country possesses the world's third-largest proven crude oil reserves, making it a factor that must be considered in any long-term energy strategy, even under extreme pressure.
Cost advantage and strategic vulnerability at low cost.
The true competitiveness of Iranian oil lies hidden within its cost structure. Loman Rasmussen points out that the extraction cost of Iranian crude oil can be as low as $10 per barrel, and even lower in some oil fields. This cost advantage is matched only by a handful of countries such as Saudi Arabia, Iraq, Kuwait, and the United Arab Emirates. In contrast, the production costs for major Western oil-producing nations like Canada and the United States typically fluctuate between $40 and $60 per barrel.
Low cost should have brought a competitive advantage, but under the shadow of sanctions, it instead highlights the structural fragility of Iran's economy. Oil revenue accounts for over 40% of the Iranian government's budget and about 80% of its export income. This excessive dependence makes the Tehran regime exceptionally sensitive to oil price fluctuations—high oil prices are the economic lifeline for maintaining its rule, while production constraints prevent it from compensating for price declines by expanding exports. This dilemma was particularly evident in the wave of protests in early 2025: street unrest weakened the regime's stability, and economic hardship was one of the key triggers for the protests, creating a vicious cycle.
Eastern Link: The Strategic Depth of China-Iran Energy Cooperation
When the Western market closed its doors to Iran, the East of the world opened another passage. The width and resilience of this passage are redefining the energy geopolitics of the 21st century.
The "Teapot" Refinery and Shadow Trade
In 2025, Washington directed its sanctions toward China's independent refineries—those non-state-owned oil enterprises known as "teapot" refineries. The U.S. Treasury accused these companies of purchasing Iranian crude oil, violating American sanctions. However, this cat-and-mouse game of sanctions and counter-sanctions has revealed a deeper reality: Sino-Iranian energy cooperation has already established an institutionalized evasion mechanism.
According to analysis from shipping data platform Kpler, in the fourth quarter of 2025, Iran exported an average of 1.74 million barrels of crude oil per day, all of which flowed to Chinese refineries. These transactions are typically conducted at significant discounts—it is estimated that Iran's oil export prices to China are discounted by $5 to $10 per barrel compared to benchmark prices. This arrangement holds strategic significance for both sides: Iran gains crucial foreign exchange revenue, while China secures a stable and low-cost energy supply.
Light and Heavy Crude Oil Blends and Supply Chain Substitution
Iran's appeal to China lies not only in its price but also in its unique resource endowment. Loman Rasmussen points out that Iran produces nearly equal amounts of light and heavy crude oil. This product mix became particularly valuable after January 3, 2025—the day when U.S. intervention in Venezuela led China to lose a significant source of heavy oil supply.
Changes in geopolitics often create unexpected strategic opportunities. When the supply of heavy oil from Caracas was interrupted, Tehran's light and heavy crude blend precisely filled the gap. This substitution is not flawless—heavy crude requires specific refining equipment—but it provides China with valuable supply chain resilience. Beijing clearly recognizes that, against the backdrop of escalating U.S.-Iran tensions, maintaining energy relations with Iran is not only about economic interests but also concerns the strategic bottom line of energy security.
Trump's Brinkmanship Game
The tweets from the U.S. President have become one of the most sensitive price triggers in the global oil market. This unprecedented linkage reveals a fundamental shift in the international order in the post-pandemic era: the dramatic expression of foreign policy is gaining direct market pricing power.
Words as Weapons: Market Pricing of Political Rhetoric
The days of January 2025 perfectly illustrated this new normal. On Wednesday, Trump's tough stance on the Iran situation drove Brent crude up by several dollars; on Thursday, his tweet claiming that the killings in Iran had stopped caused oil prices to fall accordingly. The market reflected the subtle shifts in White House rhetoric in real time, like an electrocardiogram.
Kpler senior analyst Homayoun Falakshahi offers an incisive observation on this: In the recent U.S.-Iran tensions, there have been primarily a large number of statements and expressions of position, while Iran's responses have always been meticulously calculated. Tehran's caution is not difficult to understand—direct confrontation with the United States could trigger a crisis for the regime's survival. However, this caution also creates a dangerous illusion: Washington may misjudge Iran's red lines for response, believing it can apply pressure indefinitely without triggering a large-scale conflict.
Red Line Testing and Upgrade Risks
The Trump administration's strategy on Iran exhibits evident contradictions. On one hand, it exerts maximum pressure through the maximum pressure policy, including unprecedented measures such as sanctioning Chinese refineries; on the other hand, it maintains strategic ambiguity regarding military intervention, neither abandoning the option of using force nor explicitly committing to protection.
This ambiguity itself is a strategic tool. It makes it difficult for Tehran to predict the boundaries of U.S. actions, forcing the Iranian leadership to be more cautious when dealing with domestic protests and handling foreign relations. However, ambiguity also carries the risk of miscalculation—when both sides are testing each other's red lines, the possibility of accidental escalation increases exponentially.
Farah Shahi pointed out two of the most dangerous escalation scenarios: first, Iran attacking oil facilities in other countries in the Gulf region, similar to the recurrence of the 2019 Aramco facility attack; second, Tehran attempting to block the Strait of Hormuz. This narrow waterway transports 20% of the global oil supply daily, and any disruption would immediately trigger a global energy crisis. The 12-day conflict between Iran and Israel in June 2025 already provided a preview—oil prices once surged to the range of $80–85 per barrel at that time.
The Triple Vulnerabilities of the Global Energy Market
The reason the current U.S.-Iran standoff has made the market so tense is that it simultaneously touches on three vulnerabilities of the global energy system: geographic bottlenecks, spare production capacity, and the failure of political risk pricing mechanisms.
The Strait of Hormuz: An Irreplaceable Strategic Chokepoint
In modern energy infrastructure, few nodes are as indispensable as the Strait of Hormuz. Approximately 21 million barrels of crude oil pass through this waterway daily, where the narrowest point is only 33 kilometers wide, accounting for one-third of global seaborne oil trade. Any discussion of a blockade immediately triggers panic, as alternative routes either do not exist or are prohibitively costly.
Pipeline transportation cannot replace the scale of maritime shipping, and the route detouring around the Cape of Good Hope in Africa not only adds 15-20 days to the voyage but also significantly increases transportation costs. More importantly, the impact of the strait blockade will quickly spread throughout the Gulf region—even if countries like Saudi Arabia and the UAE can export some crude oil through Red Sea ports, their overall export capacity will be severely constrained.
The Truth and Illusion of Spare Capacity
In theory, the Organization of the Petroleum Exporting Countries possesses a certain amount of spare production capacity that can stabilize the market during supply disruptions. However, reality is far more complex than theory. Data from 2025 shows that OPEC's actual spare capacity is mainly concentrated in a few countries such as Saudi Arabia, the United Arab Emirates, and Iraq, with a total volume of approximately 3-4 million barrels per day.
The issue is whether these spare production capacities can be mobilized and delivered to where they are needed in a timely manner. If the conflict in Iran leads to the closure of the Strait of Hormuz, even if Saudi Arabia has the ability to increase production, crude oil cannot enter the global market via sea transport. Although onshore pipeline infrastructure exists, its capacity is limited and cannot fully replace maritime shipping. More subtly, major oil-producing countries may be reluctant to tap into strategic reserves when the situation is uncertain—if the conflict is likely to be prolonged, retaining production capacity as a buffer is the rational choice.
The failure of political risk pricing.
Traditionally, energy markets have digested geopolitical uncertainty through risk premiums. However, the current US-Iran tensions have exposed the limitations of this pricing mechanism. When risks simultaneously involve regime change, regional war, and global supply chain disruptions, markets find it difficult to accurately assess probabilities and impacts.
The price fluctuations in January 2025 reveal a deeper issue: the market is reacting to political rhetoric rather than actual actions. Trump's tweets can instantly move oil prices, while the actual level of violence on the streets of Tehran becomes a secondary factor. This disconnect may lead to distortions in resource allocation—price signals no longer reflect the real fundamentals of supply and demand, but rather the drama of political rhetoric.
Future Scenario: From Limited Conflict to Regional War
Analyzing the potential development paths of U.S.-Iran confrontation requires moving beyond simplistic binary judgments. The actual situation is more likely to be a spectrum, with multiple possible intermediate points ranging from limited deterrence to full-scale conflict.
Limited Strike Scenario and Its Chain Reactions
The most likely scenario is that the United States carries out limited military strikes against Iran, possibly targeting facilities of the Revolutionary Guards, nuclear sites, or missile bases. According to Kpler's Farahshahi, in such a case, oil prices could quickly rise to $80–85 per barrel, similar to the level seen during the Iran-Israel conflict in June 2025.
However, the key variable lies in Iran's response method. Tehran may opt for asymmetric retaliation: disrupting the operations of oil facilities in Gulf countries through cyberattacks, targeting U.S. bases in the Middle East via proxy forces, or conducting harassing operations in the Strait of Hormuz without imposing a complete blockade. This calibrated response aims to demonstrate a resolve to resist while avoiding providing the United States with a pretext for escalation.
Extreme behaviors under the regime survival mode.
A more perilous scenario arises when the Iranian regime perceives a direct threat to its survival. Historical experience indicates that regimes in existential crises may resort to irrational actions. The 1979 hostage crisis and the tanker war during the 1980-1988 Iran-Iraq War both illustrate Tehran's behavioral patterns under pressure.
In extreme circumstances, Iran may attempt to temporarily block the Strait of Hormuz, even if aware that it cannot sustain such a blockade long-term. This gesture alone could trigger market panic. A more covert risk is Iran's increased support for the Houthi rebels in Yemen, encouraging them to launch more attacks on Saudi and UAE energy infrastructure. The Houthi attack on Abu Dhabi in 2022 has already demonstrated that non-state actors can cause substantial disruptions to global energy supplies.
China's Strategic Dilemmas and Choices
Beijing faces a delicate balance in this crisis. On one hand, China needs to maintain energy cooperation with Iran to ensure supply security; on the other hand, it does not want the escalation of U.S.-Iran conflict to undermine regional stability and affect the maritime routes of the Belt and Road Initiative.
The 2025 U.S. sanctions on Chinese teapot refineries could become a turning point. If Washington intensifies secondary sanctions, Beijing may be forced to make a clearer choice between complying with U.S. sanctions and deepening China‑Iran cooperation. Given the priority of energy security in national security strategy, China is likely to choose the latter, but will employ more covert transaction mechanisms (such as barter trade, digital currency settlement) to mitigate risks.
Structural Transformation: The New Logic of Energy Geopolitics
The current U.S.-Iran crisis is not just another cycle of Middle East tensions; it reflects the structural transformation that global energy geopolitics is undergoing. Three interconnected trends are reshaping the fundamental rules of this domain.
The first trend is the expansion of the definition of energy security. Traditionally, energy security primarily focused on the risk of supply disruptions. However, it now increasingly encompasses the security of payment systems (such as evading US dollar sanctions), the diversity of transportation routes (such as reducing dependence on the Strait of Hormuz), and the resilience of supply chains (such as establishing strategic reserves and alternative supplier networks). By diversifying supplies, investing in pipeline infrastructure, and developing RMB-denominated oil trading, China is building an energy security architecture parallel to the Western-dominated system.
The second trend is the deep integration of energy and digital technology. Drone attacks on oil facilities, cyberattacks on control systems, digital currencies evading sanctions—scenarios that belonged to the realm of science fiction a decade ago have now become routine tools in energy geopolitics. The democratization of technology enables non-state actors and small nations to acquire disruptive capabilities once reserved for major powers. Any conflict in 2025 is likely to include a significant digital dimension, challenging traditional concepts of deterrence and defense.
The third trend is the blurring of boundaries between domestic politics and foreign policy. Street protests in Iran impact oil markets, U.S. electoral politics drive Iran policy, and China's energy demand shapes Middle East diplomacy—domestic agendas are being projected into the international energy sphere in unprecedented ways. This domestic-international linkage increases policy uncertainty, as decision-makers must simultaneously address domestic pressures and international risks, and the logic of these two levels is not always consistent.
Back in front of the screens at the London trading floor, those flickering numbers are no longer just reflections of supply and demand; they have become real-time gauges of geopolitical tension. The price per barrel of oil now encompasses the scale of protests on Tehran's streets, the depth of political calculations in Washington, the length of Beijing's strategic patience, and the global market's capacity to absorb sudden events.
This winter of 2025 may not see the outbreak of a US-Iran war, but the crisis has revealed a deeper truth: the global energy system is shifting from a relatively stable old normal to a new normal filled with uncertainty. In this new normal, oil is not just a commodity but also a tool for projecting power, a litmus test for alliances, and a bargaining chip in crisis management. When Trump tweets, Iranian protesters take to the streets, and Chinese refineries receive discounted crude oil, they are all participating in the same complex game—a game where the stakes are not only the rise and fall of oil prices but also the fundamental rules of the 21st-century international order.
Finally, the market will adapt to the new risk pricing model, and traders will learn to identify genuine signals amidst political noise. However, the fundamental contradiction in energy geopolitics persists: the world requires stable energy supplies to sustain economic growth, while energy-producing nations increasingly use their resources as political leverage. As long as this contradiction remains unresolved, the next sharp fluctuation in the Brent crude curve is only a matter of time.
Reference materials
https://www.ctvnews.ca/business/article/why-does-iran-unrest-trigger-oil-price-swings/