Hydrocarbons and the War in Iran

iStock: Exploratory drilling in the Rub' Al-khali

In the months leading up to the February 2026 U.S.–Israeli strikes on Iran, tensions had been steadily escalating over Iran’s nuclear program. Renewed negotiations in early 2026 failing to bridge large gaps over uranium enrichment limits and sanctions relief. These talks unfolded against the background of Israeli and U.S. airstrikes on Iranian nuclear and military facilities in June 2025, subsequent Iranian missile and drone retaliation, and broader regional conflict involving Iran-backed groups such as Hezbollah and Hamas.

In parallel, Iran was experiencing serious domestic unrest. Since the protests following the death of Mahsa Amini in 2022, periodic demonstrations had continued into 2025–2026, driven by a mix of political repression, economic hardship, and social grievances. As the size and scope of demonstrations increased, the regime’s repressive actions became more extreme, culminating in the January 2026 massacre of perhaps 30,000 demonstrators.

On February 28, the U.S. and Israel launched surprise airstrikes that targeted a wide range of Iranian military and government sites; and that were triggered by the opportunity to bomb a rare meeting of high Iranian officials that included Supreme Leader Ali Khamenei. Khamenei and approximately 50 other officials were killed in the attack. Iran responded with missile and drone attacks on Israel and U.S. targets in the Middle East, and closing the Strait of Hormuz, shutting down the transportation of about 20 percent of global oil supplies, among other impacts.

This blog entry presents a few key facts about oil markets, in historical context and in the present day. A longer discussion available in PowerPoint form here, provides more detail on oil and other hydrocarbon markets, as well as additional thoughts on how these events have unfolded.

These are complex issues, and events are still unfolding. Even if you read the much more detailed downloadable discussion, important matters will be given short shrift, or omitted. Some of my interpretations will be challenged. Certainly by the time anyone reads this, some material will need updating. Nevertheless, I hope to present some useful information and opinions herein.

Data from FRB St Louis FRED

This is perhaps the most important chart in the collection. Of course, it is looking backwards. Monthly data smooths daily, weekly volatility; and March 2026 data (latest here) understates the March/April shocks to oil prices. Also, WTI prices understate price shocks F.O.B. at ports especially in key Asian markets.

Given the nature of the shock – a war of uncertain duration and trajectory – we don’t know how high prices will go, whether supply and demand responses will bring prices back down (“as usual”) or remain at a costly plateau for some time. Plus, there are many correlated adverse effects in other markets, given shortages of fertilizer, helium, etc. and their consequences.

Nevertheless, note that we have weathered some major shocks before, albeit sometimes at great cost. In the long run? Real oil prices have risen since the OPEC and Iran oil shocks five decades ago, as everyone knows. Very loosely, pre-1973 prices averaged around $30 per barrel in today's dollars. In recent decades prices averaged around $80 per barrel.

But these averages are obviously not "sufficient statistics." In many respects the real story of oil prices  is volatility. Just before the Great Recession WTI was trading at almost $200 per barrel, and during the COVID pandemic prices cratered to $20.

Another story is that oil shocks are often connected to recessions, both as causes and effects. In some episodes, notably the 1973 and 1979 shocks, oil prices were proximate causes of recessions. In others, they were partial contributors, in still others causality goes the other way. In the downloadable slides I list some of these episodes and the scholarly literature addressing these links, a literature I am still studying.

https://www.economist.com/graphic-detail/2019/06/21/us-iran-tensions-threaten-the-worlds-most-important-oil-shipping-route

By now anyone reading this blog will already know that every day about 20 million of the globe's 100 million barrels of oil production traverses the Strait of Hormuz, which is flanked by Iran on one side and Oman and the United Arab Emirates on the other. Just north of the UAE are the other Gulf oil producers, Saudi Arabia, Qatar, Bahrain and Kuwait.

At the start of the war, Iran shut down the roughly 135 vessels that traversed the Strait every day. While Defense Department planners had long gamed out such a closure during a Middle East conflict, President Trump confidently determined that such a response was unlikely, and that if a closure occurred, it would quickly be reversed. As of this writing, six weeks into the war, the Strait remains closed.

The chart presenting oil prices above ends with the average March 2026 monthly price for WTI trades, which does not give a clear picture of recent and current prices. Studying the current event requires more recent data, with daily or weekly quotations. For example, this chart from Oleg Schantorenko:

The two most quoted oil benchmarks in normal times are West Texas Intermediate (WTI), and Brent Crude (a European quote) Usually these are fairly well correlated, but as Schantorenko's chart illustrates, they are both rising but the European price quotes are now rising faster than those in the U.S.

These most-cited oil prices (WTI, Brent) are quoted by traders for future delivery. Spot prices are rising faster, as other data in the slide collection document. Furthermore, F.O.B. prices at actual delivery in Asian markets -- those most affected by the war -- are higher still.

Crude oil per se isn't very useful. The prices of refined products, including gasoline, diesel, and jet fuel, have risen faster, as have the margins of refineries, the "crack spread:"

Anyone purchasing airline tickets currently will know of increased ticket prices; fuel is a typical airline's second largest cost, after labor.

While most individual drivers use gasoline, diesel trucks are the backbone of the transportation system for most goods. Construction and farming equipment also commonly run on diesel, as do ships and trains.

Oil is not the only hydrocarbon, or the only vital commodity, affected by the current war. The Gulf is a major source of liquified natural gas (LNG).

While the oil market is fairly globalized, the natural gas market is fragmented due to transportation. Pipelines are inflexible; they may be cut or shut down. Shipping LNG requires expensive large-scale infrastructure.

We've presented key data about hydrocarbon prices and availability, and some of the implications of the ongoing shock from the war with Iran. But so far we have left out an important related issue...

https://berkeley-earth-wp-offload.storage.googleapis.com/wp-content/uploads/2026/01/13155613/2025-Time-Series.png

Today’s two thoughts

First, rapidly rising and highly volatile prices, and possible physical unavailability, of hydrocarbons and related commodities (e.g. fertilizers), will exact high costs on global economies. These costs will be most severe for low-income and other vulnerable populations.

Second, hydrocarbons are the main drivers of current climate change, and decarbonizing our economies is an important goal.

For more on the second point, and how we might reconcile these two issues, see the slides and references available here: Studying Climate Change: A Brief Introduction

Finally,

This deck includes more data on oil and related markets, many more links to sources, and much more of my personal commentary on the war and its effects. Spoiler alert: not a fan of Iran's theocratic regime, not a fan of how the current administration has attempted to deal with the serious challenges that regime presents, to the region, to the world, and not least to its own citizens.