Iran and the cost of a war with Israel

The rapid escalation of tensions between Iran and Israel, heightened when Teheran fired a barrage of at least 180 missiles into Israel on October 1, saw global oil prices surge by about 5% — the most in a year.

Brent crude rose again the next day to trade above $75 (€67) a barrel, after Israeli Prime Minister Benjamin Netanyahu vowed to retaliate, further increasing the risk of tit-for-tat escalation in a region that is responsible for a third of the world's oil supply.

A major escalation by Iran risks bringing the United States into the conflict, data provider Capital Economics wrote in a note to investorson the day of the attack, impacting oil prices that will remain "the key channel of transmission to the global economy."

"Iran accounts for about 4% of global oil output, but an important consideration will be whether Saudi Arabia increases production if Iranian supplies were disrupted," Capital Economics wrote. A 5% increase in oil prices adds about 0.1% to headline inflation in advanced economies.

Other analysts and traders say the market hasn't fully priced in the risk of an attack on Iranian oil facilities, or the idea that Teheran might try to block the Strait of Hormuz — something it's threatened many times without actually doing so. The narrow waterway at the mouth of the Persian Gulf handles almost 30% of the world's oil trade.

Saad Rahim, chief economist at commodities supplier Trafigura Group, says that no one knows how far this could spread. "What is the reaction now from Israel, what is the counter reaction then from Iran, do other players start to get involved?" he asked in an interview with Bloomberg TV.

Oil keeps Iranian economy afloat

Oil exports are a critical source of revenue for Iran. Despite American sanctions on the country's oil industry, Iran continues to sell oil abroad, particularly to China.

In March, Iran's Oil Minister Javad Owji said oil exports had "generated more than $35 billion" in 2023. The British business daily Financial Times quoted him as saying that while Iran's enemies wanted to stop its exports, "today, we can export oil anywhere we want, and with minimal discounts."

From January to May 2024, energy-sector analyst Vortexa reported a further increase, estimating that Iran averaged 1.56 million barrels per day in sales. "An increase in its crude production, higher demand from China and a net increase in the size of its dark fleet have helped facilitate its increase in exports," Vortexa wrote in a June report.

The terms "dark fleet" or "shadow fleet" refer to disguised ships that smuggle oil, thereby circumventing sanctions. According to the US-based nonprofit United Against Nuclear Iran, Iran's shadow fleet is made up of at least 383 ships.

According to the London-based TV station Iran International, the regime sells its oil at a 20% discount to the global market price, as compensation for the risk buyers face due to sanctions.

"Chinese refineries are the main buyers of Iran's illicit oil shipments that middlemen mix with cargos from other countries and unload in China as imports from Singapore and other sources," the Iranian opposition outlet reported recently.

Inflation and currency weigh on economy

Sanctions don't just target Iran's oil industry, they also impact the country's ability to conduct international financial transactions. This has led to a sharp decline in the national currency, the rial.

Today, Iranians pay approximately 580,000 rials on the black market for one US dollar. Following the signing of the nuclear deal in 2015, a dollar was worth 32,000 rials.

Even though oil revenues have stabilized in recent years, Iran is far from an economic powerhouse. Its population of around 88 million is nearly 10 times that of its arch-enemy Israel. But in 2023, Iran's economic output was $403 billion, significantly lower than Israel's $509 billion.

These differences become even starker when comparing the total value of goods and services produced a year. Last year, Iran's GDP per capita was $4,663 while Israel's was $52,219, according to the International Monetary Fund.

Corruption and nepotism on many levels

For Iran's middle class, the economic situation has noticeably deteriorated. "The standard of living has reverted to what it was 20 years ago due to the sanctions," Djavad Salehi-Isfahani, an economics professor at Virginia Tech, told DW.

At the same time, a significant amount of Iranian state income is said to disappear into the opaque structures of the government. The Corruption Perception Index compiled by Transparency International ranks Iran 149 out of 180 countries.

The Islamic Revolutionary Guard Corps — a paramilitary elite force within the armed forces — and numerous religious organizations reportedly control central parts of the economy. They do not pay taxes, nor do they submit balance sheets.

In Iran, the president is elected by the people, most recently in July 2024, but the country is not a democracy. Of the 80 candidates, the ultra-conservative Guardian Council allowed only six to run.

The regime tries to buy social peace with subsidies for essentials like food and gasoline. Despite all the repression, it seems to fear public discontent. Protests against the political leadership frequently erupt, often triggered by rising prices or the mandatory headscarf for women.

A war with Israel would be an enormous economic strain for Iran, potentially forcing the government to cut spending elsewhere, which could further exacerbate public dissatisfaction.

This article was originally written in German.