Why the US attack on Iran’s Kharg Island worries oil markets

Cape Town – Iran’s oil exports hinge on a small outpost in the Persian Gulf: Kharg Island, the loading point for almost all the country’s crude shipments. 

On March 14, US President Donald Trump announced in a social media post on Truth Social that the US had bombed military targets on the island but spared its oil infrastructure.

He warned Iran’s leaders that he would immediately reconsider that decision if they interfered with ships transiting the Strait of Hormuz.

The island off the Iranian coast ships about nine out of every 10 barrels of Iran’s crude exports, most of it bound for China.

If Kharg Island’s oil assets became a target, the impact would immediately ripple across energy supply chains, with unpredictable consequences for the global economy.

Why is Kharg Island important?

The small island lying about 24km off the Iranian mainland has been an oil export terminal since the 1960s, when it was established by the American oil giant Amoco.

The facility was seized by the Iranian state following the country’s 1979 Islamic Revolution. 

The island’s terminal has been handling around 1.5 million barrels per day, a volume that eclipses the output of most OPEC countries.

Shipments there are monitored closely by traders who track the ebb and flow of crude from the Organisation of Petroleum Exporting Countries’ fourth-biggest oil producer.

Governments seeking to understand the impact of Western sanctions on Iran’s oil output also monitor the site closely. Any disruption to operations or unexpected swings in export volumes can quickly affect energy prices as traders factor in the likely impact on global supplies.

The facility is seen as so strategically vital to Iran that any attack that inflicts significant damage on the site would likely trigger direct retaliation by the Iranian military. 

What are the key oil facilities at Kharg Island? 

The oil makes its way from Iranian oil fields through subsea pipes to Kharg Island, where it is stored before being loaded onto tankers.  

The site is dotted with storage tanks that can hold as much as 30 million barrels – about a third of the capacity of the giant US storage hub at Cushing, Oklahoma.

It has space to berth eight tankers and capacity to load more via ship-to-ship transfers. More than six million barrels of crude can be loaded at Kharg Island in a day, stretching to as much as 10 million barrels if necessary, according to Iranian officials.

The island is populated mainly by oil industry workers, who transit to and from the facility via an airstrip operated by the National Iranian Oil Co. 

What was happening on Kharg Island before the attack? 

Iran increased oil loadings at the terminal prior to the start of the conflict.

Tankers continued to fill there after hostilities broke out – probably because Iran’s government wanted to get as much of the country’s crude as possible onto the water and out of harm’s way. 

Those vessels need to transit the Strait of Hormuz to reach global markets, and far fewer ships have been passing through the waterway since the war began on Feb 28. 

What does such an attack on Kharg Island risk?

While neither side has reported evidence of major damage to energy infrastructure, such an attack raises the stakes for oil markets in a conflict that has already hit production and all but closed the Strait of Hormuz, sending crude prices soaring by more than 40 per cent.

Air strikes on Kharg Island could disrupt most of Iran’s oil exports for weeks or months and worsen what is already a serious economic crisis in the country. 

While most of the oil from Kharg Island goes to China, disrupting exports from the terminal will send global crude prices even higher, stoking inflation in major industrialised nations including the US – something the Trump administration will want to avoid in an election year. 

There is also a risk that an attack could prompt Iran to escalate strikes on energy infrastructure across the region. Iran has threatened to hit US-linked oil targets in the Middle East if its energy facilities are attacked, according to media reports. BLOOMBERG