Iran faces a new energy imbalance, but its options are limited

Iran is grappling with mounting energy constraints as the summer season intensifies, exacerbating an imbalance between supply and consumption. The widespread use of air conditioning and other essential needs during hotter months places significant pressure on the nation's energy infrastructure.

For decades, Iranian governments have maintained utility bills at artificially low levels, well below the actual costs of supply. This policy, supported by implicit oil and gas subsidies, administered tariffs, and state-controlled pricing, has created a persistent deficit. Compounding the issue, the economic impacts of conflicts involving Iran, Israel, and the United States have limited the government's options for addressing the current energy crisis.

Despite possessing the world's third-largest proven crude oil reserves, Iran faces a shortfall in refinery output, necessitating fuel imports. President Masoud Pezeshkian has appealed to households and offices to conserve energy, even demonstrating by removing his jacket during a meeting to show how air conditioning can be adjusted. However, factors such as corruption, mismanagement, sanctions, chronic inflation, and currency devaluation have eroded the benefits of subsidized energy prices for ordinary Iranians.

The government's attempts to manage the subsidy burden amid a severe budget crunch have been cautious. A 2019 gasoline price increase sparked nationwide protests, making the administration wary of similar measures. Current fuel pricing involves a complex tiered system, with heavily subsidized rates for initial consumption limits, followed by significantly higher prices for additional fuel. Recent supply constraints have led to further limitations on fuel card usage at petrol stations, indicating the severity of the energy deficit.

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Last week, he removed his jacket during a government meeting to demonstrate how Iranians can avoid turning down their air conditioning thermostats in their offices.