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

Iran’s government weighs limited energy control options in a strained economy, with the war impacting production.

Tehran, Iran – Iran is facing more energy constraints as its summer season begins, with the widespread use of air conditioning and other needs during hotter months contributing to an imbalance between supply and consumption.

For decades, successive Iranian governments have kept utility bills well below supply costs for households and offices through a mix of implicit oil-and-gas subsidies, administered tariffs, state-controlled pricing, and sometimes direct financial support.

The negative impacts of the war with Israel and the United States on the economy mean the government has fewer tools at its disposal to deal with an energy crisis this summer.

Despite having the world’s third-largest proven crude oil reserves, Iran will have to import fuel again as demand outpaces refinery output.

President Masoud Pezeshkian has repeatedly urged households and offices to take practical steps to limit energy consumption. 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.

Even though energy costs for households are much lower than in other parts of the world, corruption, mismanagement, sanctions, chronic inflation and currency devaluation have eroded the benefits Iranians usually feel from subsidised energy prices.

In November 2019, the government announced a tiered gasoline price scheme that would see huge increases for some consumers. This sparked nationwide protests, and since then, the government has been wary about similar price hikes.

While inflation has galloped on, continued subsidies have kept fuel artificially low.

The administration’s attempts to tackle the subsidies burden due to a mounting budget crunch have resulted in only limited increases in petrol through a complex three-tiered pricing system.

This is applied via a government-issued fuel card, giving most users of Iranian-made vehicles access to 60 litres (15.85 US gallons) per month of subsidised petrol at 15,000 rials (0.8 cents) and another 100 litres (26.42 gallons) at 1.6 cents.

Any use over tier 1 and tier 2 is priced at 50,000 rials (around 1.4 cents) and Iranians are allowed a maximum of 30 litres of fuel per day under any of these prices schemes.

An “emergency card” issued at petrol stations, permitting them to an additional 30 litres (7.9 gallons) of fuel a day at 50,000 rials (about 2.9 cents) per litre.

After a new cap was imposed during the war to lim