Iran Faces Fresh Energy Imbalance with Limited Options

Tehran, Iran – Iran is facing energy constraints at the start of summer, with widespread use of air conditioning and other demand during hotter months contributing to a supply-demand imbalance.

For decades, successive Iranian governments have kept utility bills far below the cost of supply to households and offices through a combination of implicit oil and gas subsidies, regulated tariffs, state price controls, and sometimes direct financial support.

The negative impact of war with Israel and the United States on the economy means the government has fewer tools to manage the energy crisis this summer. Despite holding the world's third-largest proven crude oil reserves, Iran is set to resume fuel imports as demand exceeds refinery output.

President Masoud Pezeshkian has repeatedly called on households and offices to take practical steps to curb energy consumption. Last week, he removed his jacket during a government meeting to demonstrate how Iranians can avoid turning on air conditioning in offices.

Although household energy costs are much lower than elsewhere in the world, corruption, poor management, sanctions, chronic inflation, and currency devaluation have eroded the benefits Iranians once enjoyed from subsidized energy prices.

In November 2019, the government announced a tiered gasoline pricing mechanism that led to sharp increases for some consumers. This sparked nationwide protests, and since then, authorities have been wary of similar price hikes. While inflation remains high, subsidies continue to keep fuel artificially cheap.

Administration efforts to address the subsidy burden amid a growing budget crisis have resulted in only modest gasoline price increases via a complex three-tier pricing system. The system, applied through government-issued fuel cards, gives most drivers of domestically produced vehicles access to 60 liters of subsidized gasoline per month at 15,000 rials ($0.008) and an additional 100 liters at 1.6 cents per liter.

Iranians exceeding these limits must use 'emergency cards' issued at petrol stations, which allow an extra 30 liters of fuel per day at 50,000 rials (about 2.9 cents) per liter. After a new limit was imposed during the war to curb fuel consumption, each card now permits only 30 liters per day. Stations are given their own 'emergency cards' for usage beyond this cap. Due to supply constraints, station workers are instructed to limit use of these cards to 10–15 liters per transaction or to deny new cards to customers.

The Iranian government is pursuing similar programs for natural gas, electricity, and municipal water, with fears of social unrest deterring sudden price increases. There appears to be little the authorities can do to bridge the gap between lower energy output and rising demand for subsidized fuel, illustrated by endless queues at petrol stations since the war began.

“Reforming and raising energy prices is not feasible or reasonable now due to the current economic conditions and social concerns,” said Esmail Saghab Esfahani, vice president of the state-owned Organization for Energy Optimization and Strategic Management, earlier this week.

Some structural price changes have taken place, but these are affecting small businesses already struggling with Iran's poor economic conditions. A 35-year-old welding workshop owner near Tehran, who asked not to be named, said his monthly energy bill has tripled from 40 million rials ($23) per month last year. “I went to the electricity company, and they just said tariffs had gone up,” he said. “I got a similar message from a friend who is paying more for the same usage as before, so it seems we are bearing the cost of war.”

The authorities say any complaints about soaring bills will be reviewed. They also have a system where normal household consumption is kept artificially low, but heavy users can face bills up to 45 times the standard rate.

Despite possessing the world's second-largest proven natural gas reserves, Iran suffers chronic supply shortages during peak winter and summer consumption. The situation has worsened during the war, with attacks on Iranian energy facilities reducing gasoline output slightly from 115 million liters per day to 110 million liters. Meanwhile, consumption has risen from 10 million liters in 2025 to 140 million liters this year.

US President Donald Trump's threats of further attacks on power plants have raised fears of more blackouts and gas shortages this summer, meaning the energy crisis is likely to persist in the coming months.