Iran has the second-largest natural gas reserves and the fourth-largest oil reserves in the world; yet, it is experiencing a severe fuel crisis that is interfering with daily life, halting industrial activities, and making the economy more fragile.
The question that arises is why a resource-rich country like Iran is experiencing ongoing energy shortages, and what policies might effectively address these issues? This paradox begs this critical question. A mix of institutional inefficiencies, faulty domestic energy policies, and external pressures—particularly international sanctions—is to blame for the crisis, which is characterized by ongoing power outages, natural gas shortages, and disruptions in the fuel supply.
This essay examines the underlying reasons for Iran's fuel issue, evaluates its geopolitical and economic ramifications, and considers possible future developments and policy alternatives. The results have immediate implications for policymakers, as Iran's energy unpredictability poses a threat to regional energy security and geopolitical stability, while also undermining economic resilience and domestic welfare.
Causes of Iran’s Fuel Crisis
Fuel shortages in Iran are the result of a combination of policy, economic, and structural shortcomings. The nation's long-standing system of massively subsidized energy pricing lies at its heart. These subsidies, which are among the lowest in the world, promote excessive domestic consumption and provide an incentive for smuggling across borders. Demand has surged as a result of gasoline prices that are significantly lower than those on the global market and even lower for monthly use that is rationed. The smuggling further depletes Iran's internal gasoline supply, accounting for 20% of its daily petroleum production, which is then exported to neighboring countries where profit margins are significantly larger.
Approximately 10 to 20 million liters of gasoline are smuggled out of Iran daily to neighboring states, where fuel prices and profit margins are substantially higher. This amounts to nearly 20% of Iran's daily petroleum production. Iran's domestic gasoline supply is drastically reduced by this illegal activity, resulting in shortages and yearly economic losses estimated at billions of dollars.
At the same time, decades of underinvestment and mismanagement are reflected in Iran's deteriorating energy infrastructure. Refineries, power plants, and gas storage facilities are examples of essential components that are becoming increasingly inefficient. Due to antiquated networks and inadequate maintenance, almost 40% of residential natural gas and electricity is lost during production and transmission. The nation's capacity to meet growing domestic energy demands is severely hindered by this inefficiency, especially during periods of peak usage.
The government's strategic use of oil revenues is another essential consideration. Tehran's dedication to supporting regional allies and proxy forces, especially in Syria, has taken a large amount of money away from improving domestic infrastructure. Iran is reportedly supplying large amounts of oil to Syria on credit, with little chance of repayment. These geopolitical expenditures represent a significant opportunity cost, undermining efforts to modernize energy systems and address internal consumption issues.
Impact of International Sanctions and Economic Constraints
The external pressure of international sanctions is layered on top of these internal dynamics. Access to foreign funding, cutting-edge technology, and contemporary energy sector equipment has been significantly hampered by sanctions aimed at Iran's nuclear program. Iran has thus been unable to diversify into renewable energy sources, upgrade its vital infrastructure, or increase its refining capacity.
Iran's fiscal resources have been severely limited, making it difficult for the government to make large-scale investments in the energy sector. In 2023, the country spent about $30 billion on electricity subsidies and $52 billion on petroleum product subsidies, which is an unsustainable expenditure in the face of declining oil export revenues and ongoing economic isolation. These subsidy figures highlight the disparity between the country's strategic priorities and its fiscal realities, underscoring the systemic nature of the current crisis.
External Disruptions and Security Vulnerabilities
External interruptions, most notably the clandestine Israeli strike on two vital gas pipelines in February 2024, have significantly weakened Iran's energy security. Authorities were forced to use emergency supplies due to the sabotage, which also led to a 350 million cubic meter daily gas shortage. Although Iranian officials have pointed to this incident as the primary cause of the current problem, the attack was preceded by several underlying vulnerabilities, including outdated infrastructure, systematic mismanagement, and a lack of investment. Additionally, the sabotage served as a catalyst rather than a primary cause, highlighting underlying structural weaknesses in Iran's energy system, given how easily pipeline repairs were carried out.
Wasteful Consumption and Structural Inefficiencies
Inefficient consumption habits and long-standing institutional flaws exacerbate Iran's ongoing energy crisis. Over 70% of the nation's energy comes from natural gas, yet a significant portion of that is wasted due to the fleet of antiquated, fuel-inefficient cars that achieve an average of only 17–21 miles per gallon. Since over 95% of houses are linked to the gas grid, industrial demand is neglected in favor of residential use, which is frequently driven by political considerations and reduces economic output.
These difficulties are made worse by unregulated cryptocurrency mining, which is mostly run by organizations with ties to the state. Power shortages are exacerbated by these operations, which consume electricity at a rate comparable to that of entire provinces. Furthermore, systemic inefficiencies are exacerbated by gasoline smuggling across porous borders and inadequate energy sector management, which restricts Iran's ability to implement crisis response plans.
Geopolitical and Economic Pressures
The energy crisis in Iran is emerging amid growing economic and geopolitical pressures. In addition to reducing Tehran's regional clout, the fall of Syria's Bashar al-Assad government has also upended Tehran's strategic presence in the Levant. At home, the collapse of the Iranian rial, which currently trades at about 770,000 to the US dollar, highlights the country's soaring inflation and discourages crucial foreign investment in the energy industry. Concurrently, Iran's deteriorating fuel shortages have compelled reductions in gas supplies to Turkey and Iraq, endangering vital commercial ties and increasing financial pressure. Iran's capacity to stabilize its energy sector and secure the funding required for long-term reform is further limited by the combination of geopolitical isolation and economic vulnerability.
Consequences of the Energy Crisis in Iran
Iran's energy crisis is having a severe impact on its domestic economy and regional obligations. Long-term gas and electricity shortages have disrupted public infrastructure, industry, and daily life, and have also reduced energy exports, weakening Iran's economic viability and regional influence.
Economic and Industrial Collapse
Massive economic losses resulting from the crisis are projected to be in the tens of billions of dollars per year. Energy-intensive industries, such as steel, manufacturing, and petrochemicals, are operating at less than half capacity, and daily blackouts, which can last up to two hours, severely impact output in cities like Tehran. The depreciation of the rial has increased the cost of fuel imports, further exacerbating the economic consequences. The government spends an estimated $1.3 billion annually on gasoline purchased in foreign currencies. Nearly one-third of the population is now below the poverty line due to inflation and stagnant earnings, making it difficult for many to afford necessities.
Public Health and Environmental Catastrophe
Iran has increasingly turned to using mazut, a highly polluting fuel oil, in power plants as gas supplies have diminished. A public health catastrophe has resulted from this emergency measure, as sulfur dioxide and fine particulate matter emissions have exceeded WHO safety guidelines by up to 20 times. For almost a month, schools in major cities have been closed due to poisonous air.
According to former Health Minister Mohammadreza Zafarghandi, the yearly economic cost of air pollution, including medical expenses and lost productivity, is between $12 and $20 billion, which is more than the nation spends on fuel subsidies. Ironically, Iran has increased its LPG exports since 2020, reaching 337,000 barrels per day by 2024, prioritizing hard currency profits over public health, despite facing environmental challenges at home.
Social Unrest and Governance Challenges
As citizens deal with gasoline shortages, power outages, and declining living standards, the growing crisis has damaged popular confidence in government institutions. In an attempt to ease financial strain, the government decided to cut gasoline rations in half in December 2024. This move caused widespread fear and brought back memories of the 2019 protests, when a violent response killed hundreds of people.
The administration has used oppressive measures to quell criticism instead of enacting structural reforms, like modernizing infrastructure or increasing energy efficiency. The leadership is caught in a policy bind: keeping subsidies in place accelerates economic decline, while cutting them could lead to widespread dissent and instability.
Policy Responses and Future Outlook
Iran is attempting both immediate mitigation and long-term transformation in response to its worsening energy issue. Some programs concentrate on updating antiquated infrastructure and controlling use, while others seek to stabilize fuel supplies and create income. However, the effectiveness of these measures is hampered by institutional inefficiencies, political opposition, and financial hardship.
Short-Term Mitigation and Its Limitations
To prevent harmful air pollution, the Iranian government prohibited the use of mazut in power plants and implemented electricity rationing in Tehran, Qom, and other northern districts in November 2024. Although these policies provide temporary respite, they worsen the situation for businesses and individuals already experiencing energy insecurity by failing to address the underlying cause, which is ongoing gas shortages. Similar failures have been observed in attempts to enhance border security and curb the $8 billion annual fuel smuggling trade. The continued illegal trade, driven by corruption and the involvement of high-level players, exposes the structural weaknesses in Iran's energy governance and the futility of band-aid solutions to long-standing institutional problems.
Renewable Energy: Promise Undermined by Policy Contradictions
With an estimated 300 days of sunlight per year and the potential to produce up to 12,000 MW of solar energy, Iran has considerable potential for renewable energy. A positive step has been taken with Minister Abbas Aliabadi's intention to add 2,400 MW of solar capacity by mid-2025. This program, however, competes with Iran's continuous nuclear energy investments, which take political and financial focus away from renewable energy. Iran devotes less than 1% of its national budget to renewable energy development, which is a sharp contrast to regional counterparts such as the United Arab Emirates, which is now building the world’s largest solar farm. This disparity is indicative of a larger strategic misalignment that prioritizes symbolic megaprojects and short-term, piecemeal solutions over long-term, scalable energy transformation.
The Path Forward: Structural Reforms or Escalating Crisis
Structural transformation is necessary to resolve Iran's energy crisis. This entails removing the IRGC's influence over energy infrastructure, depoliticizing energy prices, and needs billions in international capital to update the system and refineries.
Functional administration and strategic planning of Iran's energy sector have been severely hindered by the Islamic Revolutionary Guard Corps' (IRGC) broad control over the country's energy infrastructure, which includes power generation, distribution, and oil exports. Because IRGC commanders own important energy assets and receive no-bid contracts, widespread corruption and the embezzlement of monies intended for expansion and upkeep are made possible. Its power includes controlling as much as half of Iran's oil exports, which brings in a sizable sum of money for its regional proxies and military endeavors. Because the IRGC prioritizes political and military interests over the modernization and efficient operation of Iran's energy infrastructure, this control has contributed to the country's ongoing energy crisis, which is marked by frequent shortages of electricity, natural gas, and fuel smuggling.
However, the regime's hostile foreign policy and well-established patronage networks significantly restrict the viability of such reforms. Blackouts, pollution, and financial losses will all worsen if the energy sector continues to deteriorate in the absence of a diplomatic solution that lifts sanctions.
The crisis is a sign of more serious problems with the government. Mismanagement can transform an economic asset into a national liability, as seen in Iran's inability to convert its wealth in resources into dependable infrastructure.
Energy Efficiency and Demand Management: A Missed Opportunity
For Iran's vulnerable power industry, advanced grid technologies such as demand-response systems, smart meters, and AI-enabled load balancing present a game-changing opportunity. Particularly during the winter months when heating demands are at their highest, these technologies allow for real-time control, minimize waste, and match the supply of electricity with changing demand.
These technologies are still underutilized in spite of their potential. They are crucial to any long-term energy strategy, as their deployment may improve grid reliability, reduce reliance on emergency fuels like mazut, and facilitate the integration of renewable energy sources. Digital energy management solutions are both essential and desirable for a nation with aged infrastructure.
Fuel Smuggling: A Structural Drain on Resources
Fuel smuggling continues to be a significant burden on Iran's energy sector. Approximately 20% of the nation's gasoline and diesel production, or 10 to 15 million liters per day, is smuggled, costing the country $3 to $5 billion in lost income each year. The leading cause is the enormous price difference between regional markets like Iraq and Turkey, where prices sometimes surpass $0.70/liter, and Iran's substantially subsidized fuel, which is only around $0.04/liter.
This disparity in pricing encourages extensive smuggling, which is frequently made possible by dishonest officials and organized networks. Border towns are further pushed into this illegal economy by high unemployment and inflation. The political complexities of the energy situation are further highlighted by the participation of IRGC-affiliated organizations in smuggling operations, which also makes enforcement more difficult. Fuel shortages at home are exacerbated by smuggling, leading to rationing and power outages. Additionally, a large portion of the $52 billion in fuel subsidies in 2023 indirectly supports the illicit market, depriving the state of funds that could otherwise be used to modernize infrastructure. Additionally, smuggling fuels geopolitical tensions, especially with Iraq, and affects regional fuel markets.
Potential Scenarios
- Optimistic Scenario: At best, sanctions are lifted, and Iran attracts substantial international investment, paving the way for a significant overhaul of its energy industry over the next five to ten years. Iran may stabilize domestic energy output and lessen its reliance on fuel imports by depoliticizing energy prices, addressing systemic inefficiencies, and utilizing its substantial renewable energy potential as well as its plentiful natural gas reserves. Essential changes, such as updating antiquated refineries, promoting energy efficiency, and eliminating unnecessary subsidies, will not only help alleviate energy shortages but also make Iran a more competitive player in the regional and international energy markets.
- Pessimistic Scenario: If sanctions remain in place and political incompetence goes unchecked, Iran's energy issue is sure to get much worse. This could lead to further social discontent, economic stagnation, and increased inflation resulting from prolonged blackouts, a gasoline shortage, and rising prices. Under these circumstances, the absence of both foreign investment and internal reform would exacerbate the deterioration of infrastructure, heighten popular discontent, and further erode the government's legitimacy. Particularly if energy insecurity worsens in tandem with declining living standards and diminished state capacity, the increasing strain may cause the system to become unstable.
- Likely Scenario: Between these two extremes lies the most realistic perspective. Although radical changes are unlikely to occur anytime soon, Iran may make modest strides with careful alliances, especially with China and Russia, and small-scale policy changes. These initiatives won't address the underlying causes of the problem, but they can mitigate its worst consequences, such as severe shortages or total infrastructure failure. In the absence of significant governance change and a reorientation of energy strategy, long-term stability will continue to be impeded by deep structural inefficiencies, fuel subsidy distortions, and geopolitical isolation. Therefore, without more extensive systemic reform, permanent recovery is still difficult, even when short-term stabilization is achievable.
Conclusion
The purpose of this paper was to address a crucial query: What are the potential solutions to the growing fuel crisis in Iran, given its enormous oil and gas reserves? The results indicate that a combination of global sanctions, longstanding governmental shortcomings, and outdated infrastructure is the root cause of the crisis. These issues have made it extremely difficult for Iran to meet its own energy needs, resulting in power outages, industrial disruptions, and increased expenses.
According to the report, short-term solutions, including import surges, plant closures, and restrictions, are inadequate and unsustainable. Instead, a sustainable solution necessitates both external participation and concerted home reforms. To draw in vital investment and technology, this entails depoliticizing energy prices, updating distribution and refinery infrastructure, eliminating wasteful subsidies, and reentering international markets.
Ultimately, politics will determine the development of Iran's energy sector. Iran's energy system might stabilize during the following ten years if the Pezeshkian administration is able to carry out these structural changes and negotiate the lifting of sanctions. Otherwise, the nation runs the danger of worsening its energy problem, jeopardizing its economic recovery, and further eroding public confidence. This issue is crucial to Iran's future stability, as the stakes are not just economic but also fundamentally political and social.
