Iran’s Energy Crisis

Authored by Brenda Shaffer & Dalga Khatinoglu via RealClearEnergy,

Iran is experiencing a systemic energy crisis. While many times in the past, Iran has had gas shortages or refined product shortages, this time Iran is undergoing an energy meltdown, with parallel shortages of electricity, natural gas and refined products. The Iranian energy crisis can affect regime stability. The lack of ability to provide basic energy needs to the public is an indicator of significant regime weakness. Iran’s gas trade with its neighbors— Turkey and Iraq—has also been disrupted. There is no quick fix to Iran’s energy shortages, which will continue to limit economic activity.

Iran holds the world’s second largest natural gas reserves and is the fourth-largest holder of oil reserves globally. With 300 sunny days annually, vast coastal and mountainous windy regions, the country also has strong wind and solar potential. Yet, Iran faces a constant 20% electricity deficit, a 25% natural gas deficit, and severe shortages of petroleum products, especially gasoline. For years, Tehran has seen the energy crisis coming but took no meaningful steps to avert it.

There is no quick fix to Iran’s energy crisis. Iran’s Oil Minister Mohsen Paknejad said this week that Iran needs $45 billion in investment to emerge from the energy crisis. Iran could reduce the impact of the crisis through increased gas imports from Turkmenistan. However, Iran has not been able to sustain gas import from Turkmenistan over the years, due to Tehran’s lack of payment. The regime’s energy subsidies to the public are also a huge financial burden, with close to a quarter of Iran’s GNP expended on subsidies.

There are multiple factors in Iran’s energy crisis.

One, the domestic gas and power prices in Iran are too low and this leads to high energy demand. The low prices are essentially a government subsidy aimed to keep the public complacent. In the past, when the government has raised energy prices, they have often triggered large-scale protests. The regime cannot risk new unrest. With such low prices, there is no motivation for private investment in gas and power supply in Iran and the government loses money on the energy it provides to the public.

Second, Islamic Revolutionary Guard Corps (IRGC) commanders control the energy sector, like most infrastructure and communication sectors in Iran. The finances are murky and there is extensive corruption. Even when the government allocates funds for maintenance and expansion of energy infrastructure, a lot is syphoned off.

Third, subsidized refined products are smuggled abroad, exacerbating the shortages. Approximately, 20% of Iran’s fuel production is smuggled and sold abroad. There is a huge gap in prices in gasoline and other refined products between Iran and its neighbors, making smuggling abroad a very lucrative business. 

Fourth, Tehran has not maintained its energy infrastructure and production consistently. Due to aging and inefficient infrastructure, Iran loses during production and transmission 40% of the total household electricity and gas consumption in Iran. In addition, Iran does not maintain sufficient gas storage capacity, in order to balance seasonable demand and production swings and other challenges.

Last, policy priorities generated the energy crisis: for close to a decade, Tehran provided Syria with 80,000-100,000 barrels a day of oil cost-free (on a credit line that will never be paid), while failing to provide sufficient fuel to its own citizens.

The energy crisis is having a huge impact on Iran’s economic output. Between 30-50% of Iran’s factories are currently idle due to lack of regular power. The crisis also affects Iran’s oil production, since gas for injection into fields is lacking. Iran’s steel production declined in half over the last year due to the energy crisis. Several of Iran’s refineries are not operating due to the lack of power, adding to the refined fuel shortage. This creates shortage of refined products for the domestic market as well as cuts into export revenue. Due to the energy crisis, some 22 cement plants are idled and pharmaceutical production had declined.

Iran’s energy crisis affects its food production as well. Iran’s fertilizer production is down, due to the lack of natural gas for feed stock. Higher fertilizer prices generate higher agricultural good prices. In previous summers, the energy crisis has hurt crops, since frequent electricity disruptions incapacitated water pumps.

In contrast to the regime’s statements, sanctions are not the cause of the Iranian energy crisis. Iran does not need foreign equipment to produce natural gas and power. Russia has been under sanctions for over a decade, and still manages quite well to provide electricity and heat to the Russian population. Iran could purchase from Russia and China any equipment it cannot manufacture at home. In addition, this is not Israel’s doing. With no evidence, the regime claims that last year Israel attacked two gas pipelines, and this is the cause of the crisis. However, gas pipelines are relatively easy to fix, and this does not explain the all-out shortages in electricity and fuel.

The gas shortages also affect Tehran’s natural gas export. Tehran exports gas to Turkey, Iraq and Armenia. The Minister of Energy and Natural Resources of Turkey, Dr. Alparslan Bayraktar, stated that Iran’s exports to Turkey are currently at half of its contractual commitment. Iraq also reported cutbacks in oil production due to the supply disruption of Iranian gas.

Iran’s power demand has continued to grow, but generation has not kept up. According to Iranian government estimates in 2010, the country needed annual electricity generation growth of at least 7% to avoid electricity shortages, but Iran only reached half that rate. In 2023, only one third of the electricity production was achieved. And, last year, electricity generation growth was even lower.

Source:  Tehran Chamber of Commerce

Currently, over 90% of the country’s electricity is generated by thermal power plants, with very low efficiency rates. Some of the country’s oldest plants have efficiency rates as low as 20%. Renewables provide only 1% of Iran’s electricity.

Iran also has a major gasoline and diesel deficit. To address these shortages, Tehran imports fuel from neighbors, including Russia.

Frequent blackouts and lack of fuel have been triggers to widespread regime protests and government overthrow in multiple locations in the world. The regimes of Egyptian presidents Hosni Mubarak and Mohammad Morsi, both fell after protracted power blackouts. The civil war in Syria during Bashar al-Assad’s reign, emerged right after Syria’s oil production fell to the level of its domestic consumption, leaving little oil revenue to fund the government and its security services. This year in Bangladesh, protestors toppled the government of Prime Minister Sheikh Hasina amid widespread power outages. Iran’s energy crisis can galvanize further opposition to the rule of the unpopular Islamic Republic. Iran’s energy crisis and potential regime crisis is happening on the eve of President Trump’s return to the White House and he is set on removing the Iranian threat.

Brenda Shaffer is a faculty member of the U.S. Naval Postgraduate School.

Dalga Khatinoglu is an expert on Iran energy issues. He served as head of Iran news service at Azerbaijan’s Trend News Agency (2007-2017) and was at Natural Gas World (2014-2020). Currently he is at RFE/RL and DW (Persian desk).