Is Iran shielding the state or its people?

President Masoud Pezeshkian’s government, operating with limited room for manoeuvre, has increasingly framed the energy sector as the primary lever through which incremental stability might be restored.

Yet these efforts at reform unfold against a backdrop of widening social distance between the state and society, now that the post-war lull is effectively gone and Iranians’ anger keeps rising.

Energy as the “Master Key”

Despite vast resources, Iran faces as much as 20GW electricity shortages, must spend $6 billion per year on fuel imports, and limits gas as well as electricity supplies to industries during peak demand – thus reducing Iranian production and much needed revenues from non-oil exports.

On top of that, chronic environmental degradation such as water strain and urban pollution has directly worsened living conditions for all Iranians and fuelled frustration across the country.  

Accordingly, the government has viewed energy reforms as central to resolving broader economic and social pressures. On December 13, the government introduced a new fuel pricing mechanism that will apply to 43% of fuel users.

Under the revised subsidy system, consumption above 160 litres per month will be priced higher at 50,000 rials per litre ($0.04), still far below the estimated real cost of fuel, which officials place at around 700,000 rials ($0.5). Even so, the change represents a politically sensitive step in a country where fuel subsidies are deeply embedded in the social contract.

Authorities argue the reform is targeted. Government vehicles, free-zone licence plates, newly registered cars, foreign imports and multi-car owners are those who will be more affected.

Government officials have said the measure will add only 0.2 percentage points to inflation, help rationalise consumption and improve social justice by redirecting additional revenue into direct cash subsidies. Immediately after the introduction of higher prices, fuel consumption saw a 40% drop.

The scale of Iran’s fuel problem is stark. Domestic fuel production stands at around 110 million litres per day, while average consumption is closer to 130 million litres—spiking to 160 million litres during the Iranian new year period in March and nearly 200 million litres during wartime conditions last June.

This requires costly fuel imports which starkly contrast with Iran’s refining boom of the late 2010s when it gained billions from fuel exports.  

The fuel price policy is accompanied by harsher police crackdown on fuel smuggling networks – trafficking at least 20 million litres a day - which have thrived from Tehran’s heavily subsidised fuel that can be sold 15 times more expensive across the Gulf and 30 times higher in Turkey.

Pezeshkian justified the measure as unavoidable and will face increased scrutiny, not only from the population let down by his earlier promises not to increase fuel prices but also by the security apparatus which warned of increased upheaval risks – at a time when the Islamic Republic can least afford it.

The targeted nature of the price hike – as opposed to the general 2019 fuel price increase that led to overnight nationwide protests – demonstrates the government’s caution to frame its reforms as attempts to target corruption as well as market distortions that favour “upper” classes.

In the same vein, the Pezeshkian government has so far cut 8.5 million people from direct subsidies, aiming to remove the top three income deciles by March 2026.