Iran, a land blessed with the world’s fourth-largest proven crude oil reserves and the second-largest natural gas reserves, faces an energy paradox. Despite holding such immense “liquid gold,” the nation struggles with severe domestic energy crises, a struggle worsened by continuing international sanctions and an unstable geopolitical environment, notably the escalating tensions with Israel.
Iran’s energy potential is staggering. With approximately 157 billion barrels of crude oil and massive natural gas deposits, it accounts for roughly 4% of global oil output and a remarkable 18% of global gas reserves. Historically, Iran has been a crucial player in global energy markets, reaching a peak crude oil production of 6 million barrels per day (bpd) in 1974 before the 1979 revolution.
Yet, the current reality presents a contrast to this potential. In early 2025, Iran’s crude oil production remained around 3.28-3.3 million bpd, significantly below its potential capacity of over 4 million bpd. This gap is a direct consequence of decades of underinvestment, alongside the tight constraints of international sanctions, which have left Iran’s abundant energy wealth largely undeveloped.
The primary external force shaping Iran’s oil sector is the comprehensive U.S.-led sanctions regime, particularly the sanctions reimposed after the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA), which lifts international sanctions in exchange for restrictions on Iran’s nuclear program development, in 2018. These sanctions meticulously target Iran’s banking, insurance, shipping and core oil and gas industries. The result? Iran has lost billions in potential annual revenue, with oil exports crashing to near-zero levels during peak sanctions periods.
However, Iran is not a passive victim of international pressure. It has developed a sophisticated “shadow market,” an underground, unofficial, and illicit system of trade to avoid these restrictions. This illicit network, involving ship-to-ship transfers, tankers sailing under false flags and suspicious financial transactions, enabled Iran to move an estimated 1.4 million bpd and generate over $50 billion in revenue from shadow exports in 2023. China remains Iran’s largest customer, purchasing 80-90% of Iran’s crude, often at discounted prices.
The recent escalation of tensions between Iran and Israel has piled new complications onto this already volatile situation. While Israeli attacks have, to date, primarily targeted domestic infrastructure like fuel depots and a refinery near Tehran, rather than core oil production and export facilities, the regional conflict is shaking up global energy markets, raising uncertainty.
Any significant escalation, such as a direct targeting of major Iranian oil fields or, more critically, a threat to the Strait of Hormuz (which connects the Persian Gulf to the Gulf of Oman and is a choke point for roughly 30% of global oil consumption), could send oil prices climbing. Brent crude prices briefly surged by 8-13% to $75-$78 per barrel following initial Israeli attacks on Iranian targets in June 2025.
Furthermore, the increased political instability makes foreign companies even more hesitant to invest in Iran’s crucial energy infrastructure, regardless of whether sanctions are in place or not. What’s more, the conflict is draining Iran’s valuable oil money. Reports suggest that nearly a third of their military budget for 2025-2026 is being funded by oil allocations, rather than direct cash. This “oil-for-military” arrangement is a less transparent way for them to finance their military, including the U.S.-designated terrorist organization Islamic Revolutionary Guard Corps (IRGC), and the groups they support in the region.
But even beyond all the international drama, Iran faces a huge energy problem right at home. It’s a puzzling situation for a country so incredibly rich in oil and gas. The main reason for this mess? Energy prices are ridiculously cheap, some of the lowest in the entire world.
Instead of making life more affordable for everyday people, however, these low prices encourage people to overuse energy or illegally smuggle it out of the country. In 2023 alone, Iran spent a staggering $30 billion on cheap electricity and $52 billion on cheap fuel, money it can’t afford to keep spending. Add to that a population that’s doubled since 1979, and these factors have pushed energy demand far beyond what the country can provide. That’s why running out of fuel and losing power has become a common, frustrating part of daily life across Iran.
For decades, Iran hasn’t put enough money into its energy system, and it’s been poorly managed. Its old oil refineries, power stations and the lines that carry energy just don’t work well anymore. Almost 40% of the gas and electricity meant for homes simply disappears between where it’s made and where it’s used. Because Iran hasn’t upgraded to newer technology, its huge but aging oil and gas fields are producing less and less.
What all this means for people is that power cuts happen all the time, homes lose gas in winter and electricity goes out in summer. This makes daily life difficult and hurts businesses. Not having reliable energy also causes prices to rise and makes people’s lives harder, to the point where almost a third of Iranians are now living in poverty.
Iran’s energy situation is tough, with very few clear paths forward. Sure, the country has a lot of potential for clean energy, like sunshine almost every day, enough to produce solar power. But right now, this clean energy sector isn’t really working. Even plans to add more solar power by mid-2025 are stuck because Iran is cut off from the world and has more urgent priorities for its money, due to sanctions and regional tensions.
To fix its old energy systems and find new oil and gas, Iran desperately needs a lot of money — hundreds of billions of dollars, to be exact. But sanctions and uncertainty in the region undermine this goal.
For now, Iran will probably keep relying on its hidden trade routes for oil. But if sanctions get even tougher, or if there’s a direct military clash, that hidden network may not work anymore. Recent reports also show that more and more of Iran’s oil money is going straight to the military. This means they’re choosing to spend on fighting rather than making sure people have steady energy or building a stronger, more diverse economy.
At the end of the day, Iran’s strange energy problem is just a small piece of its bigger national troubles. Although the country has many natural resources, its true power is locked away, held captive by international demands, poor decision-making from its government, and a regional fight that’s getting more dangerous for every country in the region.
Photo Caption: Oil Refinery in Iran
Photo Credit: Photo by Abdolhassan Fazeli on Unsplas