Iran’s Energy Economy: Sanctions, Geopolitics, and Global Market Shifts
1. The Paradox of Plenty
Iran controls one of the largest hydrocarbon endowments on Earth. With roughly 209 billion barrels of proven oil reserves and the world’s second-largest natural gas holdings, it ranks among the true energy superpowers on paper.
Yet the numbers tell a more complicated story.
Despite this extraordinary resource base, Iran is also the largest primary energy consumer in the Middle East. In 2022, it used approximately 13.5 quadrillion British thermal units of energy domestically. That scale of internal demand absorbs a massive portion of what might otherwise translate into export-driven wealth.
The result is a striking contradiction: abundance without proportional prosperity.
Decades of sanctions, underinvestment, and structural inefficiencies have prevented Iran’s resource wealth from fully transforming its economy. Instead of functioning purely as a global energy engine, the country increasingly operates as a case study in constrained power, where geology and geopolitics are in constant tension.
While global headlines often focus on naval movements in the Strait of Hormuz, the deeper shift is happening elsewhere: in currency markets, infrastructure bottlenecks, and strategic export pivots.
2. The Eastward Turn: Why Most Exports Now Go to China
By 2023, nearly 90 percent of Iran’s crude oil and condensate exports were heading to China. That shift generated an estimated $53 billion in net oil export revenues.
This is more than a trade realignment. It represents a structural recalibration of how Iran engages with the global financial system.
Rather than settling transactions predominantly in U.S. dollars, a growing share of trade is conducted in Chinese renminbi. This shift supports what analysts often describe as the “petroyuan” model, in contrast to the long-standing petrodollar framework that has dominated global oil trade since the 1970s.
The logic behind the move is straightforward. As sanctions increasingly rely on access to the U.S. dollar clearing system, countries under pressure seek alternative settlement mechanisms.
Analyst Monique Taylor summarized the dynamic succinctly:
“The weaponisation of the dollar and the dollar payments system in recent years to sanction US enemies such as Russia, Iran… is incentivising this move away from the US dollar by those who think they might be subject to the same punishment.”
However, the transition is not frictionless.
Unlike the highly liquid and globally integrated dollar system, renminbi-based settlement lacks comparable transparency and depth. That introduces transactional friction, pricing inefficiencies, and currency risks.
Rather than replacing one dominant system with another, the global energy trade is slowly evolving toward a more fragmented, multipolar currency structure.
3. The Efficiency Crisis: Burning Wealth Into the Sky
Iran is the world’s third-largest producer of dry natural gas. Yet it simultaneously ranks among the highest in gas flaring and venting.
In 2023, Iran flared or vented approximately 721 billion cubic feet of natural gas, a 19 percent increase from the previous year. Only Russia exceeded that volume.
This waste is not primarily a resource problem. It is an infrastructure problem.
Years of limited access to foreign investment, aging equipment, and technological constraints have left parts of the energy sector deteriorating. Instead of capturing and commercializing associated gas, large quantities are burned off.
The domestic consequences are visible.
Iran currently faces an electricity supply gap of roughly 12 gigawatts. Rolling blackouts during peak summer demand disrupt industry and daily life. Installed power capacity exists, but effective generation is significantly lower, with operational availability falling below 78 percent in some cases due to aging plants and maintenance constraints.
The paradox is stark: a country rich in gas burns large volumes unused while facing electricity shortages at home.
4. Bypassing the Strait of Hormuz: Strategy vs. Reality
For decades, the Strait of Hormuz has been considered one of the most critical maritime chokepoints in the world. A significant share of global oil trade passes through it.
Iran’s strategic response has been the development of the Goureh–Jask pipeline and the Jask export terminal. Located east of the Strait on the Gulf of Oman, the project aims to enable oil exports without transiting Hormuz.
On paper, the pipeline’s nameplate capacity is approximately 1 million barrels per day.
In practice, throughput has been far lower. By mid-2024, flows were reported near 300,000 barrels per day, and the facility’s operational record remains limited. Iran exported a single cargo from Jask in July 2021 and has not consistently used the route for crude exports since.
Construction delays, incomplete pumping stations, and limited storage capacity have constrained full deployment.
Strategically, the infrastructure represents insurance against maritime disruption. Operationally, it has yet to function at scale.
The distinction between geopolitical signaling and sustained throughput capacity remains significant.
5. The 2026 Surplus Paradox
Looking toward 2026, oil market projections suggest a potential oversupply. The International Energy Agency has forecast a possible surplus of roughly 3.73 million barrels per day, or about 4 percent of global demand, assuming slower consumption growth.
In classical supply and demand logic, such a surplus would place downward pressure on prices.
Conceptually, the relationship can be simplified as:
When supply exceeds demand, price pressure typically moves downward.
Yet markets are not governed by mathematics alone.
Even with surplus projections, geopolitical risk remains embedded in pricing behavior. Memories of recent regional tensions, naval deployments, and diplomatic uncertainty continue to shape trader psychology.
Energy markets are often described as “headline-driven” during periods of heightened tension. Even when supply balances suggest softness, risk premiums can persist.
The International Energy Agency has noted that economic uncertainty and higher prices can weigh on consumption. That feedback loop complicates the picture: elevated prices suppress demand, but geopolitical risk can keep prices elevated.
The result is a surplus that may not translate into sustained price collapse if geopolitical volatility remains a structural feature of the market.
6. A Fragmented Energy Future
Iran’s evolving energy strategy reflects broader global shifts.
Three structural themes stand out:
- Currency diversification in energy trade
- Infrastructure constraints limiting full resource monetization
- Strategic rerouting efforts aimed at reducing chokepoint exposure
The petrodollar remains dominant in global energy trade, but alternative settlement systems are expanding at the margins. Infrastructure bottlenecks continue to limit Iran’s ability to fully leverage its resource base. Strategic projects like Jask signal intent, even if operational scale remains limited.
Taken together, these developments point toward a more fragmented global energy landscape.
Rather than a single hegemonic currency and highly integrated financial system, the future may involve parallel payment networks, regionally aligned trade blocs, and persistent transactional friction.
Iran’s position within that system is neither marginal nor fully dominant. It sits in between: resource-rich, strategically significant, but constrained by structural and geopolitical realities.
In an era where energy trade increasingly intersects with financial sanctions and security policy, the central question may no longer be who controls the most reserves, but who controls the rules of exchange.
The reshaping of those rules is still underway.
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