Iran government signals fuel price hike on eve of new US sanctions

Tehran, Iran – The Iranian administration is preparing the public for another rise in fuel rates as it attempts to buoy the country's ailing economy.

Key points

• The International Monetary Fund predicts that Iran's gross domestic product (GDP) will contract by 5.4 percent in 2026.
• On Friday, First Vice President Mohammad-Reza Aref remarked that the cheapest rate tier with the 60-litre quota must remain in place.
• Iranians now consume roughly 135 million litres per day of fuel, with authorities saying earlier this month that production was at regarding 121 million litres per day.
• Local authorities, reportedly in conjunction with the administration, unveiled the new rates would be enforced in 204 pump stations throughout the province overnight into August 13.
• Hiking the cost of petrol in this oil-rich country has already sparked unrest before, including nationwide demonstrations in 2019.

With the United States' siege of Iran's seaports and the economic impact of the war continuing, the offer of heavily subsidised fuel to the country's 93 million population is a burden that the administration is struggling to afford.

Meanwhile, the International Monetary Fund predicts that Iran's gross domestic product (GDP) will contract by 5.4 percent in 2026.

Hiking the cost of petrol in this oil-rich country has already sparked unrest before, including nationwide demonstrations in 2019. Such measures additionally preceded the January 2026 protests by a number of weeks.

So authorities are treading carefully, with a final decision projected over the coming weeks.

"I understand that we have plenty of difficulties in society now. We are doing our best so the individuals are not afflicted, but the enemy is doing its absolute best so we won't succeed, " President Masoud Pezeshkian stated during a speech on Sunday morning, alluding to the six-month US-Israel war on Iran.

After US President Donald Trump threatened to target Iran with the "most crushing economic operation" ever undertaken against any country, the Iranian rial hit a new all-time low of 2 million rials per the US dollar in Tehran's open market on Sunday afternoon.

On Friday, Pezeshkian observed that the rate of fuel in Iran is considerably lower than in most countries in the world.

He remarked his administration pays 1.3 million rials (65 US cents at the current rate) per litre of petrol produced by refineries. The lowest cost tier offered to the population is 15, 000 rials (less than 1 cent) per litre (0.26 gallons).

Two other cost categories for personal vehicle apply – one at 30, 000 rials (1.5 cents) per litre and the third at 50, 000 rials (2.5 cents) – are additionally eating into the government's finances.

Meanwhile, Iranians with imported, free-zone or newly registered vehicles are liable for the highest-price tier.

Still, there are limits to the amount of subsidised fuel Iranians can purchase, with each category having its own monthly quota, and sales are only allowed with a fuel card.

Pump stations have their own cards that offer some extra fuel at the highest-price category, but with a single-use limit of 25 litres in Tehran.

In practice, the quota for the cheapest category is 60 litres. From the start of the current calendar year in late March, authorities cut the quota for the second category from 100 to 70 litres. After two weeks of fighting between Iran and the US erupted again in July over the Strait of Hormuz, this allowance was cut again to 50 litres.

To compensate for these financial losses, the administration has attempted to rise refinery production, applied petrochemical products, and reduced the quality of fuel by diluting it. Fuel imports have additionally ceased due to the war.

For context, the government's head of energy optimisation, Esmail Saghab-Esfahani, informed state television last week that there are three options – each with their own complexities.

One option, he explained, is a first-come, first-served mechanism whereby rates would remain unchanged, but pump stations would simply shut down after running out of their allocated petrol.

Another is to offer all Iranians – including those without a vehicle – roughly 30 litres of fuel per month at the lowest cost tier. Those who don't drive could sell their monthly quota if they choose.

Notably, the third option is to liberalise the cost of fuel for all, with the administration reportedly considering a cost of 872, 000 rials (concerning 44 cents) per litre. But the consequence of this would be to create another massive inflationary bubble, with the massive rise in transport and logistics costs for businesses being passed on to consumers.

This cost is closer to the refinery production rate tag, and was almost implemented in a pilot programme in Kerman, the country's largest province, in southeastern Iran.

Local authorities, reportedly in conjunction with the administration, unveiled the new rates would be enforced in 204 pump stations throughout the province overnight into August 13. But the administration cancelled the pilot scheme at the last minute, and contradicted local office-holders by saying they were not consulted on the move.

Nevertheless, the administration has signalled that a considerable rate growth is in the works.

On Friday, First Vice President Mohammad-Reza Aref remarked that the cheapest rate tier with the 60-litre quota must remain in place. But the second quota could gradually fall, and rates should ultimately be liberalised transparently with proceeds directed toward vulnerable residents.

"The government keeps talking about how fuel prices don't match other countries, but it doesn't like to talk about how salaries don't even begin to match other places, or other expenses, " Mostafa, who earns 300 million rials ($150) a month working at a clothing shop in western Tehran, informed Al Jazeera.

As well as domestic mismanagement and state-imposed internet shutdowns, he explained that while the cost of driving to work in his 15-year-old Iranian-made vehicle does not factor heavily in his monthly calculations, housing, food and other runaway expenses are a major challenge after months of war, blockade and intensified US sanctions.

According to Figures published by the Statistical Center of Iran in July, rates were 88 percent higher compared to the same month last year, with food inflation standing at over 128 percent.

Meanwhile, a 55-year-old man working as a driver for multiple online ride-hailing services informed Al Jazeera that conversations with passengers often turn into expressions of anger and frustration concerning the deteriorating living conditions in Iran.

"Everything will get more expensive a little while after fuel gets more expensive, " he remarked. "We're already getting crushed by the prices we have today."

For now, iran government signals fuel price hike on eve of new US sanctions remains the part of the story worth watching, and further updates are likely as more details are confirmed.