Iran's oil lifeline is drying up, and the biggest pain may fall on ordinary citizens

Iran is approaching a financial reckoning as a US naval blockade tightens around its seaborne crude exports. Iran's trackable floating oil inventory outside the blockade zone has fallen to zero, according to energy intelligence firm Kpler, which projects that Tehran's crude revenues could dry up by the middle of December as outstanding payments are settled.

Losing that revenue, however, would not necessarily translate into an immediate military funding crisis. Analysts say Tehran could shield military spending while cutting civilian programmes, allowing inflation to erode purchasing power, so the economic pain may fall more heavily on ordinary Iranians than on the military Washington is trying to constrain.

The numbers are stark. Oil directly accounts for roughly 30 percent of Iran's government budget, according to Gregory Brew, a senior Iran and energy analyst at Eurasia Group, and Miad Maleki, an Iran sanctions and financial expert at the Foundation for Defense of Democracies.

Maleki's estimate is larger still: oil and refined petroleum products account for between 50 and 60 percent of regime revenue when indirect income is included.

Iran entered the year expecting to export about 1.7 million barrels per day at roughly $54 per barrel, Brew said. Actual exports have fallen short of that target, though higher oil prices allowed Tehran to build some financial cushion.

Tehran held roughly 135 million barrels of crude in floating storage before the war began in February, providing a stockpile it could continue selling after US forces restricted new exports. That offshore inventory has now been exhausted. US Central Command estimates the blockade has already denied Tehran at least $25 billion in oil revenue.

Buyers of Iranian crude typically settle payments one to two months after delivery, creating the lag between the disappearance of Iran's floating inventory and Kpler's projected revenue cutoff in December. US Treasury Secretary Scott Bessent has said Iran will have 'nothing left to trade' within two weeks as the oil lifeline dries up.

Even so, the December deadline is not a date on which Iran suddenly runs out of money. 'The December timeline is more of a cash flow kind of disruption, and not really a collapse state,' Maleki said. Tehran has so far allowed inflation and the weakening rial to absorb some of the pressure rather than abruptly stopping government salaries, so the purchasing power of Iranians incrementally declines.

Losing a revenue stream that covers roughly 30 percent of the government budget would nevertheless force increasingly difficult choices. Tehran can cut spending, borrow more or run larger deficits. Deeper cuts could hit subsidies, pensions and other government programmes, while deficit spending risks fuelling already high inflation. 'There's already expectations that government spending next year is going to be greatly reduced,' Brew said, with a bigger chunk of the budget likely to be met through borrowing and deficit spending.

Military spending, however, could prove more resistant. Brew expects non-military spending to be slashed significantly while military spending is maintained and might even increase because of the war footing the Iranian regime has been put on. Iran is already spending resources to rebuild missile production facilities, expand underground facilities and repair damage to its nuclear programme.

Iran's armed forces also have a direct connection to the country's oil trade. The Treasury Department said last year that Tehran was allocating roughly 200,000 barrels of crude per day to its armed forces, with the value of planned allocations expected to exceed $10 billion annually. Military organisations can sell allocated oil abroad and use the proceeds themselves. Maleki said those sales have helped finance equipment, chemicals and weapons components and support Iran-backed groups including Hezbollah and Hamas.

The Islamic Revolutionary Guard Corps also draws revenue from smuggling, black-market commerce and sanctions-evasion networks outside the formal state budget. Brew said its economic influence has expanded as sanctions have squeezed Iran's private economy.

Even if Kpler's projection broadly holds, Iran is unlikely to stop earning money from hydrocarbons altogether. Smaller quantities of oil can still move overland by truck and rail and across the Caspian Sea, while refined petroleum and petrochemical products can travel through routes outside the seaborne crude trade targeted by the blockade. 'While the amount of Iranian oil that can be tracked has fallen to zero, it's unlikely Iran's oil exports completely fall to nothing,' Brew said. 'The amount will likely be fairly small, but it won't be completely zeroed.'

Both experts said an agreement with Washington allowing Iranian tankers to resume leaving the Persian Gulf could reverse the trajectory. Without a deal or relaxation of the blockade, the financial pressure is expected to build into next year. The bigger test may arrive in March, when Iran begins its new fiscal year and must reconcile its spending plans with dramatically lower oil income. 'There's going to be a fiscal squeeze, and there's going to be pressure around the release of the new budget,' Brew said. 'There's going to be economic unrest, potentially even economic turmoil as the government rolls out spending cuts.'