Masoud Pezeshkian, a former heart surgeon, took the oath of office before the Iranian Parliament on July 30, a day after he received an endorsement for the presidency from Supreme Leader Ayatollah Ali Khamenei. Iranians hope that the reformist president will be able to make good on his mandate to carry out social and economic reforms and alleviate some of the pain that sanctions have wrought on the country’s economy and left it with few allies.

The new president has promised a more inclusive government and more moderate foreign policy, but he is likely to be distracted by more pressing matters at home and abroad early in his presidency. On the day of his inauguration, Pezeshkian was made aware of the challenge he faces in assuming the presidency at a time of heightened tensions between Iran and Israel. No sooner had he been sworn in than Hamas political leader Ismail Haniyeh was assassinated in Tehran, where he had been among guests at the ceremony. Iran blamed Israel, though the Israeli government has not taken responsibility for the strike in the heart of the Iranian capital.

Can Pezeshkian heal internal rifts and carry out economic reforms while reaching out to the outside world for some sanctions relief? The challenges he faces are immense considering his limited constitutional powers. And the president assumes office at a particularly difficult juncture in the Middle East, where Iranian proxies and allies from Gaza to Yemen, to Lebanon and Iraq, the “axis of resistance” against Israel and U.S. interests in the Middle East, have inserted themselves into Hamas’ fight against Israel and its superpower ally.

Iran has vowed to avenge Haniyeh’s death, which could draw it into a direct confrontation with Israel. Khamenei has reportedly ordered a direct strike on Israel in retaliation, according to a New York Times report citing three Iranian officials briefed on the order.

Pezeshkian has submitted his nominees for a new Cabinet, including one woman, to the Iranian Parliament for approval. Iranian presidents do not have a free hand when it comes to sensitive portfolios. Interior and intelligence are normally the purview of the supreme leader, while defense is another post that the Islamic Revolutionary Guard Corps normally has a say on. The new president’s candidates for the other key ministries of foreign affairs and oil indicate the direction Pezeshkian intends to take with regard to the nuclear file and energy sector. For the Oil Ministry, Pezeshkian selected industry veteran Mohzen Paknejad, who previously served as acting managing director of the state-owned National Iranian Oil Company.

The IRGC, through its subsidiaries, has tentacles across the Iranian economy, including the energy sector, where the IRGC’s Khatam al-Anbia contracting business has had its pick of energy projects since the exit of Western oil and gas companies more than a decade ago. The IRGC and its subsidiaries are likely to oppose any measures that would exclude them from lucrative contracts and the illicit oil trade.

During his campaign, Pezeshkian said that should Republican businessman, and former president, Donald J. Trump win the U.S. presidential election in November, Iran could do business with him. However, Trump took a hard line against Tehran during his presidency and in 2018 tore up the Iranian nuclear deal, the Joint Comprehensive Plan of Action, concluded in 2015 with world powers.

Pezeshkian has suggested he would “spare no effort” to negotiate a similar deal with the United States to bring about sanctions relief and allow Iranian oil to flow freely again, Bloomberg reported. “The Islamic Republic has an ‘absolute right’ to normal economic and trade relations with the rest of the world, Bloomberg quoted Pezeshkian as saying in his first public speech after he won a runoff election July 5.

However, he would need the supreme leader’s blessing, as the nuclear file is an area where the president does not have a free hand. The purpose of U.S. sanctions was to deprive Iran of oil revenue and prevent it from providing financial and military aid to its Middle Eastern proxies. The strategy has failed, however: Iran continues to sell its oil, mainly to Asian customers willing to defy Washington, while the armed militias it backs remain active. Lax sanctions enforcement by the administration of President Joseph R. Biden Jr. and strong Chinese demand for discounted Iranian barrels helped to raise Iran’s crude output to a post-2018 high of 3.2 million barrels per day.

The International Energy Agency projected in its July “Oil Market Report” that the United States and Iran will be the largest contributors to oil supply growth for the second year running in 2024. The report indicated that OPEC+ producer Iran, which is exempt from the group’s supply cuts, is on track to post anticipated gains of 410,000 b/d this year. It estimated June output at 3.35 mb/d, a six-year high. Iran has capacity to produce more oil, but just how much is tied to two external factors: resolution of the war in Gaza and the U.S. presidential election in November.

Consultancy FGE, which tracks closely the Iranian energy sector, expects a significant change in policy with Pezeshkian as president but “no U-turn.” In a July 11 note to clients, it assessed the implications for Iran’s oil and gas depending on the outcome of the U.S. election. The analysis was published before Biden withdrew from the race and endorsed his vice president, Kamala Harris, as the Democratic candidate.

If a Democrat secures the White House, FGE expects a deal by mid-2025 that would ease sanctions and allow Iran to increase oil production by 200,000 b/d to 300,000 b/d in the third quarter of 2025. In the event of a Trump win, “it would be a lot harder and take much longer, if ever, to reach a deal.” This would likely result in a decline of 500,000 b/d in Iran’s oil production in 2025, as Trump is expected to “put extra pressure” on Iran and return to the “maximum pressure campaign” on Iranian oil exports of his first presidential term.

Iran has since developed a “complex network of marketing agents and payment mechanisms” that have allowed it to ramp up its oil exports due to lax enforcement of U.S. sanctions by the Biden administration. This means that the decline would not be as steep as it was during Trump’s first term as president, when Iran’s oil output fell by 1.15 mb/d to 2.45 mb/d in 2019, according to calculations by specialist publication MEES.

In 2023, Iran produced at a post-sanctions record, averaging 2.91 mb/d, based on estimates from both OPEC and the IEA. In the second half of 2023, output stabilized above 3 mb/d. Exports of crude oil and condensates, mainly to China, have been running at roughly 1.5 mb/d to 1.6 mb/d compared to the 2023 average of 1.3 mb/d, according to the IEA.

Tehran wants to consolidate recent gains and add production capacity, an investment that is needed if it is to prevent declines from its older fields, which require enhanced oil recovery techniques to carry on pumping. The Iranian National Oil Company has announced plans to add 400,000 b/d to capacity, a program that was ratified May 25 by Mohammed Mokhber, the interim president following the death in a helicopter crash of President Ebrahim Raisi.

Mokhber approved $5.5 billion in “financial facilities” to private companies developing six fields that lie near the border with Iraq. The program does not specify a target date for achieving the increase, and many of Iran’s stated targets for oil and gas developments often run behind schedule. Full development of the fields will cost an estimated $13 billion, the Iranian National Oil Company has calculated.

Iran is also a significant natural gas producer, mostly from the massive offshore South Pars field. Development of the vast resources in one of the world’s largest concentrations of natural gas has been carried out in phases over the past decade, but new investment is now needed to maintain output.

In March, Iran awarded contracts for a planned $20 billion program to reverse declines and allow recovery of an additional 90 trillion cubic feet of gas from South Pars, which has capacity to produce 27 billion cubic feet per day of gas. Despite its vast conventional gas reserves, which are second only to Russia’s, Iran is not a major exporter of natural gas. High domestic demand and a drop in hydropower capacity due to drought has led to more gas being used to generate electricity, leaving only a little surplus for exports to a handful of neighboring countries. Planned liquefied natural gas projects never got off the ground as European oil majors left rather than incur punitive action by Washington.

With all the Western multinational energy companies out of the picture, Iran has relied on domestic and Chinese contractors to carry out energy projects. Pezeshkian has said that he wants to “open our borders to the region and the world” rather than rely on Chinese investment. But any significant foreign inflows would require a lifting of the U.S. sanctions should Tehran be able to conclude a nuclear deal with Washington as well as the country’s removal from the Financial Action Task Force blacklist.

The sanctions, poor management, and inflation have battered the Iranian economy, and it desperately needs foreign investment. Inflation soared after Trump tightened sanctions and has averaged at around 22% since 2000. As the value of the Iranian currency collapsed due to falling exports, the government loosened monetary policy by increasing liquidity through local bank borrowing for expansionary budget spending, itself an inflationary policy.

The new Iranian president is caught between a hard rock and a hard place – external pressures and threats on the one side and hard-line conservative forces on the other. Pezeshkian was elected because Iranians were desperate for respite from economic hardship and repression, believing in his campaign promise of economic reform and more personal freedoms. Now he will have to deal with the fallout from Haniyeh’s assassination.

A more moderate response at this point would clash with the more strident condemnations of Israel by the supreme leader and IRGC. Pezeshkian cannot afford to appear out of sync with the powerful clerical establishment so early in his presidency, so reforms might have to take a back seat as he tackles a dangerous foreign policy crisis that could escalate into military action.