Determinants of Fossil Energy Demand in Iran's Manufacturing Sector

Document Type : Research Article


Depaertment of Economics, Bu-Ali Sina University


Fossil energy is one of the most important inputs in the production process of manufacturing enterprises. Industrial enterprises manufacture their products with the mixture of energy and the other inputs and sell them in markets. Hence, understanding the fossil energy demand and its determinants along with the other policies on energy demand can play an effective role in economic decision process. The industrial­, agricultural and transportation sectors are the major energy consumers in Iran. Energy can be divided by fossil energy (such as kerosene, gasoline, natural gas and the other petroleum products) and non-fossil energy (such as electricity, sun and wind energy).Nowadays, most of industrial firms use fossil energy as well as electricity for light and production process. The policy of each firm is also to use optimal energy in its production process. The main purpose of this research is the study of kinds of fossil energy on demand of manufacturing sector of Iran over the period 1982-2015.  The most important variables which affect the demand for fossil energy in the industrial enterprises are fossil prices, electricity price, the value-­added of production and the physical capital. In Iran, the manufacturing sector is the third sector of house-made, commercial and transportation, sectors, and the natural gas consumption is increasing instead of oil products and electricity.­ The estimation technique of this paper is Auto-Regressive Distributed Lag (ARDL). Thus, the impacts of capital stock, the real price of electricity, and the real prices of various fossil energy in industrial sector in short-run and long­–run. The result of this research show that fossil energy price elasticity in the long and short run is elastic in the manufacturing sector of Iran. Thus, the price policies are effective in industrial enterprises demand and they can lead the consumers to use the optimal energy in the production process. The cross elasticity of demand is negative and it is a good substitution for fossil energy. The long and short run income elasticity of demand has a direct effect on the optimal consumption of fossil energy, so that when the industrial products grow, their value added increases and the demand for fossil energy increases too. Finally, the elasticity of physical capital is not significant in short run­, but it has a negative effect on demand for fossil energy in long-run. Thus, using modern machinery can decrease the demand for fossil energy. Nowadays, in Iran the price of various kinds of energy is relative cheap. So, the energy consumption is very large and extreme. Since the fossil energies are endless, the economizing of them is very necessary. The government can perform the following policies to prevent the extreme energy consumption in industries. Installing Multi-tariff meters, for pricing energy, determining the real price of different kinds of energy­, and eliminating the energy subsidies are some government policies for controlling the energy in manufacturing sector.


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