Analysis of Oil Demand Determinants in Iran: Short and Long-Term Perspectives

Abstract

Fossil fuels are the predominant source of energy globally, with oil being the most extensively used among them. This study aims to estimate the short and long-run demand function of fuel oil in Iran over the period from 1988 to 2020. The ARDL cointegration analysis reveals a significant long-run relationship between the selected variables, including gross domestic product, oil prices, the prices of alternative energy sources, and population size. These factors have been identified as having substantial impacts on the demand for oil. Specifically, the results show that GDP, the price of alternative energy sources, and population have positive effects on oil demand in both the short and long term. This indicates that as the economy grows, the demand for oil increases, likely due to higher industrial activities and increased consumption needs associated with a growing population. Conversely, the study finds that oil prices have a significant negative effect on fuel oil demand in the long run. This negative relationship can be attributed to the economic principle of price elasticity of demand, where higher oil prices lead consumers and industries to reduce their consumption or switch to alternative energy sources. The shift towards alternative energy sources is also driven by uncertainties related to future oil prices and supply stability. As oil prices rise, the relative cost advantage of other energy sources becomes more attractive, prompting a transition away from oil dependency. The implications of these findings are critical for energy policy and economic planning in Iran. Understanding the determinants of oil demand helps in formulating strategies that can ensure energy security and economic stability. For instance, the negative impact of high oil prices on demand suggests that stabilizing oil prices could be beneficial for maintaining consistent energy consumption levels. Additionally, promoting alternative energy sources can reduce the economic vulnerability associated with oil price fluctuations. Moreover, the positive relationship between GDP and oil demand highlights the importance of aligning energy policies with economic growth objectives. Policymakers need to consider the interplay between economic activities and energy consumption to devise comprehensive energy strategies. This includes investing in energy efficiency and diversification to support sustainable economic development.