Economic growth and energy resources in Iran: Future of oil in Iran

Course: Energy Economics and Policy

Department of Management, Technology and Economics

Term Paper

Kaveh Rashidi Ghadi

April 2011

Abstract: In this paper the relation of economic growth and energy consumption in Iran in

the short run has been assessed. Energy structure in Iran has been explained. Economic

growth definition, energy consumption and its trend in Iran is analyzed. Future of Oil in Iran

and the scenarios of its reservoirs termination have been explained. The short run relation of

oil consumption variation and economic growth is analyzed by Vector Auto regression

method (VAR). The results have been shown in graphs.

Key words: Economic growth, Vector Autoregression Method, Impulse response Analysis

Contents

1. Introduction ................................................................................................................................... 3

2. Economic growth and energy consumption .................................................................................. 4

3. Energy resources in Iran .................................................................................................................... 5

3.1 Fossil fuels.................................................................................................................................... 5

Oil .................................................................................................................................................. 5

Natural Gas .................................................................................................................................... 5

3.2 Renewable energy resources ....................................................................................................... 6

Solar ............................................................................................................................................... 6

Wind Power ................................................................................................................................... 6

Geothermal .................................................................................................................................... 6

Hydropower ................................................................................................................................... 6

4. Energy consumption structure in Iran ............................................................................................... 7

4.1 Oil products consumption trend .................................................................................................. 7

4.2 Natural gas consumption trend ................................................................................................... 7

4.3 Electricity consumption trend ...................................................................................................... 8

5. Comparison between energy consumption and Economic growth ................................................... 8

6. Future of Energy in Iran - Oil .............................................................................................................. 9

7. Economic Growth and Energy ......................................................................................................... 10

7.1Literature review ........................................................................................................................ 10

7.2 Studies about case of Iran .......................................................................................................... 11

7.3 Model and result........................................................................................................................ 11

8. Conclusion ....................................................................................................................................... 14

Appendix .............................................................................................................................................. 15

Bibliography ......................................................................................................................................... 17

1. Introduction

This article surveys the correlation of energy consumption and economic growth, the changes

in components of energy carriers and influence over the short run growth (business cycle).

The future of oil in Iran based on the current consumption is assessed.

In general, neoclassical theorists of economy, consider capital, labor and technology as the

main components of GDP and therefore economic growth, (Figure A1 - appendix). They

believe in the idea that all the production is initiated with some amounts of capital, labor and

technology and ends with outputs of goods and products and energy plays the intermediate

role. But, some other economists like (Stern 2003), energy is the major influencing factor.

In the first part, the economic growth and energy consumption theories has been noted. Then

we continue by writing about the energy resources in Iran. They have been classified into two

main sources of fossil and renewable resources. In the fossil fuels, it is noted that oil is the

strategic and main product for Iranian economy and plays the significant role in the economic

cycle.

Later in this paper energy consumption structure in Iran is going to be discussed. Oil,

electricity and gas consumption trend has been shown. The schematic comparison between

energy consumption and economic growth has been exhibited comes next in this article. We

can explore that there is a relative good correlation between economic growth and energy

consumption in Iran between the years 1966 – 2008. Future of Oil in Iran as a main strategic

product of Iran`s economy and main energy resource has been argued later. In this part, oil

consumption and export trend is argued and ways to response to these trends has been

developed.

Then economic growth and energy consumption in econometrical model is determined. But,

first some literature reviews about the long run and short run analysis of economic growth

and energy consumption are noted. Many surveys like (Granger 1969), (Lee and Chang

2008), (Kraft and Kraft 1978) prove that in the long run there is a causality from energy to

output. They by using Toda Yamaoto method (Yamamoto 1995) and granger causality

(Granger 1969) prove the idea that energy granger causes economic GDP and therefore

output. For case of Iran, (Taheri fard and Rahmani 1996) and (Abbasian, Nazari and

Nasindoost 2010) prove the same. They conclude that, in the long run, energy carriers like

Oil, Electricity and Gas granger cause output.

In this article, it is tried to find a relation between oil, electricity and gas consumptions

shocks and reponse of GDP to these shocks in the short run (Business Cycle). Our main focus

is on the oil. The Vector Autoregression (VAR) method has been applied, and then Response

Impulse Analysis has been done in order to find the response of GDP to the sudden

unforeseen shocks to the oil consumption.

2. Economic growth and energy consumption

Capital and labor are the most important factors influencing economic growth. Recent

theories of economic growth, entered energy factor into the model, but the importance level

of energy in these models differs. (Stern 2003), points out that in the biophysical model of

growth, energy is the only and the most important factor of growth. He also with regards to

other neoclassical economist’s researches argues that energy by its impact over the labor

force and capital is indirectly effective in economic growth and does not have direct effect

over the economic growth.

Today, besides labor and capital, energy is considered as an important factor of production in

macroeconomic literature so that the production output is contemplated as a function of labor,

capital and energy. Moreover, economists suppose that there is a correlation between the

amount of application of these factors and production level. On the other hand, energy

consumption is the inverse function of its price and any change in energy price, will influence

energy consumption significantly which consequently affects gross domestic products

(Shahid Alam 2006).

In determination of aggregate supply in macro economics- by supposing variable labor force

and other factors constant - increasing the energy price which reduces demand for energy

reduces the productivity of labor force and consequently, demand curve for labor force will

be shifted to the left. This means reduction in employment rate. By reduction in employment

level, domestic product decreases and price level increase. In this case, aggregate supply

curve will be shifted towards left. Energy price shock can increase the products price level

which reduces all the factors constituting aggregate demand and shifts aggregate demand

curve towards left and reduce net domestic product (NDP).

To do more analysis about the relationship of energy consumption and economic growth, I

review some viewpoints of theorists. (Pindyck 1979) believes that effect of energy in

economic growth, depends on the production structure. From his point of view, in industries

that energy is applied as an intermediate input, price increase (reduction in energy

consumption), will influence over facilities and level of production and in gradually, reduces

domestic product. He uses the total costs function to prove that and bases his analysis on the

elasticity of production cost on energy price. If capital and labor are supposed to be the

substitutes of energy, increase in energy price will lead in the increase in application of both

factors of capital and labor. Increase in production costs because of the increase in energy

price will change the allocation of production factors and relative share of two factors of

capital and labor will be increased. (Douglas 1991) expresses that in the production function,

total energy is a production factor that has a weak separable correlation with labor factor. In

his suggested production function, energy is first mixed with capital and then, their

composition with labor factor, creates product. Therefore, energy consumption without

effecting over final production of labor, affects final capital production.

According to what discussed above and other theoretical evidences on hand, that justifies the

relation between energy consumption and economic growth; we can observe this relation to

some extend logical and indictable.

3. Energy resources in Iran

3.1 Fossil fuels

In this part we consider oil and natural gas as the main drivers of Iran`s energy and neglect

presence of the other sorts of fossil fuels like coal in the total energy consumption in Iran

(Figure A4 - Appendix).

Oil

It is estimated that Iran accounts for 10% of proven oil reserves. Iran is the second largest

producer of oil in OPEC after Saudi Arabia (Figure A2 Appendix). In year 2008, Iran

produced 4.2 million barrels per day (mbd), which approximately was 5 percent of global

production. Iran is also the fourth exporter of crude oil worldwide (Shayerah Ilias 2008). Net

crude revenue of Iran in oil export sector was 54 billion USD in year 2006 for 2.5 million

barrels of oil daily (EIA 2010). Most of Iran`s oil fields are located in the south-west of Iran

and Persian gulf. Figure 1, exhibits the oil share in Iranian export basket.

Figure1. Components creating the export products

Natural Gas

Oil and Gas journal in year 2010 reported that Iran has the estimated proven natural gas

reserves of 1.045 trillion cubic feet (Tcf) which makes it the second largest reserve after

Russia (Figure A3 Appendix). More than 66% of natural reserves are located in non-

associated fields and have not been developed. Iran`s natural gas fields are mostly in Pars-

Jonubi, Pars- Shomali, Kish and Kangan-Nar. Iran produced natural gas an estimated amount

of 4.1 Tcf and consumed 4.2 Tcf .This difference made Iran the importer of gas from

2% 2%

79%

0% 11%

5%

1%

Export BasketPie Chart

Agricultural raw materials exports (% of merchandise exports)

Food exports (% of merchandise exports)

Fuel exports (% of merchandise exports)

ICT goods exports (% of total goods exports)

Turkmenistan to compensate the domestic consumption. Iran`s natural gas consumption is

estimated to grow 7 percent annum (EIA 2010).

3.2 Renewable energy resources

Solar

On average, solar radiation for the whole surfaces of Iran is estimated to be about 19.23

MJ/SqM. In the central parts of Iran, this radiation is higher. The volatility of radiation varies

between 2.8 kWh/SqM in the south- east and 5.4 kWh/SqM in central areas. The calculations

reveal the fact in which applicable solar radiation hour in Iran is over 2800 hours yearly

(Kazemi, et al. 2002). This makes Iran relatively a good source of energy in terms of

renewable energy resources. Regions having high potential for solar energy are: Shiraz,

Tehran, Khorasan, Yazd, and Semnan (Atabi 2004).

Iran Ministry of Energy in recent years has instituted several major solar projects and has

more in hand (WEC 2010).

Wind Power

(Moshiri 2010) According to (CHEERS, HBS and WI 2005) argues that there are many

different estimations of wind power potentials in Iran. These amounts vary between 6500

MW by World Bank and 12000-16000 MW by Organization of Renewable Energies in Iran,

SUNA. Assuming about 2000 full load hours, the estimation by SUNA yields in the potential

generation of 32 TW/h of electricity. (Moshiri 2010) in his research notes that (Hagenkort

2004), in their study found out that there are some remarkable wind power sites in north

eastern Iran with high velocities. Therefore, utilization of this type of energy would not only

be possible but also economically feasible (IME 2008). By the calculations, we can assume

that wind power in Iran will have the capability of generating 22 TWh/a electricity by 2030,

in case of appropriate investments (Moshiri 2010).

Geothermal

Iran has high geothermal potential distributed across the country. The most productive of

them are three regions of Damavand, Maku and Sahand. In pasts, geothermal heat has been

used for medical and treatment purposes. Beucase of the cheap price of fossil fuels in Iran,

the government was reluctant to development and application of geothermal potential as a

source of energy. Fortunately, government interest for the improvement of renewable energy

especially in the geothermal field is increasing because of the rising trend of energy demand

in Iran. SUNA currently has two projects under process which will generate totally 410

GW/h amount of electricity (WEC 2010).

Hydropower

Hydropower has a minor contribution in total energy production in Iran. These facilities, in

overall generates less than 10 TWh elcetricty.Based on the (WEC 2010), Iran`s hydropower

installations was 7432 MW in the beginning of year 2008. Meanwhile, Iran has 5083 MW of

hydro power capacity under construction and over 10400 MW are in the planning phase.

4. Energy consumption structure in Iran

Following the structural economical changes in Iran especially in years after 1961, growth

and development of industries and application of new technologies consequently,

consumption of different types of energies increased. After Iran`s 1979 revolution, due to the

unstable political-economical situations, energy production and consumption diminished.

This reducing trend continued drastically by the beginning of war with Iraq and therefore;

energy supply in Iran encountered with troubles. Because of that, energy consumption

became rationed. Since lift of the ration over oil products consumption in year 1989, energy

consumption has been growing averagely 7.41 % yearly. In the second development plan of

government, energy consumption growth was 3.07 % on average (IME 2008). This reduction

is the consequent of governmental policies in lowering the consumption of energy carriers.

Energy consumption between years 1999 to 2002 had the growth of 6.68 % per year. (World

Bank Data 2011)

4.1 Oil products consumption trend

Consumption of major oil products (liquid gas, gasoline and gasoil) between the years 1967

to 1977 had the growth 14.08% annum. This growth diminished around 4.6% during the

years 1979-1988 because of revolution and war situations. Oil products consumption between

the years 1996 to 2002, averagely grew 1.58% annum. This happened due to the substitution

of oil products with natural gas and gasoil, setting consumption patterns policies and

moreover, relative saving in other oil products. However, liquid gas consumption has been

increased drastically due to the increase in supply of gas combustion cars and inappropriate

technologies installed in the cars. In recent years, most of the portion oil product

consumptions comprised gasoil and gasoline and the least belonged to liquid gas. In the

figure A5 appendix, petroleum production and consumption in Iran has been exhibited (EIA

2010).

4.2 Natural gas consumption trend

Special features of this energy resource from economical and ecological points of view have

made this energy resource as an important production factor in industrial sectors and also a

desirable energy resource in final consumption sectors. All these factors, motivated policy

makers to think about the increasing of natural gas consumption share in nation`s energy

basket and substituting that with oil products, as a strategic policy over the energy sector.

Natural gas consumption in year 1967 was equal to 0.7 millions of barrels of crude oil. This

amount has been increased to 13.4 and 172.4 millions of barrels of crude oil in years 1979

and 1995 respectively. Natural gas consumption has the average growth of 22.59 % annum in

these years. In Iran, household, business, industry and power plant sectors respectively are

the major consumers of natural gas in the whole country (IME 2008).

4.3 Electricity consumption trend

In year 2008, electricity consumption reached to 169 billion KW. Electricity consumption in

year 1967 was equal to 2.2 millions of barrels of crude oil. This amount for years 1979 and

1995 was equal 10 and 42.1 million barrels of crude oil respectively. Household, public,

business, industrial and agricultural sectors are the major final consumers of electricity

energy in the country. Figure A6 Appendix shows the rate of electricity consumption and

generation growth trend. (IME 2008). Figures 2 exhibits consumption of all sorts of energy in

Iran (World Bank Data 2011).

Figure 2. Final energy consumption in Iran. Source: (Sabetghadam 2005/2006)

5. Comparison between energy consumption and Economic growth

Statistics and data available about the energy consumption and economic growth for Iran and

other countries, prove that: First, there is a meaningful correlation between energy

consumption and output growth (Figure 3). If we consider energy like the other factors of

production (such as Labor, Capital and Technology) increase in energy consumption can

increase the output level. Second, energy consumption in various economic growth periods

follows a specific pattern. Based on that, in the beginnings of economic growth, energy

consumption rate is above the gross domestic products rate, but gradually aforementioned

trend will be inversed so that the GDP`s growth rate may surpass the energy consumption

trend (World Bank Data 2011).

Figure3. Energy Use growth and GDP growth between years 1966 – 2008. Source: (World Bank Data 2011)

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

1966196819701972197419761978198019821984198619881990199219941996199820002002200420062008

GDP Growth Energy Use Growth

6. Future of Energy in Iran - Oil

Despite the revenues gained by oil export increased in the recent years due to a surge in oil

prices, the output of oil in Iran is remained constant. Iran policy makers have set the goal to

extract 5 mbd, but this amount is still below the capacity of pre-revolution years. Two key

factors can be counted as barriers to the production of oil in Iran. For the first factor, we can

point out to the high rate of natural declining trend in mature oil fields. This rate is 8% for

onshore fields and even greater at 10% for offshore fields. The second factor is the

extraordinarily low rate of oil recovery rate averagely between 24% and 27% comparing to

the world average. Millions of barrels of oil are being lost annually due to the natural declines

and damages to the reservoirs and old infrastructures. Moreover, due to the sanctions set by

United Nations Security Council and United States, there is a lack of investment and access

to new technologies, structural upgrades and enhancement of oil recovery efforts (Shayerah

Ilias 2008). Therefore, we can conclude that crude oil production in Iran as a factor that

shapes the export capacity is in a serious challenging time. Figure 4 demonstrates the

investment trends in the oil fields in Iran:

Figure 4. Annual foreign investment in Iranian upstream oil and gas industry, 1999–2007, in US$ billion (CBI

2010).

Moreover, crude oil production hastily increased within the past three decades. The average

depletion rate for Iranian oilfields is 8%, that makes it 3% higher than the world`s average.

On the other hand, energy demand for the natural gas and crude oil has been increased in

Iran, especially in the last years. Demand growth rate for the crude oil is 10.7% and 5.7% for

the natural gas and they comprise more than 97% of ultimate energy supply. This causes the

annual loss of 10% in export of crude oil capacity (Kamran Azadi, A., Yarmohammad, M.H.

2011).

Kamran Azadi, A., Yarmohammad, M.H. 2011, in their analysis about the future of oil export

in Iran define three scenarios. In the first scenario, which is called optimistic scenario, we

suppose that all the sanctions are lifted, and countries are free to invest in Iran oil fields. All

the necessary investments from local and foreign resources have been gained and Iran is able

to keep its export level. In this case they concluded that absolute increase in crude oil

production is not a possible solution since it yields in the very large amount of oil which is

definitely not possible for Iran to produce. They believe that without controlling the local

0.027

0.86

1.4

2.5

2

2.5

2.12.4

0.90.7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Foreign investment in US billion dollars

demand, even extra investments cannot solve this dilemma. In the second scenario, Iran is

able to afford half of the investment, but the export will drop to zero in year 2022. In the last

scenario, which is called pessimistic scenario they found out that in case of no investment in

Iran`s upstream oil industry, the export will fall to zero before year 2016 arrives. Figures 5

and 6 show these trends.

Figure 5. Export prediction in basic scenario for reference case of 8% annual decrease in production. The

numbers in the bottom of the figure are the local consumption increase rates.

Figure 6. Export prediction in pessimistic scenario for reference case of 8% annual decrease in production. The

numbers in the bottom of the figure are the local consumption increase rates.

7. Economic Growth and Energy

7.1Literature review (Granger 1969) in his model, proposed the method to determine the causal relationship

between energy consumption and economic growth. Since then, this method has been

developed for many times. By using (Sims 1972) methodology, (Kraft and Kraft 1978)

calculated the causal relationship between energy consumption and Gross National Products

in the United States. (Yu and Choi 1985) for the determination of causal relationship between

GDP and energy consumption in Korea, used (Granger 1969) for the test and found out that

the causality direction is from GDP to energy consumption. (Cheng 1997) tested the same for

three south American countries of Brazil, México and Venezuela and discovered a long-run

relationship from energy consumption to economic growth. (Soytas and Sari 2003) tested for

energy consumption and Gross Domestic Product for top 10 emerging markets and G7

countries. They determined the bidirectional casualty running from GDP to energy

consumption in Italy and Korea and from energy consumption to GDP for the other countries

in their study. (Lee and Chang 2008) did the same analysis for 16 Asian countries.

(Tsani 2010) in his article, tested for the causality analysis between energy consumption and

economic growth for the case of Greece. He found out that there is a bidirectional causal

relationship between energy consumption and to the output. As the causality tests are time

sensitive and alternate depending on the lag lengths, the results may vary for the same

country.

7.2 Studies about case of Iran

(Taheri fard und Rahmani 1996) in their research about the causality relationship between

energy consumption and economic growth in Iran explain that there is a long run relationship

between economic growth and energy consumption in Iran. In their appraisal they explain

that the average percentage of energy consumption is around 6% which is much higher than

0.8 % economic growth rate in those years. They link this difference to the low price of fuel

in Iran because of the governmental subsidies dedicated to this product. (Abbasian, Nazari

und Nasindoost 2010), in their methodology by using Toda-Yamamto and Granger Causality,

proved that in the long run total energy consumption, oil products and electricity impacts

over economic growth since energy plays a significant role in capital and labor side for the

production. They also came to this conclusion that there is trend for using renewable and

clean energy resources in the long run.

Next part, investigates the influence of changes in oil consumption over the GDP growth in

short run. Vector Auto regression (VAR) has been applied.

7.3 Model and result Vector Auto Regression (VAR), is an autoregressive process for vector of variables, it finds

interdependencies between multiple time series (Enders 2003). The general matrix model of

VAR with p lags has the equation below:

Which are the time series (variables) we want to do the analysis, reflect the constant

terms,

are the coefficients, are the error terms and in the end p determines the lag

number.

We use this method to observe of the sudden unforeseen shocks in oil, electricity and gas

consumption and the economy output`s behavior in response to that.

The model for this assumption is as following:

11 12 13 14 1 11

21 22 23 24 1 22

31 32 33 34 1 33

41 42 43 44 1 44

t t t

t t t

t t t

t t t

Lgdp Lgdp uc

Loil Loil uc

Lelec Lelec uc

Lgas Lgas uc

Here data for oil, gas, electricity and GDP has been used for the years 1980 – 2008. The data

has been extracted from the (EIA 2010). For the ease of calculations, the variables are used in

their logarithmic form. tLgdp represents the gross domestic product for the time t, tLoil is

the logarithmic form of oil consumption, tLelec is total electricity consumption in

logarithmic form and tLgas is the total gas consumption.

We first do Vector Auto Regression for the model above and then do the Impulse Response

Analysis. The amounts in table 1, exhibit the VAR results:

Table1. Vector Autoregression estimates

After we found out these estimations, we can process the Impulse Response Analysis. In the

figure 7, we can observe the reaction of the economy to the exogenous impulses. These

impulses can be named Shocks.

Figure7. Response of GDP growth to oil, electricity and gas consumptions shocks

As can be seen in the figure 5 we can interpret that, in case we have a shock in the oil

consumption, in the short run, we have a negative impact on the growth of GDP. This shock

can be the government`s policy to control the consumption, removing the subsidies for the

energy carriers (oil products). If we shock the electricity consumption, we have the

significant positive response in the GDP growth and in the end, the shock in the gas

consumption we can observe the positive response of GDP. In the figure 6, we can see the

rest of shocks to the consumptions of gas, oil and electricity with regards to GDP growth.

Figure8. Response of GDP, Electricity, Gas and Oil to Cholesky

-.04

-.02

.00

.02

.04

.06

1 2 3 4 5 6 7 8 9 10

Response of LGDP to LGDP

-.04

-.02

.00

.02

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.06

1 2 3 4 5 6 7 8 9 10

Response of LGDP to LELEC

-.04

-.02

.00

.02

.04

.06

1 2 3 4 5 6 7 8 9 10

Response of LGDP to LGAS

-.04

-.02

.00

.02

.04

.06

1 2 3 4 5 6 7 8 9 10

Response of LGDP to LOIL

-.02

.00

.02

.04

.06

.08

1 2 3 4 5 6 7 8 9 10

Response of LELEC to LGDP

-.02

.00

.02

.04

.06

.08

1 2 3 4 5 6 7 8 9 10

Response of LELEC to LELEC

-.02

.00

.02

.04

.06

.08

1 2 3 4 5 6 7 8 9 10

Response of LELEC to LGAS

-.02

.00

.02

.04

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1 2 3 4 5 6 7 8 9 10

Response of LELEC to LOIL

-.02

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.04

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.08

.10

1 2 3 4 5 6 7 8 9 10

Response of LGAS to LGDP

-.02

.00

.02

.04

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.10

1 2 3 4 5 6 7 8 9 10

Response of LGAS to LELEC

-.02

.00

.02

.04

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1 2 3 4 5 6 7 8 9 10

Response of LGAS to LGAS

-.02

.00

.02

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1 2 3 4 5 6 7 8 9 10

Response of LGAS to LOIL

-.01

.00

.01

.02

.03

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1 2 3 4 5 6 7 8 9 10

Response of LOIL to LGDP

-.01

.00

.01

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1 2 3 4 5 6 7 8 9 10

Response of LOIL to LELEC

-.01

.00

.01

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1 2 3 4 5 6 7 8 9 10

Response of LOIL to LGAS

-.01

.00

.01

.02

.03

.04

1 2 3 4 5 6 7 8 9 10

Response of LOIL to LOIL

Response to Cholesky One S.D. Innovations

-.04

-.02

.00

.02

.04

.06

1 2 3 4 5 6 7 8 9 10

LGDP LELEC

LGAS LOIL

Response of LGDP to Cholesky

One S.D. Innovations

-.02

.00

.02

.04

.06

.08

1 2 3 4 5 6 7 8 9 10

LGDP LELEC

LGAS LOIL

Response of LELEC to Cholesky

One S.D. Innovations

-.02

.00

.02

.04

.06

.08

.10

1 2 3 4 5 6 7 8 9 10

LGDP LELEC

LGAS LOIL

Response of LGAS to Cholesky

One S.D. Innovations

-.01

.00

.01

.02

.03

.04

1 2 3 4 5 6 7 8 9 10

LGDP LELEC

LGAS LOIL

Response of LOIL to Cholesky

One S.D. Innovations

As our main focus of this article is on the oil consumption, we can conclude that any shock in

the oil consumption will have a negative impact on GDP. This means that the government

should take wise strategies to control the oil consumptions which has the average growth of

6% per year.

8. Conclusion In Iran the consumption of oil, electricity and gas as the energy carriers is dramatically

increasing (Figure 2). Econometrics studies about energy and economic growth in various

economic structures reflect the fact that in the long run, energy consumption influences over

the output of the economy. (Abbasian, Nazari and Nasindoost 2010) in their survey, prove

that energy carriers like oil, gas and electricity granger cause the output in the long run in

Iran. Besides that, they proved in the long run there is a tendency to use renewable energy

resources and green energies.

On the other hand, based on the observations and appraisal of (Kamran Azadi, A.,

Yarmohammad, M.H. 2011) , in near future due insufficient domestic resources and the

inability to attract foreign investment by the government, Iran`s crude oil production and

export in Iran will be in a critical condition soon. They believe that Iran will be trapped into

inextricable condition to the extent that the government cannot provide sufficient fund to

develop its oil fields and even keep its current production level. We can conclude

immediately, by reduction in oil production and consequently oil export; the overall economy

will be harmed. In an optimistic scenario Iran will be importer of oil in 2022 and

pessimistically will become importer in 2016. They recommend the government to control

the consumption.

What if the government tends to control the consumption and what would be the

consequences in the short run?

In this paper the behavior of GDP against sudden shocks to the oil consumption have been

reviewed. By testing VAR analysis and Impulse Response Analysis, we found out that in case

of any shock to the oil consumption, the response of GDP will be negative. This shock can be

abrupt change of the prices or rationing of energy carriers. The consequents may go further

than this; it means that, sudden changes in prices to control energy consumption will increase

the overall price of final products. This shifts the demand curve for products to the left. By

decreasing the demand for the products, the unemployment will be increased.

Therefore, the government should prevent the sudden acts to reduce the consumption. By

planned strategies and motivations to both firms and households, government should control

consumption; otherwise, in both long run and short run economy will suffer.

But in the end, this question remains challenging which is: If the government controls the

consumption, the oil export will be continued and economy will be growing, on the other

hand controlling the consumption will harm the economy in the short run and long run. What

strategies the government should take in between these two streams, in order to minimizing

the consumption and maximizing export?

Appendix

K

Y Y=F(K)

D

S

K*

Y*

S-D

Figure A1. The neoclassical theory of Economic Growth

Figure A2. OPEC crude oil production 2009

FigureA3. World Natural Gas reserves by country, January 1, 2010

Figure A4. Total energy consumption in Iran, by type (2007)

FigureA5 – Iran`s Petroleum Production and Consumption 1976-2008

FigureA6. Iran`s Electricity Generation and Consumption, 1988-2007

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