Estimating Oil Products Demand by State-space Model and Relevant Guidelines for Price Liberalization

The purpose of this paper is to estimate oil products demand by the state-space model, taking into account the implications for price liberalization using the Kalman filter technique in the framework of a time-varying pattern. For this purpose, we use the data of the Energy Balance Sheet and the National Iranian Oil Refining and Distribution Company during the period of 1994-2017. Our model results indicate that the price elasticity of oil products varies during the studied period.   Using three different scenarios, we consistently find that a 10% annual increase in oil product prices during the sixth development plan, leads to a decrease in the consumption of kerosene and fuel oil, while gasoline and gas oil consumption increases.  We thus observe that while kerosene and fuel oil demand responds as expected to rising prices, the price sensitivity of demand for gasoline and gas oil declines.  We observe that while the absolute value of the price elasticity of gasoline has fallen unexpectedly, the price elasticity of kerosene, fuel oil and gas oil have increased. Therefore, in order to encourage gasoline consumers to reduce their demand, the speed of price liberalization at the end of the sixth development plan has to be more than at the beginning of the program. However, the rate of price increase for kerosene, gas oil and fuel oil products has to decrease at the end of the program.