Structural time series model for energy demand in Iran's transportation sector

Since the first oil crisis in the 1970s, demand for energy has undergone significant transformations. This paper intends to model the demand by the transportation sector for the petroleum products in Iran. We propose a structural time-series model with an underlying trend. After transforming the model to state-space form, we apply the Kalman Filter algorithm to estimate the parameters of the model for the period between 1980 and 2016. Results indicate that the underlying trend for gasoline and diesel demand by the transportation sector is non-linear. This trend can be used as proxy applicable for studying those variables which could enable us to explain technological improvements and changes in consumer preferences for gasoline and diesel over time. Results also show that technological improvements and changes in consumers' behavior led to a decrease in the consumption of diesel in recent years while it has no decreasing effect on gasoline. Demand functions show that gasoline and diesel are inelastic. Gasoline price elasticity of demand ranges between - 0.17 and - 0.24. The price elasticity of demand for diesel is very low and statistically insignificant at the 5% level. The income elasticity of demand for gasoline and diesel ranges between 0.34 and 0.48, and between 0.33 and 0.52 respectively, being strongly statistically significant. Finally, this paper proposes that the price of fuel should be determined by market mechanism to reduce fuel consumption.