Energy intensity determinants in an energy-exporting developing economy: Case of Iran

Abstract

While the empirical literature on energy intensity is focused mainly on reduced energy intensity, this study examines a case where energy intensity is increasing. The paper aims at identifying price and non-price determinants of Iran's energy intensity and analyzing their importance in dynamics of it. In order to answer the research question, LMDI decomposition technique as well as time series econometrics have been used to data analysis. Based on the results, both structural changes in economic activities and inefficiency of energy consumption have led to the increase in Iran's energy intensity, although the latter dominated the former. The elasticity of energy intensity with respect to total factor productivity, real energy prices, and industrial development is negative in the short-run and long-run. Additionally, per capita income has a positive linear relationship with energy intensity that implies a high income elasticity of energy demand. Furthermore, changes in TFP and energy prices contribute more than two-thirds of forecast error variance decomposition of energy intensity, which shows the importance of these factors in energy intensity dynamics. Hence, in order to change the increasing trend of energy intensity, it is important to consider the necessities of improving technology and productivity while realizing energy prices.