Government Subsidies and Demand for Petroleum Products in Iran

Like most other petroleum-exporting countries, Iran subsidizes domestic consumption of refined products. Real product prices have declined for the past 25 years while the rest of the world has adjusted to higher energy prices. In this paper I describe the market for petroleum products in Iran and estimate demand functions for the four main refined petroleum products. My results indicate that price elasticities of demand are larger than previously thought. Particular attention is paid to the kerosene market where the price subsidy is the largest and where rationing in the 1980s requires taking into account the working of the black market. The results indicate that price increases can stem the rise in consumption. Forecasts show that allowing for modest economic growth, increases that bring domestic prices to the level of world prices in 15 years will stabilize consumption at its current level. However, increases that merely keep real prices constant will double consumption in the same period. This is significant in light of the fact that Iran's production capacity has stayed constant in the last five years and exports are under increasing pressure from domestic consumers of refined products.