Analysis of Fuels Substitution in the Iranian Industerial Sector Using a Linear logit Model

Analysis of substitution between energy carriers is an important topic in economics and energy policy. Substitution between energy carriers could create radical changes in energy balance and combinationofenergy supply. Substitution between fuels is often caused by changes in relative prices. The information about the possibility of substitution between fuels in evaluating the effects of government policies، particularly energy pricing policy is very effective. Meanwhile، energy demand in the industrial sector has great potential for substitution between fuels. In this study we analyze the substitution between various energy carriers in Iranian industerial sector during 1367-88 using the linear logit model. Logistic function by entering lagedvalues، well illustrates the dynamic adjustment mechanism. Estimation of dynamic linear logit model shows that the elasticity of gas demand in the industry with respect to its price changes is-1. 25 that is high. In contrast، electricity demandhaslower elasticity (-0. 25) and demand for petroleum products has almost zero elasticity (-0. 008). Petroleum products and electricity are complement، and petroleum products and gas are substitue by each other. Allen partial elasticity of substitution between electricity and petroleum products and petroleum products and natural gas are -0. 775 and 1. 096 respectively. Furthermore، electricity and gas with Allen elasticity of substitution equal 0. 395 are moderate substitutes for each other.