Estimating Demand Function for Natural Gas in the Industrial Sector of Iran using Structural Time Series Model (STSM)

The industry as one of the most productive sectors is one of the most applicants energy especially natural gas. In this study using structural time series model (STSM) for evaluating demand for natural gas in the industrial sector of Iran is the focus of the analysis. Such model contains unobservable elements which have been transported to state space model with the use of kalman filter and is estimated by implementing maximum likelihood approach for the period of 1981-2011. Finding of the research is that، first of all the nature of the trend is smooth one. Secondly، it is changing on a nonlinear basis. The estimated demand function shows that price elasticity for natural gas in the long and short run is less than unit، correspondingly، (-0. 33) and (-0. 16). So، natural gas price in the short and long term is inelastic and even the time horizon which is one of the effective factors on the value of elasticity، have no influence on this good. Hence، it is suggested using nonpricing policies like induce production sector through tax-deductible depreciation and financing industries through the banking system. However، production elasticities of natural gas in the short and long run، correspondingly، are 2. 08 and 0. 99. These findings show that in the short term to keep pace with increased production in the manufacturing sector، the more intensive use of natural gas is observed. Cross elasticity for electricity is estimated to be 1. 64 in the long run and 0. 76 in the short run. This result suggests that in the long run the possibility of changing or replacing devices is high. The result of considering the implementation of the Targeting of Subsidies Plan shows that this policy has no influence on natural gas demand in industrial sector of Iran.