Short-term and Long-term Gasoline Demand in Transportation Sector

Transportation is one of the most important economic sectors, which the performance of the other economic sectors is highly depends on it. High gasoline consumption in this sector has been an issue in Iranian economy. Because of high gasoline consumption there is not any alternative for the government unless the import of gasoline which this could lead in trade deficit. Moreover as a result of economic habitation it would be more tangible. Because of some facts such as low price of gasoline in Iran, none existence of a suitable substitution, high consumption and its effects on macroeconomic variables it would be necessary to investigate the main factors which affects the gasoline's consumption in transportation sector. Therefore this study aimed to estimate long and short- term gasoline consumption function in transportation sector in Iran.In this area, one of the studies that was carried out by Esmailnai, A. (1999) employed data from 1967-1998 for Iran, The results indicate that the demand for gasoline is inelastic with respect to price and income. Naji Eltony (2003) in Kuwait also found same results. Furthermore Khaksari,A & Ardebali, P.(2006), Gaskari, R. Eghbali, A. Eidani,M.(2005), Khatai,M.Eghdami,P.(2005), Zaranejad,M.Ghapanchi,F.(2007), Norozi,H.Salgi,M.(2006), Pagolatous,J.H.(1986), Johanson,T.&Totto,L.(1983), Adegbulugde, A. & Dayo, F.(1986), Akinboade, O. Ziramba, E. Wolassa, L.(2008) also studied the gasoline consumption in transportation sector and its sub sectors such as road, rails and so on. In this study oil-group price index to calculate real price was studied. The investigation of nominal and real price of gasoline for the period over 1974-2006 shows that in spite of increasing nominal price of gasoline between these years, the real price decreased. Also, results showed that the average growth of gasoline consumption in transportation sector was 8.4%. In order to estimate the short and long term demand function of gasoline in transportation sector of Iran the Auto Regressive Distributed Lag (ARDL) method has been used. This method in spite of providing coefficient of long term model would give the error correlation term too. To estimate the model the MICROFIT 4.0 package has been used.This study aimed to estimate short-term and long-term gasoline demands in transportation sector during the periods (1974-2006) using ARDL method by considering real price of gasoline, GDP, number of cars and average lifetime of cars as independent variables. The dummy variable is defined for 1981 & 1982 which in these years the consumption of gasoline has decreased. When the variables of interest are non-stationary or exhibit a unit root, the procedures of conventional econometric technique may not be appropriate pointed out that in the presence of non-stationary variables, an OLS regression might become a spurious regression, thereby leading to biased and meaningless results. It is important to test stationary of time-series data to set up an appropriate methodology in the formation of econometric models. Therefore, prior to testing a long-run equilibrium relationship between gasoline consumption and dependent variables, the Augmented Dickey–Fuller tests were carried to examine the presence of a unit root for all study variables. Results of ADF tests for stationary are showed that gasoline consumption and average lifetime of cars are stationary in level, I (0) and other variable are stationary first differences, I (1).Results indicate that gasoline price elasticity in short-term is -0.04 while in long-run is meaningless, because of the fixed nominal price and a lack of suitable substitution for gasoline in transportation sector. Short-term & long-term income elasticity for gasoline is 0.57 and 0.89, respectively. We also found that the short-term & long-term elasticity of gasoline for number of cars is 0.33 and 0.51, respectively. For average lifetime of cars the short-term & long-term elasticity is 0.15 and 0.24, respectively. The result also shows that income had more effects and the cars average life time had the least effect on gasoline consumption in short and long term. The lagged error correction term was significant with expected negative sign (-0.64). The CUSUM and CUSUMSQ tests on gasoline consumption in transportation sector have been done and the results showed a stabilization of coefficient in confidence level 5%.By conclusion, low price elasticity of gasoline resulted in low efficiency of price policy. Therefore liberalization of gasoline price and omitting of its subsidy could increase the efficiency of price policy. Meanwhile the liberalization of gasoline price could decrease the high consumption. Because of the fact that there is no any suitable substitution for gasoline in transportation sector the demand for gasoline is inelastic with respect to price and income. Hence, substitution of gasoline with CNG would be a good solution. Since there is a strong and positive relation between the number of cars and imports in recent years it would be useful to develop and diverse public transportation such as subway, tram, bus, and so on. The results presented that there is also a strong and positive relation between average lifetime of car and the amount of gasoline consumption, therefore, declining average lifetime of cars and scrapping old car are recommended.