The Relationship between Disaggregated Energy Consumption and Industrial Production in Iran

This paper examines the cointegration and causality relationship between disaggregated energy consumption and total final energy consumption by the industrial sector with industrial production in Iran within a multivariate framework Iran using the autoregressive distributed lag (ARDL) approach developed by Pesaran and Pesaran [Pesaran، M. H.، Pesaran، B.، 1997. Working with Microfit 4. 0. Camfit Data Ltd، Cambridge] and Pesaran، Shin and Smith [Pesaran، M. H.، Shin، Y.، Smith، R. J.، 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics 16; 289–326] and vector error correction model (VECM) for the period 1346-1386. After examining the relationship between different disaggregated forms of energy consumption with industrial production in the second stage we investigate the relationship between total final industrial energy consumption and industrial production. Our results imply that industrial production، employment and capital stock are effective long-run variables that influence final industrial energy consumption of all souorces of energy except coal. The VEC results indicate unidirectional strong causality running from industrial production to petroleum products، electricity and final industrial energy consumption، while we find bi-directional strong causality between natural gas consumption and industrial production. Thus، as far as final industrial energy consumption، petroleum products and electricity consumption are concerned، there is evidence in support of the energy conservation hypothesis and the feedback hypothesis of energy consumption with respect to natural gas consumption. The findings have practical policy implications for decision makers in the area of macroeconomic planning، as they indicated that energy conservation is a feasible policy option with no damaging repercussions on economic (industrial) growth.