Bivariate Cointegration Analysis of Energy-Economy Interactions in Iran

It is common with governments of many oil producing developing countries to fix the prices of energy products below their opportunity cost for welfare and redistribution purposes. This has often resulted in huge energy consumption in developing countries and the question that emerge is whether this increased energy consumption results in higher economic activities. In Iran, the first and second phases of pricing reform to manage domestic consumption were introduced in 2010 and 2014 respectively. Available statistics show that the country’s economy growth shrunk for the first time in two decades from 2011. This suggests a relationship between energy use and economic growth that deserve to be investigated. Accordingly, the study examined the causality and the likelihood of a long term relationship between energy and economic growth in Iran. The outcome reveals a one-way causality running from economic growth to energy with no feedback with evidence of long run connection. The results lend further support for the ongoing subsidy reforms in Iran to check excessive and inefficient use of energy without necessarily causing harm to the country’s growt