Investigating the granger causality relationship between the consumption of different oil products and economic growth in Iran

Abstract

In light of the recent implementation of subsidy reform plan and the elimination of subsidies for energy carrier prices and, in particular, for oil product prices in Iran, and the pressing need for providing clearer and more effective policy guidelines to help advance the plan, the present study is an attempt to explore the relationship between the consumption of different oil products and economic growth. This study primarily seeks to determine whether a Granger causality relationship exists between the consumption of different oil products and economic growth. And, if so, is it unidirectional or bidirectional? To answer the above questions, the author has applied vector autoregressive and vector error correction model (VECM), using quarterly data from 1988 to 2008. The results indicate that, in short-run, none of oil products consumption stimulates economic growth. But the economic growth Granger causes the consumption of gas oil and gasoline. There is also a weak Granger causality from economic growth to consumption of fuel oil and kerosene. There is no relationship between economic growths and liquid gas. In the long run, there exist a two-way Granger causality relationship between fuel oil consumption and economic growth and a one-way Granger causality relationship from economic growth to the consumption of gas oil and, there is not any relationship between the consumption of other products and economic growth. The results suggest that the reduction of oil products consumption (except fuel oil consumption), due to price increases resulting from removal of subsidies, will not negatively affect the economic growth and, hence, we can pursue the subsidy reform plan on oil products without decelerating economic growth.