Estimation of Residential and Commercial Demand for Natural Gas in Iran Using the Structural Time Series Model

The residential and commercial sectors are the main consumers of natural gas in Iran. The demand for natural gas in these sectors is on its peak in the cold seasons for the heating. In addition to changes in temperature, which is the main determinant of demand fluctuation in energy, other factors such as unobservable seasonal shocks affect the seasonal demand. Moreover, observable economic factors such as price and income, as well as non economic factors, like changes in consumer’s taste and technical progresses, affect the energy demand. In this paper, we use an applied structural time series model (STSM) approach, which considers both stochastic trend and stochastic seasonality, to estimate the price and income elasticities for the natural gas demand in Iran. We apply the kalman filter with a maximum likelihood estimation method to provide unbiased estimators for the parameters. According to our results, although the estimated demand for natural gas does not have a trend component, the nature of seasonal component is stochastic. The elasticity of demand with respect to temperature is -0.26 percent and the long-run income and price elasticities are 0.17, -0.13, respectively.