The effect of natural gas price liberalization on natural gas consumption in residential sector in Iran

High natural gas consumption in residential sector in Iran is an important issue that Price liberalization and omitting natural gas subsidy is one of the solutions to reduce natural gas consumption in residential sector. Our Objectives in this study is: 1) Estimation of long and short- run natural gas consumption functions in residential sector in Iran; 2) Determination of long-run and short-run price and income elasticities; 3) The impacts of cutting subsidies on residential consumption of natural gas are studied in two scenarios (in first scenario the liberalization process is considered in 3 years (2011-13) and in second scenario is considered in 5 years (2011-15)). The results indicates that short-run price and income elasticities are -0.12 and 0.62, and long-run price and income elasticities are -0.36 and 0.88, respectively. Low price elasticity leads to low efficiency of price policy because when the prices are too low the responsiveness of demand with respect to price could be low as well. Hence it is possible that in much higher range of prices the consumer response to price changes could increase too, withdrawing subsidies on natural gas is one of the solutions to both increasing the efficiency of price policy and reducing natural gas consumption. Withdrawing subsidies on natural gas leads to reduction of annual growth of natural gas consumption in first scenario (2011-13) and second scenario (2011-15) by 7.2 % and 5.7% respectively. Also this sudden increase in natural gas price probability could have significant negative side effects such as welfare loss or fuel poverty which should be considered.