Estimating the Demand for Diesel in Agriculture Sector of Iran

International Journal of Energy Economics and Policy ISSN: 2146-4553 available at http: www.econjournals.com International Journal of Energy Economics and Policy, 2015, 5(3), 660-667. Estimating the Demand for Diesel in Agriculture Sector of Iran Lotfali Agheli* Economic Research Institute, Tarbiat Modares University, Iran. *Email: ABSTRACT This paper estimates per capita demand for diesel by agricultural sector in Iran using auto-regressive distributed lags method over 1973-2012. The findings indicate that the demand for diesel is relatively inelastic in response to changes in its price, electricity acts as substitute input for diesel, diesel is a necessary input in agriculture, and mechanization index, despite having expected positive sign, fails to explain variations in diesel use. In addition, there is a long-run relationship among variables. According to error correction model, the speed of adjustment in short-run distortions towards longrun equilibrium is moderate. The findings show that government policy on cutting energy subsidies is not enough for reducing diesel consumption in Iranian agricultural sector. Thus, non-price measures such as innovations in inter-fuel substitution technologies and applying efficient machineries are recommended to manage energy uses in agriculture. Keywords: Demand, Price, Diesel, Electricity, Auto-Regressive Distributed Lags JEL Classifications: C51, Q16, Q41 1. INTRODUCTION In Iran, the agriculture is of great importance due to its contributions to the national economy through employment creation, investment promotion, food provision, and poverty reduction in rural areas. In 2012, agriculture and its subsectors including hunting, forestry, and fishery accounted for 19.4% of employed persons aged 10 years and over (SCI, 2012). The use of diesel in Iranian agriculture compared to the commercial and industrial sectors is relatively high. According to the energy balance sheet of Iran, the share of diesel use in agriculture was 10.8% in 2012, whereas corresponding shares for commercial and industrial sectors were 0.65% and 6.68% in the same period, respectively. As well, the use of diesel in agriculture grew by 2.8% per annum over the period 1973-2012. In addition, diesel accounted for 92.8% of total oil products use during 1973-2012 (Iran Energy Balance Sheet, 2012). Figure 1 shows the overall increasing movements in diesel use in agriculture sector of Iran. Agriculture sector of Iran has adopted mechanization process through changing energy use forms. In the 1970s, peasantry and rural farming units were consuming traditional fuels extensively; however, the fossil fuels and electricity uses have increased 660 substantially in 2000s due to energy subsidies and transition to mechanized agriculture (Sabetghadam, 2006). Diesel consumption in agriculture takes various forms in different activities. All tillers and tractors, combines and water pumps use diesel for different purposes. For instance, tillers and tractors use diesel for land preparation, planting, harvesting, and transporting of farm products. In addition, diesel is consumed in producing crops and livestock on the farm and processing operations. The pricing of diesel in the agricultural sector is just like pricing in the other sectors of national economy. Until 2010, all oil products were highly subsidized, so low nominal prices encouraged consumers to use them inefficiently in different sectors. The low diesel prices induced more farmers to use it for diversifying cultivation patterns, transporting farm products to markets, and producing food (Mehrabi Boshrabadi and Naqavi, 2011). The nominal price of diesel (PD) was 1.83 cent/L in 20051, while it jumped to 21 cent/L in 20102 (Iran Energy Balance Sheet, 2012). The increases in diesel price caused rapidly rising costs of agricultural production. For example, delays in handling 1 2 1 US $= 9023 Iranian Rial (official exchange rate, yearly average) 1 US $= 10337 Iranian Rial (official exchange rate, yearly average) International Journal of Energy Economics and Policy | Vol 5 • Issue 3 • 2015 Agheli: Estimating the Demand for Diesel in Agriculture Sector of Iran agricultural products, which are attributable to high freight fees, increased the cost of production of farm products. The real PD, defined as price ratio of diesel to consumer price index (CPI), acts as a main factor affecting diesel use in agriculture. A glance at Figure 2 indicates that the real diesel price was nearly 50 Iranian Rials/L until recent years; however it jumped to over than 300 Iranian Rials/L in 2011 due to government policy on cutting energy subsidies. Electricity ranks at the second place after diesel in providing energy requirements in agriculture. In particular, some agroindustrial processes have been designed in such a way that they can make use of competing fuels especially for heating purposes. Hence, it is necessary to track the movements in electricity tariffs in agriculture. Figure 3 exhibits the real price of electricity (PE) over the 1973-2012. Evidently, the agricultural activities especially farming are dependent on land and its physical and chemical characteristics such as soil fertility, intensity of farm inputs, rainfall, etc. While extensive agriculture relies on vast land areas, the intensive agriculture is identified by the more use of inputs such as machinery, pesticides, and chemical fertilizers relative to land area. Due to difficulty in measuring mechanization and lack of data on various agricultural machinery, the number of tractors per 100 km2 of arable land is used as a proxy for mechanization index (mechindex) in this paper. This indicator is obtained from the World Bank. As Figure 4 illustrates, use of tractors in Iran’s agricultural sector has increased over time. According to Iranian agriculture mechanization database3, the number of operative tractors amounted to 389,536 in 2009. More 3 Available at website of Iranian Agriculture Mechanization Development Center: http://www.agmdc.ir than 85% of tractors are medium-sized with 33.5-59.6 kW power. In addition, the age of half of the operating tractors is over 13 years, and most of them are outdated. With existing tractors, light farm operation is completed with loss of energy, and heavy operation is made by low quality. Each tractor in modest circumstances of its lifecycle consumes about 12-13 L of diesel/h. The Central Bank of Iran (CBI) estimates agricultural activities value-added in five areas: farming, animal husbandry and hunting, fishing, forestry and agricultural services. The overall achievements of agriculture can be summarized at value added figures. The annual changes of value-added indicate real economic growth of the sector, when they are valued at constant prices. Figure 5 illustrates a relatively increasing trend of real agriculture value added with average growth rate of 4.4% per annum. The changes in energy prices result in the farmers reactions (...truncated)