Measuring the Energy Market Uncertainty Index and Analyzing Its Effects on Economic Growth in Iran

Abstract
Economic growth is one of the most important indicators of development and welfare. For an economy such as Iran, which is faced with structural challenges and long-standing dependence on oil revenues, economic growth is of great significance. The energy sector functions as the primary engine of economic growth, playing a critical role in production, employment creation, and social welfare. Yet, uncertainty and instability within the energy sector represent one of the most pressing challenges for Iran’s economy, shaping the outlook for both growth and sustainable development. Enhancing energy security through the promotion of clean energy and the implementation of effective and forward-looking energy policies can help lay the foundation for stable, inclusive, and environmentally responsible growth. The present study seeks to estimate the degree of energy economy uncertainty and analyze its impact on Iran’s economic growth during the period 1989–2024. To quantify uncertainty, conditional GARCH models are applied and, to evaluate its influence on growth, the Dynamic Ordinary Least Squares (DOLS) method is employed. The empirical results demonstrate that uncertainty in the energy economy exerts a significant and negative effect on economic growth, leading to reduced investment flows, delays in production projects, and lower productivity levels. In contrast, higher levels of investment, labor force development, and technological progress are associated with significant positive impacts on growth, expanding the country’s productive capacity. Moreover, political improvements and increased female participation in economic activity strengthen institutional stability, foster confidence among economic actors, and support labor market development, whereas geopolitical risks continue to limit growth potential.
 
Extended Abstract
 Purpose: Economic growth is widely recognized as a key determinant of national development and quality of life. In resource-dependent economies like Iran, fluctuations in energy markets, structural inefficiencies, and external shocks can significantly affect growth trajectories. The energy sector, encompassing oil, gas, and electricity production and consumption, is directly linked to industrial performance, fiscal revenues, and employment creation. Despite its centrality, the volatility of energy prices, production, and exports creates uncertainty that can adversely influence investment decisions, productivity, and overall economic stability. Understanding the role of energy market uncertainty is, therefore, essential for designing robust growth policies. This study contributes to the literature by constructing a novel Energy Market Uncertainty Index specific to Iran, which captures the combined volatility of key energy variables including crude oil production and exports, gas production and consumption, and electricity generation and use. Unlike prior research that has primarily focused on aggregate economic uncertainty or global energy markets, this study offers a localized and policy-relevant measure for Iran. In addition, the research investigates the broader determinants of growth, including capital accumulation, labor force development, technological progress, political risk, geopolitical uncertainty, and female labor force participation. The overarching goal is to provide policymakers with insights into how energy-related uncertainties interact with structural and institutional factors to shape economic outcomes.
 
Methodology: To estimate energy market uncertainty, this study employs conditional Generalized Autoregressive Conditional Hetero-skedasticity (GARCH) models, which allow for modeling volatility and capturing dynamic fluctuations at energy prices and production levels. The GARCH framework is particularly suitable for financial and commodity time series, enabling the derivation of a reliable uncertainty index from historical energy market data. To analyze the impact of energy market uncertainty on economic growth, the study applies the Dynamic Ordinary Least Squares (DOLS) approach. This methodology is proper for potential endogeneity and serial correlation, providing consistent and efficient estimates of long-run relationships between energy uncertainty and GDP growth.
The empirical analysis utilizes the annual data covering the period from 1989 to 2024 and extracted from credible sources such as the World Bank, International Energy Agency, and national statistical agencies. The variables considered include gross domestic product (GDP) as the dependent variable, alongside independent variables capturing capital accumulation, labor input, total factor productivity, energy production and consumption, political risk, geopolitical risk, and female labor force participation. This comprehensive dataset allows for the assessment of both direct and indirect effects of energy market uncertainty,
 
Findings and Discussion: The empirical results indicate that energy market uncertainty has a significant negative effect on Iran’s economic growth. Periods of heightened volatility in oil prices, crude oil exports, domestic energy consumption, and electricity production correspond to declines in investment, interruptions in production projects, and reductions in overall productivity. These findings highlight the vulnerability of the Iranian economy to fluctuations in the energy sector, emphasizing a critical need for risk mitigation and stable policy frameworks.
Conversely, the results show that sustained investment in physical capital, labor force development, and technological advancement positively and significantly contributes to economic growth. These factors enhance production capacity, improve productivity, and reinforce the economy’s resilience to external shocks. Furthermore, improved political conditions and increased female labor force participation bolster institutional stability, enhance investor confidence, and expand labor market participation, all of which further support growth. Geopolitical risks, however, continue to constrain economic expansion, underscoring the importance of regional tension reduction, diversification of international relations, and strategic energy diplomacy.
 
Conclusions and Policy Implications: The findings suggest that managing energy market uncertainty is crucial for sustaining economic growth in Iran. Policy measures aimed at stabilizing energy markets, improving transparency and data availability, developing risk-hedging instruments, and coordinating energy and macroeconomic policies can mitigate adverse impacts. Diversifying the energy mix, promoting renewable energy sources, and increasing energy efficiency across industrial and residential sectors are also essential strategies to enhance economic resilience. Additionally, fostering technological innovation, investing in human capital, and encouraging greater female labor force participation can reinforce long-term growth prospects.
Overall, the study confirms the dual role of energy as both a driver of growth and a source of uncertainty in Iran’s economy. By providing a localized Energy Market Uncertainty Index and demonstrating its tangible effects on GDP growth, this research offers valuable insights for the policymakers who seek to stabilize the economy, improve investment confidence, and pursue sustainable and inclusive development. Implementing coordinated and forward-looking policies that address structural vulnerabilities and energy volatility can help Iran achieve a more predictable, resilient, and sustainable growth trajectory.