OPEC and demand response to crude oil prices

This paper investigates demand response to crude oil price movements before and after the recent global financial and economic crisis. It employs several market power indices to structurally estimate price elasticities. A newly developed market power index for crude oil markets is implemented. In this approach OPEC is the central player and acts as a dominant producer in the global oil market. We quantify how a change in market structure (such as changes in marginal cost of production) would contribute to market power exercise of OPEC and have an ultimate impact on price elasticity of demand for oil. Our price elasticity predictions fall in a range reported in the literature, however estimates for pre-crisis deviate from the post-crisis ones. In fact, demand response to crude oil prices has almost doubled during the crisis. This severe change in price response can be associated with record price levels caused by supply shortages and surge in alternative renewable energy resources. The key advantages of this methodology over the existing literature are that it is simple to use and estimates price elasticity using a competition framework without specifying demand/supply function(s), and utilizes commonly observable market variables that can be applied to any admissible data frequency.     

Market conditions and future oil prices

This paper analyses the relationship between price elasticities of oil demand and supply and the real price of oil. With the help of a two-equation model it is shown that under market conditions prevailing during the 1973–1978 period. OPEC countries could have imposed even higher real oil prices if they had acted as a revenue-maximizing cartel. It is also shown that market conditions in the longer term were not supportive of the oil price escalation of 1979–1980.The real price of oil has already receded from its level in 1980 and further downward adjustments may be necessary to restore balance in the market if the world economy does not resume sustained growth and the pace of off-oil substitution does not subside.     

Natural gas price elasticities: Variations by region and by sector in the USA

This article's primary objective is to estimate the own-price and cross-price elasticities of demand for natural gas in the residential, commercial and industrial sectors by DOE region in the USA. A simultaneous-equations model was developed and its reduced form was employed for natural gas consumption demand elasticity estimation in conjuction with the instrumental price variables. Data from 1967 to 1978 were used in the estimation, but the 1973 oil embargo effect was separated with the use of a dummy variable. The demand for natural gas was much more price elastic in the long run than in the short run, and the industrial sector was more less price sensitive than others. However, there were significant interregional and intersectoral variations among the elasticities estimated.     

Residential consumption of gas and electricity in the U.S.: The role of prices and income

We study the residential demand for electricity and gas, working with nationwide household-level data that cover recent years, namely 1997–2007. Our dataset is a mixed panel/multi-year cross-sections of dwellings/households in the 50 largest metropolitan areas in the United States as of 2008. We estimate static and dynamic models of electricity and gas demand. We find strong household response to energy prices, both in the short and long term. From the static models, we get estimates of the own price elasticity of electricity demand in the − 0.860 to − 0.667 range, while the own price elasticity of gas demand is − 0.693 to − 0.566. These results are robust to a variety of checks. Contrary to earlier literature (Metcalf and Hassett, 1999; Reiss and White, 2005), we find no evidence of significantly different elasticities across households with electric and gas heat. The price elasticity of electricity demand declines with income, but the magnitude of this effect is small. These results are in sharp contrast to much of the literature on residential energy consumption in the United States, and with the figures used in current government agency practice. Our results suggest that there might be greater potential for policies which affect energy price than may have been previously appreciated.     

Electricity demand for South Korean residential sector

This study estimates the electricity demand function for the residential sector of South Korea with the aim of examining the effects of improved energy efficiency, structural factors and household lifestyles on electricity consumption. In the study, time series data for the period from 1973 to 2007 is used in a structural time series model to estimate the long-term price and income elasticities and annual growth of underlying energy demand trend (UEDT) at the end of the estimation period. The result shows a long-term income elasticity of 1.33 and a long-term price elasticity of −0.27% with −0.93% as the percentage growth of UEDT at the end of the estimation period. This result suggests that, in order to encourage energy efficiency in the residential sector, the government should complement the market based pricing policies with non-market policies such as minimum energy efficiency standards and public enlightenment.     

The residential demand for electricity in Australia: an application of the bounds testing approach to cointegration

This paper reports estimates of the long- and short-run elasticities of residential demand for electricity in Australia using the bounds testing procedure to cointegration, within an autoregressive distributive lag framework. In the long run, we find that income and own price are the most important determinants of residential electricity demand, while temperature is significant some of the time and gas prices are insignificant. Our estimates of long-run income elasticity and price elasticity of demand are consistent with previous studies, although they are towards the lower end of existing estimates. As expected, the short-run elasticities are much smaller than the long-run elasticities, and the coefficients on the error-correction coefficients are small consistent with the fact that in the short-run energy appliances are fixed.     

Energy consumption and economic activity in industrialized countries : The dynamic aggregate time series relationship

Most econometric studies suggest that the income elasticity of demand for energy is approximately unity. For the developed market economies it is shown that over the period 1950–1978 the long-run income elasticity is substantially higher than unity in terms of a CES energy demand function. This result reflects the application of a generalized dynamic estimation methodology where serial correlation is regarded as a diagnostic guide to distributed lag fitting. Price elasticities are also estimated but these are in line with conventional estimates.     

The price and income elasticities of natural gas demand: International evidence

Natural gas contributes a growing share of the world's energy mix. In this paper we use national-level data for a sample of 44 countries to estimate the price and income elasticities of natural gas demand. We present both single-equation results and results instrumenting natural gas prices with proved natural gas reserves. Our instrument includes both domestic reserves and distance-weighted reserves in other countries. We obtain estimates of the average long-run price elasticity of natural gas demand of around −1.25 and of the average long-run income elasticity of natural gas demand of +1 and higher. We also present separate estimates for final natural gas demand by industry and households.     

Gasoline consumption and the stock of motor vehicles : An empirical analysis for the Swiss economy

The demand for gasoline and the stock of cars is empirically explained for the Swiss economy by applying statistical methods from modern time series analysis to annual data over the period 1962–1985. The short-run price and income elasticities of gasoline consumption are -0.3 to -0.45 and 0.7. The price elasticity became substantially higher after the first OPEC shock in 1973. Pollution control measures introduced in 1982 negatively affected the stock of cars. Longer run effects operating over changes in the size of the stock and the fuel efficiency of cars are stretched out over several years as shown by a variety of simulation experiments.     

Improved technical efficiency and exogenous factors in transportation demand for energy: An application of structural time series analysis to South Korean data

This paper stresses the importance of incorporating the effects of improved technical efficiency and exogenous factors when estimating energy demand functions. Using annual time series data for the period 1973–2007 in the STSM (structural time series model) developed by Harvey et al. [26] the paper estimates price and income elasticities of demand for energy as well as the annual growth of the stochastic trend at the end of the estimation period. The results of the study reveal a long-run income elasticity of 1.37 and a price elasticity of −0.19. In addition, the underlying trend is generally stochastic and negatively sloping during the greater part of the estimation period. Finally, the estimated result from the structural time series is compared with the results from the Johansen Cointegration. These results suggest that income is the dominant factor in energy consumption. In addition, the coefficient of linear trend is negative, supporting the results from the STSM.     

Structural change and Thailand energy demand

This paper examines the impact of changes in the structure of the economy, radical changes in economic policy and oil price shocks on the relation between Thailand energy demand and its macroeconomic determinants. The impact of these structural changes on the relationship between energy consumption, income, energy prices and structural variation is examined through unit root and cointegration tests, the cointegration relationship and the error correction model. Methods which endogenize the location of an a priori unknown break point are employed to assess the impact of structural change. In general, the recognition of structural change has lead to some unique insights. In particular, the results of some of the conventional unit root and cointegration tests are reversed once structural changes are recognized. Estimates from the cointegrating regression imply long-run income, price, and structural variation elasticities of 0.568, −0.600 and 1.046, respectively. In comparison, estimates from the error correction model suggest a higher short-run income elasticity (0.788) but lower short-run price and structural variation elasticities (−0.522 and 0.491, respectively). One of the important implications of the estimates pertains to the low price elasticity for aggregate energy demand which implies that the over-pricing of energy as a policy instrument is not likely to be very influential for restraining future energy demand. Additionally, taxes on energy prices are unlikely to achieve government goals for energy conservation and environmental improvement, although they may well be efficient for raising revenue. Copyright © 2006 John Wiley & Sons, Ltd.     

The price elasticity of the residential demand for electricity in the Vepco service area

In this study, we derive seasonal estimates of price elasticities of the residential demand of electricity in the Vepco service area from a detailed integrated economietic and end-use model that does not constrain the demand function to constant elasticities with respect to the explanatory variables. The elasticity coefficients derived from the model conform to expectations based on theoretical considerations.We also examine the structural stability of the demand function for residential electricity in the Vepco service area during 1969: 2–1980: 4. Two shifts are detected, one at the beginning of 1976 and the other at the end of 1978. The first shift is attributed to the delayed reaction of Vepco residential customers to the oil embargo and the subsequent increases in energy prices; the second relates to increased energy consciousness brought about by continued high prices of energy and also by encouragement from the federal government to conserve.     

Estimating short and long-term residential demand for electricity: New evidence from Sri Lanka

This study investigates the short-run dynamics and long-run equilibrium relationship between residential electricity demand and factors influencing demand – per capita income, price of electricity, price of kerosene oil and price of liquefied petroleum gas – using annual data for Sri Lanka for the period, 1960–2007. The study uses unit root, cointegration and error-correction models. The long-run demand elasticities of income, own price and price of kerosene oil (substitute) were estimated to be 0.78, ? 0.62, and 0.14 respectively. The short-run elasticities for the same variables were estimated to be 0.32, ? 0.16 and 0.10 respectively. Liquefied petroleum (LP) gas is a substitute for electricity only in the short-run with an elasticity of 0.09. The main findings of the paper support the following (1) increasing the price of electricity is not the most effective tool to reduce electricity consumption (2) existing subsidies on electricity consumption can be removed without reducing government revenue (3) the long-run income elasticity of demand shows that any future increase in household incomes is likely to significantly increase the demand for electricity and (4) any power generation plans which consider only current per capita consumption and population growth should be revised taking into account the potential future income increases in order to avoid power shortages in the country.     

Improved stoves in Sub-Saharan Africa: the case of the Sudan

The paper estimates charcoal demand and supply elasticities to determine rebound effects from improved stoves in the Sudan. These are increases in fuel consumption resulting from gains in real income upon the use of more efficient appliances, and from downward price adjustments associated with the reduction in fuel requirements. The findings are that: (1) charcoal markets are characterized by low elasticities; and (2) 42% of fuel savings are lost, mostly as a result of large price adjustments since low elasticities place more of the burden of market adjustment on prices than on quantities. Nonetheless, price-related effects may be small because of increases in charcoal prices as a result of accelerated deforestation.     

The structure of residential energy demand in Greece

This paper attempts to shed light on the determinants of residential energy demand in Greece, and to compare it with some other OECD countries. From the estimates of the short-run and long-run elasticities of energy demand for the period 1965–1999, we find that residential energy demand appears to be price inelastic. Also, we do not find evidence of a structural change probably because of the low efficiency of the energy sector. We find, however, that the magnitude of the income elasticity varies substantially between Greece and other OECD countries.     

An oil demand and supply model incorporating monetary policy

Oil price inflation may have had a significant role in pushing the world economy into its worst post-war recession during 2008–2009. Reserve currency central banks pursued an overly expansionary monetary policy during 2001–2009, in the form of low or negative real interest rates and accompanied by a rapidly falling US dollar, while paying inadequate attention to the destabilizing effects on oil markets. In this paper, we show that monetary policy variables, namely key interest rates and the US dollar exchange rate, had a powerful effect on oil markets. World oil demand was significantly influenced by interest and dollar exchange rates, while oil supply was rigid. Oil demand and supply have very low price elasticity and this characteristic makes oil prices highly volatile and subject to wider fluctuations than the prices of other commodities. Aggressive monetary policy would stimulate oil demand, however, it would be met with rigid oil supply and would turn inflationary and disruptive to economic growth if there was little excess capacity in oil output. We argue that a measure of stability in oil markets cannot be achieved unless monetary policy is restrained and real interest rates become significantly positive. Monetary tightening during 1979–1982 might imply that monetary policy has to be restrained for a long period and with high interest rates in order to bring stability back to oil markets.     

Regional electric power demand elasticities of Japan's industrial and commercial sectors

In the assessment and review of regulatory reforms in the electric power market, price elasticity is one of the most important parameters that characterize the market. However, price elasticity has seldom been estimated in Japan; instead, it has been assumed to be as small as 0.1 or 0 without proper examination of the empirical validity of such a priori assumptions. We estimated the regional power demand functions for nine regions, in order to quantify the elasticity, and found the short-run price elasticity to be 0.09–0.30 and the long-run price elasticity to be 0.12–0.56. Inter-regional comparison of our estimation results suggests that price elasticity in rural regions is larger than that in urban regions. Popular assumptions of small elasticity of 0.1, for example, could be suitable for examining Japan's aggregate power demand but not power demand functions that focus on respective regions. Furthermore, assumptions about smaller elasticity values such as 0.01 and 0 could not be supported statistically by this study.     

Gasoline demand in Saudi Arabia: are the price and income elasticities constant?

ABSTRACT

The paper investigates gasoline consumption in case of oil-exporting country applying Time-varying Coefficient Cointegration approach to the data from 1980 to 2017. Empirical estimations show that long-run income and price elasticities are not constant and are responsive to price and income fluctuations in the period considered. The income elasticity of gasoline demand increased until 2014, peaking at 0.151, following growth in disposable income, before declining to 0.136 in 2017. However, consumers do not stop driving when their disposable incomes fall, resulting in a less elastic response of gasoline demand to income. Price elasticities sit in the range of ?0.31 to ?0.05, becoming less elastic when prices are low and vice versa.

The findings of the study may be useful in successful implementation of energy price reforms and implementation of environmental policies.     

Energy conservation and official UK energy forecasts

Behind the latest UK official forecasts of energy demand are implicit assumptions about future energy price elasticities. Here David Pearce examines the basis of the forecasts and finds that the long-term energy price elasticities which they imply are two or three times too low. The official forecasts substantially understate the responsiveness of demand to energy price rises. If more realistic price elasticities were assumed, the official forecasts would imply a zero primary energy demand growth to 2000. This raises the interesting possibility of a low energy future being brought about entirely by market forces.     

Gasoline prices,gasoline consumption,and new-vehicle fuel economy: Evidence for a large sample of countries

Countries differ considerably in terms of the price drivers pay for gasoline. This paper uses data for 132 countries for the period 1995–2008 to investigate the implications of these differences for the consumption of gasoline for road transport. To address the potential for simultaneity bias, we use both a country's oil reserves and the international crude oil price as instruments for a country's average gasoline pump price. We obtain estimates of the long-run price elasticity of gasoline demand of between − 0.2 and − 0.5. Using newly available data for a sub-sample of 43 countries, we also find that higher gasoline prices induce consumers to substitute to vehicles that are more fuel-efficient, with an estimated elasticity of + 0.2. Despite the small size of our elasticity estimates, there is considerable scope for low-price countries to achieve gasoline savings and vehicle fuel economy improvements via reducing gasoline subsidies and/or increasing gasoline taxes.