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...and decreases in oil prices; the asymmetric effects on demand of increases and decreases in income; and the different speeds of demand adjustment to changes in price and in income. Our main conclusions are the following: (1) OECD demand responds much more to increases in oil prices than to decreases; ignoring this asymmetric price response will bias down ward the estimated response to income changes; (2) demand's response to income decreases in many Non-OECD countries is not necessarily symmetric to its response to income increases; ignoring this asymmetric income response will bias the estimated response to income changes; (3) the speed of demand adjustment is faster to changes in income than to changes in price; ignoring this difference will bias upward the estimated respon se to income changes. Using correctly specified equations for energy and oil demand, the long-run response in demand for income growth is about 1.0 for Non-OECD Oil Exporters, Income Growers and perhaps all Non-OECD countries, and about 0.55 for OECD countries. These estimates for developing countries are significantly higher than current estimates used by the US Department of Energy. Our estimates for the OECD countries are also higher than those estimated recently by Schmalensee-Stoker-Judson (1998) and Holtz-Eakin and Selden (1995), who ignore the (asymmetric) effects of prices on demand. Higher responses to income changes, of course, will increase projections of energy and oil demand, and of carbon dioxide emissions.
INTRODUCTION
This paper analyses the determinants of commercial energy and oil demand, for 96 of the world's largest countries (listed in Appendix A), using 1971-1997 data on per-capita basis. Our primary interest is estimating the long-run response of demand to income changes. This parameter has important implications for future energy and oil demand, and for emissions levels for carbon dioxide and other pollutants--not to mention its effect on the future prices of oil and other forms of energy. However, estimation of this parameter is relatively sensitive to the assumed specification of demand as a function of income and price. We are especially interested in whether there are:
* asymmetric effects on demand between increases and decreases in price;
* asymmetric effects on demand between increases and decreases in income;
* differences in the speed of demand adjustment for changes in price and for changes in income;
* differences across countries and various groups of countries.
To address these issues, we examine various specifications of the demand equation for various groups of countries. Specifically, we test whether allowing for asymmetries in the demand response to price and income at the country level can improve our understanding of world energy consumption trends.
The paper was motivated by estimates of the income elasticity of energy and oil demand in the recent literature that seemed too low, both for developing countries and for high-income countries. For example, demand projections reported by the US Department of Energy's Energy Information Administration (EIA), (1) whose outlooks are used extensively by number of organizations, used an income elasticity of about 0.65 for energy and oil in Asian Developing Countries. In contrast, econometric estimates reported by Pesaran et al. (1998) are 1.0 or higher for those countries.
For higher-income countries, several recent articles in the literature on world energy and carbon dioxide emissions have reported income elasticities that are close to zero and sometimes negative--for examples, Schmalensee, Stoker, and Judson (SSJ, 1998), Judson, Schmalensee, and Stoker (JSS, 1999) and Holtz-Eakin and Selden (HES, 1995). For the highest-income OECD countries, SSJ (1998) estimated income elasticities that are quite low; in fact, their estimates were not even positive for the richest set of countries. The SSJ (1998) estimate of -0.30 for carbon emissions and -0.22 for energy implies that both per capita energy and carbon dioxide emissions will decrease with per capita income growth in the future. The HES (1995) analysis, although it does not report elasticities for different sets of countries, suggests an income elasticity of 0.36 for the highest-income countries considered by SSJ (1998).
The outline of the paper is as follows. In Section II we describe important features of the data, namely: the fundamental influence of income growth upon the demand for energy and oil; the asymmetric effects on demand of price increases and decreases; the asymmetric effects on demand of income growth and decline; and the substantial heterogeneity across countries, not only between the OECD and the Non-OECD countries but also among the Non-OECD countries themselves. In Section III we describe the various specifications of the demand equations that we shall examine. Section IV presents the econometric results for these alternative specifications of the demand for energy and for oil, for several groups of countries: for the OECD countries, for the Non-OECD countries, and then for three sub-groups within the Non-OECD countries whose behavior differs substantially from each other: the Oil Exporters, the Income Growers (those developing countries with the fastest income growth), and the Other Countries. Section V s ummarizes our conclusions.
II. BACKGROUND ISSUES
Important Determinants of the Growth of Energy and Oil Demand: Income and Price, and Heterogeneity across countries
We assume that a country's per-capita energy and oil demand are determined by changes in income and price. These effects on demand may be asymmetric. That is, the demand-reducing effect of price increases may not necessarily be completely reversed by a comparable reduction in price. Likewise, the demand-increasing effect of an increase in income may not necessarily be completely reversed by a comparable decrease in income. In several graphs below, we illustrate important phenomena that we shall attempt to capture in our econometric modeling.
* Figure 1 shows the fundamental role of income growth for developing countries' demand growth; it shows the 1971-97 time-paths of per-capita energy and oil demand vs. per-capita income, for five large Asian countries. We see that their energy and oil demand increased about as fast as income over this period.
* Figure 2 illustrates the difference between symmetric and asymmetric response of demand to changes in price.
* Figure 3 uses 1971-97 data for US oil demand and price to illustrate the phenomenon of asymmetric demand response to price changes: the demand reduction caused by price increases are not reversed when price falls.
* Figure 4 illustrates the difference between symmetric and asymmetric response of demand to changes in income.
* Figure 5 uses 1971-96 data for Saudi Arabia to illustrate the asymmetric effect on oil demand of changes in income: the demand-increasing effects of income increases are not reversed by income decreases.
The top graph of Figure 1 depicts the 1971-97 time-paths of per-capita energy demand against per-capita income (moving left to right, with increasing income), for five large Asian countries. The bottom graph shows the analogous time-paths for per-capita oil demand. In each graph, the scales are logarithmic--which allows for order-of-magnitude differences among countries, and which facilitates growth-rate comparisons across countries and between energy [or oil] growth and income growth. Movement parallel to the diagonal lines indicates equi-proportional growth in energy and income; steeper [less steep] movement indicates that energy is growing faster [slower] than income. For example, in the top graph we see that South Korea's tenfold income growth was the fastest (greatest horizontal movement) and that its energy demand increased as fast as its income (movement parallel to the equi-proportional growth lines). China's energy demand grew more slowly than its income, while Bangladesh's energy demand grew faster than its income.
Figure 2 illustrates the difference between asymmetric and symmetric demand response to changes in price. If demand responds symmetrically, the demand-reducing response to a price increase (year 2) will be reversed by the demand-increasing response to a price cut (year 3). That is, the slopes will be the same. In addition, the response to any price increase will be the same, whether it is an increase in the maximum historical price (year 2) or only a price recovery (year 4).
In contrast, if demand responds asymmetrically, the demand-increasing effect of a price cut (year 3) will not simply reverse the demand-reducing effect of a price increase (year 2). Nor will a price recovery (year 4) necessarily reduce demand at the same rate as occurred with the first, larger price increase (year 2); the slopes need not be the same for the price increases in year 2 and year 4.
Figure 3 plots the 1971-97 path of US oil demand and oil price, which illustrates asymmetric demand response to price changes. The demand reductions caused by the oil price increases of 1973-74 and 1978-80 were not reversed by the oil price decreases of 1981-86. Even the demand-increasing effect of income growth (most obvious in 1971-73 and 1975-78) cannot obscure the asymmetric effect of the price changes.
Figure 4 illustrates the difference between asymmetric and symmetric demand response to changes in income, analogously to Figure 2--except that the dependent variable, demand, is now on the vertical axis rather than on the horizontal.
If demand responds symmetrically, then the demand-increasing response to an income increase (year 2) will be reversed by the demand-reducing effect of an income decrease (year 3). Moreover, the demand response to an income recovery (year 4) will be that same as that to an increase in maximum historical income (year 2). All the slopes will be the same.
In contrast, if demand responds asymmetrically, the demand-reducing effect of an income reduction (year 3) will not simply reverse the demand-increasing effect of an income increase (year 2). Nor will an income recovery (in year 4) necessarily increase demand at the same rate as occurred with the first, larger income increase; the slopes need not be the same for the income increases in year 2 and year 4.
Figure 5 plots the 1971-96 path of oil consumption and income in Saudi Arabia, which illustrates an asymmetric demand response to income changes. The demand increases resulting from the income increases of 1971-81 were only slightly reversed by the income decreases of 1981-96.
The above graphs have illustrated the heterogeneity of experience for a few countries in a variety of dimensions: in their income growth (or decline), and in the response of demand to changes in income and to changes in price. To summarize the relationship between the growth of income and the growth of energy and oil demand for all countries, we plot in Figure 6 (OECD) and Figure 7 (Non-OECD) each country's energy and oil demand growth rates versus their income growth rates. The names and 3-letter abbreviations of the 96 countries appear in Appendix A.
The top graphs of Figures 6 and 7 plot countries' energy growth rate on the vertical scale and their income growth rate on the horizontal. Similarly for the two bottom graphs of Figures 6 and 7: oil growth rate on the vertical, and income growth rate on the horizontal. The scales on all...
NOTE: All illustrations and photos
have been removed from this article.
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