Dynamic Panel Data Approaches for Estimating Oil Demand Elasticity

Abstract

This study examines the general relationships between crude oil consumption, real oil price and real GDP using a quarterly time series from 1993 to 2012. Specifically, the long-term and short-term GDP and price elasticities of oil consumption per capita were estimated using dynamic panel and pooled data regressions based on Nerlove's oil demand model for 25 countries that represent 75 per cent of global oil demand. Price elasticities were found for most OECD countries. These estimates were low and consistent with previous estimates. According to the study results, the short-run price elasticity ranged between −0.05 and −0.20 and the long-run between −0.11 and −0.36. Price elasticities for most non-OECD countries were either positive or insignificant. Estimates of GDP elasticities varied. The short-run GDP elasticity was between 0.15 and 1.09, while the long-run was between 0.21 and 1.54. On average, income elasticity for OECD countries was found to be slightly higher than for non-OECD countries. Contrary to expectations, we found China's income elasticity to be 0.34 in the short run, but it was 0.76 in the long run.