Oil Consumption and Economic Growth Interdependence in Small European Countries

Abstract The paper examines the existence and the direction of causality between the oil consumption and the economic growth in small European countries over the period 1980–2007 for the developed countries and 1993-2007 for the transition countries. Our findings show that small European states can be divided into two groups. The first group is characterized by the causality running from real GDP to oil consumption and is composed of the most developed European countries and a number of transition countries. In the former case, the direction of causality is a consequence of a highly developed post-industrial society with a strong tertiary sector. In the case of transition economies the direction of causality can be related to deindustrialization process and transition depression that resulted in a sharp industrial decline and decreased industrial oil demand. The second group is characterized by the causality running from oil consumption to economic growth, in which case the state should employ additional resources in subsidizing oil prices and securing long term and stable oil sources for its economy. In such countries the reduction of oil consumption because of different reasons (external prices shocks, increased taxes on oil and its derivatives, restrictive ecological laws regarding CO2 emission) could lead to a fall in economic growth.