In recent years, global growth of demand for oil has been mainly due to the increasing demand for energy in major developing nations, namely China, India and Brazil, fuelled by their exceptional economic performance. In the Organization for Economic Cooperation and Development (OECD), on the other hand, and particularly in the G7 countries where more than 70 per cent of OECD demand for oil is consumed, demand for oil has been stagnant and seems to be plateaued. Indeed, per capita consumption for oil in these countries has been diminishing in recent years. Given the rising share of the major developing economies in global demand for oil, increased attention to carbon emission and the recent ascending trends of oil prices have renewed interest in the likely paths of demand for oil in these economies and the role that energy policies and rising oil prices might play in oil-saving technological changes in the major oil-consuming nations. In this paper, an attempt is made to use time-series modelling techniques for estimating income and price elasticities of demand for oil in G7 and Brazil, Russia, India and China countries and to test whether oil-saving technological changes in these economies could be attributed to exogenous factors such as energy policies and regulations or should be considered mainly a matter of price-induced endogenous changes. 189
Oil prices behave differently over different time-horizons. For the short run, we examine the pattern of movements in crude oil prices over business cycles and test whether price increases influence global output and/or are influenced by economic cycles. For the long run, we focus on whether "shocks" to crude oil prices are persistent or not. Our findings indicate that the price of crude oil exhibits substantial cyclical behaviour, as verified by several tests carried out in this paper. The VAR analysis indicates that the price of oil is a pro-cyclical variable. Moreover, the results show that, while, during the 1972-2003 period (when OPEC exerted more influence in the oil market), the oil market experienced substantial fluctuations in price, the price cycles were mean-reverting and not shockpersistent. This could indicate that OPEC market power can have stabilising effects.
This paper contains some results of a study in which the dynamics of petroleum markets in the Organization for Economic Cooperation and Development (OECD) is investigated through a vector auto regression (VAR)–vector error correction model. The time series of the model comprises the monthly data for the variables demand for oil in the OECD, WTI in real term as a benchmark oil price, industrial production in OECD as a proxy for income and commercial stocks of crude oil and oil products in OECD for the time period of January 1995 to September 2007. The detailed results of this empirical research are presented in different sections of the paper; nevertheless, the general result that emerges from this study could be summarised as follows: (i) there is convincing evidence of the series being non‐stationary and integrated of order one I(1) with clear signs of co‐integration relations between the series; (ii) the VAR system of the empirical study appears stable and restores its dynamics as usual, following a shock to the rate of changes of different variables of the model, taking between five and eight periods (months in our case); (iii) we find the lag length of 2 as being optimal for the estimated VAR model; (iv) significant impact of changes in the commercial crude and products’ inventory level on oil price and on demand for oil is highlighted in our empirical study and in different formulations of the VAR model, indicating the importance of the changes in the stocks’ level on oil market dynamics; and (v) income elasticity of demand for oil appears to be prominent and statistically significant in most estimated models of the VAR system in the long run, while price elasticity of demand for oil is found to be negligible and insignificant in the short run. However, while aggregate oil consumption does not appear to be very sensitive to the changes of oil prices (which is believed to be because of the so‐called ‘rebound effect’ of oil (energy) efficiency in the macro level) in the macro level, the declining trend of oil intensity (oil used for production of unit value of goods and services), particularly when there is an upward trend in oil price, clearly indicates the channels through which persistent changes in oil prices could affect the demand for oil in OECD countries.
In recent years, global growth of demand for oil has been mainly due to the increasing demand for energy in major developing nations, namely China, India and Brazil, fueled by their exceptional economic performance. On the other hand, in OECD and particularly in the G7 countries, where more than 70% of OECD demand for oil is consumed, demand for oil has been stagnant and seems to have plateaued. In fact, per capita, consumption for oil in these countries has been diminishing in recent years. Given the rising share of the major developing economies in the global demand for oil it is important to have a clear idea about their likely future paths of (per capita) demand for oil. A closely related issue is whether energy and oil efficiency in these economies are price induced or could be considered an exogenous process.In this paper an attempt is made to employ time-series, auto regressive error correction modeling technique to estimate short and long run income and price elasticity's of demand for oil in G7 and the BRICs, (Brazil, Russia, India and China). We have also tested for oil saving technological changes in these economies. This is done by making use of a price decomposition approach and testing for existence of deterministic trend in the estimated demand for oil models. The study yields a set of GDP and price elasticity's of demand for oil in G7 and the BRICs comparable to income and price elasticity's of demand for oil in other studies.
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