Accounting for non‐economic factors in demand for transportation fuels: a comparative study of South Korea and Indonesia

Abstract

This paper demonstrates the importance of capturing the influence of non‐economic factors such as changes in economic structure and life style in estimating energy demand functions for transportation fuels. Using annual time series data for South Korea and Indonesia from 1971 to 2016 in an Unrestricted Error Correction Model, the paper estimates the energy demand functions for transportation fuels as well as the growth of the underlying demand trend (which captured the effects of non‐economic factors). The estimated elasticities are in the range of 1.103 to 1.82 for long‐run income elasticity and −0.024 to 0.009 for price elasticity in the long‐run. However, the estimated coefficient of the linear trend variable ranged from −0.36 to 0.009. The overall result suggests that demand for transportation fuels are more elastic to changes in real income than real prices in the long run. The relative magnitude and sign on the coefficient of the trend variables (both linear and stochastic) suggest that South Korea is more efficient in transport sector energy consumption than Indonesia, on the other hand, Non‐technical exogenous factors (such as motorisation and traffic congestion) tend to outweigh energy efficiency improvements in Indonesia.