Determinants of Energy Inflation in Pakistan: An Empirical Analysis

Abstract

Energy inflation has remained a significant topic in macroeconomic policy for the past few decades. This is due to several reasons pertaining to both demand and supply sides. In addition, the history of energy prices has also been characterised by extreme volatilities, Hamilton (2008). This makes forecasting and modelling of energy prices difficult, nevertheless it is important to model and forecast energy prices in all economies. In this paper we have tried to identify the determinants of energy inflation in Pakistan. Energy products are a critical component in any economy, serving as a core input, particularly in manufacturing industries. Moreover, the demand for energy and fuel comes from households fuelling cars and kitchens for which other alternatives are not easily available. This renders the demand inelastic compared to any other good [Edelstein and Kilian (2009)], making economies vulnerable to supply and price shocks. The energy price inflation therefore through cost push inflation and demand-pull inflation has a major impact on core inflation itself, thereby playing a significant role in macroeconomic health of a country. As predicted by Ben Bernanke for the US in 2006, “in the long run energy prices can reduce the productive capacity of US economy if high energy costs make businesses less willing to invest new capital”. The nature of the energy market itself creates a major gap between the oil consumers and oil producers. Whilst demand is inelastic everywhere, supply is limited and is difficult to increase, and confined to certain regions on Earth. This is true particularly for two of the most common energy types: oil and gasoline. The supply of oil is controlled by a few countries, and supply shocks therefore lead to an immediate surge in prices.

Impact of Rising Energy Prices on Consumer’s Welfare: A Case Study of Pakistan

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“…Global oil price is taken to be as a main cause of energy inflation because few nations are responsible to control the supply of oil and any disturbance in its supply leads to sudden rise in the prices. Pakistan is the net importer of oil and any disturbance in oil supply makes Pakistan helpless by putting subsequent burden on its import bills [Haider, et al (2013)]. International economic depression in 1970 due to oil shocks produced by OPEC created a serious problem for oil importing nations around the world and led to sudden rise in energy prices and created a large demand gap.…”

Energy Consumption and Inflation Dynamics in Nigeria: An ARDL Cointegration Approach

“…Applying ordinary least square regression on prices of petroleum products and inflation from 1990 to 2011, he found that premium motor spirit and diesel prices affect inflation positively, but not so with dual purpose kerosene. Haider et al (2013) found that energy consumption causes energy inflation in an economy. In a study of the Pakistani economy from 1973 to 2012 using Ordinary Least Square (OLS), Generalized Least Square (GLS) and…”

“…A large chunk of the debate is that energy consumption is sine qua non for general economic development (Kraft and Kraft, 1978;Onakoya et al, 2013;Mustapha and Fagge, 2015;Sama and Tah, 2016). However, increasing debate shows that energy consumption may affect the general price level as well (Haider et al, 2013;Iyke, 2014;Eregha and Mesagan, 2017). More particularly, for developing economies, energy consumption has continued to be a driving force for macroeconomic activities.…”

Infrastructure of Sustainable Energy Development in Pakistan: A Review

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