The Revealed Relationships between Energy Consumption and Economic Growth: Causality, Macroeconomics, New Trend, and Implications

Abstract

The literature of the “energy–economy” relationship presents mixed conclusions. Such conclusions could attribute mainly to the differences in methodology (econometrics), the selection of the data (period, frequency, length, time series vs panel data), the variety of possible explanatory variables employed in the model, different dynamics (lag structure) modeled, heterogeneity in the behavior of different sectors in the economy, heterogeneity in climate conditions, and various levels of development and economic structure. Even for the same countries, as its economy develops and its structure changes, the short‐run and long‐run relationships between energy consumption and economic growth may also change. This article reviews the literature on the “energy–economy” relationship and presents the evidence from studies that apply various methodologies and raise the research question at different levels of details and with different perspectives. It presents the relationships in four distinct hypotheses: a unidirectional causality from economic growth to energy consumption, a unidirectional causality from energy consumption to economic growth, a bidirectional feedback between energy consumption and economic growth, and no relationship at all (i.e., the neutrality hypothesis). This article also dives into the role played by other macroeconomic factors such as population, capital stock, prices, and technologies in revealing the true relationship between energy consumption and economic growth. The literature has started to pay more attention to sectoral characteristics of energy consumption and economic growth as well as the characteristics of different types of energy such as oil, natural gas, coal, nuclear, and renewable energy. These factors could reveal the new details of the hypotheses that drive a causality in either direction. Finally, this article presents relevant policy implications derived from the revealed relationships.