or_oil_elas - Price elasticity of demand for crude oil:...

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March 2003 © 2003 Organization of the Petroleum Exporting Countries 1 Abstract Price elasticity of demand for crude oil: estimates for 23 countries John C.B. Cooper This paper uses a multiple regression model derived from an adap- tation of Nerlove’s partial adjustment model to estimate both the short-run and long-run elasticities of demand for crude oil in 23 countries. The estimates so obtained confirm that the demand for crude oil internationally is highly insensitive to changes in price.
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2 © 2003 Organization of the Petroleum Exporting Countries OPEC Review The author is from the Department of Economics at Glasgow Caledonian University, Scotland.
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March 2003 © 2003 Organization of the Petroleum Exporting Countries 3 RUDE OIL CONTINUES to occupy a pre-eminent position at the heart of the world economy. It is the most important source of energy, ac- counting for some 40.6 per cent of primary energy consumption, and it is the raw material for the international petrochemical industry. Over the 30-year period from 1971 to 2000, world crude oil consumption increased by 46 per cent, from 2,412 to 3,519 million tonnes per annum. Of this total, the United States of America currently consumes just in excess of 25 per cent. One would have expected the large oil price rises of the 1970s to have provided a very strong incentive for the more efficient use of oil, through the development and exploitation of new technology. The accompanying table shows the average annual rate of growth of oil consumption per capita, along with the average annual rate of growth of real GDP per capita over the period 1979–2000 for 23 economies. A com- parison of these two figures provides a crude measure of any improved efficiency. More precisely, if oil consumption has grown at a slower rate than real GDP, then, ceteris paribus , the rate of oil consumption in the production of GDP must have de- clined. Of course, it may be the case that GDP growth is now being fuelled by the relatively less energy-intensive service sector, rather than the more energy-intensive industrial sector, but, with this caveat in mind, it is still interesting to make the comparison. All 23 economies experienced positive real economic growth to varying degrees, and 13 of these showed negative average growth in oil consumption. Of the ten for which average growth in oil consumption was positive, seven recorded a higher rate of economic growth. Newly industrializing China is a prominent example. In only three economies, namely Greece, Korea and Portugal, did growth in oil consumption exceed economic growth. Thus, in general, as economies have substituted more energy effi-
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or_oil_elas - Price elasticity of demand for crude oil:...

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