Price and Income Elasticities of Crude Oil Demand: Cross Country Analysis

Abstract

Volatility in crude oil price is the main issue in this era. Great volatility in price of crude oil affects the demand of oil directly and indirectly in developing countries because these countries are oil importing countries especially Pakistan, India and China. Crude oil therefore contributes to and thereby influences the GDP of the country as a source of energy. It is very critical and essential for any country to explore and produce gas to improve energy shortage, for some deliberate importance of gas because natural gas is very clean, cheap and sustainable source to produce energy within a country. This study aimed to analyze the price and income elasticities of crude oil demand in developing countries time series data used from the period of 1971-2014. ADF test was used to check the stationary of variables and it is seem that all variable are not stationary at level. ARDL used for co integration and all variables of the models have long run relation with dependent and explanatory variables. Price and income elasticities of crude oil demand were measured in short and long run for developing countries and it was concluded that long run elasticities of price and income were less inelastic or some cases like China was elastic than short run elasticities of price and income of crude oil demand. It was suggested that oil importer countries should explore the alternatives of oil within a country to fulfill the domestic demand.