An investigation into changes in the elasticity of U.S. residential natural gas consumption: A time-varying approach

Abstract

This study examines whether the responsiveness of U.S. residential natural gas demand to price and income movements has changed in recent times. Using annual data from 1970 to 2016, we apply a conventional aggregate demand model to estimate the own price and income elasticity of natural gas consumption by residential users in the U.S. We estimate this as a static model across alternative sample periods, as well as a stochastic model over the full sample, and reach two main conclusions. First, the own price elasticity of natural gas demand increased sharply in the mid 1980's and has declined steadily since. This finding is consistent with increasing reliance on natural gas by residential consumers and improvements in energy efficiency. Second, the income elasticity of U.S. residential natural gas demand has remained relatively constant and consistently negative. We explain this result by reference to increasing energy efficiency as well as the Environmental Kuznets Curve. The findings have important implications regarding the effectiveness of price and income measures to influence energy consumption and the energy mix.