Demand elasticities of oil in the kingdom of Saudi Arabia using autoregressive and error correction procedures

Abstract

This paper investigates the short-run and the long-run oil demand elasticities in Saudi Arabia for the period 1980-2009, using auto-regressive and co-integration analyses. It finds oil price (the world crude price) insignificant in the short-run and significant in the long-run, and the demand to be price inelastic. The income is significant, and the demand is income inelastic in the short-run and elastic in the longrun. There is a long-run co-movement between the oil consumption and linear summation of the oil price and the income. However, a deviation from this long-run equilibrium takes a long time to correct, as only 0.08% of deviation is corrected annually. The income and the oil consumption have a bidirectional relationship, whereas the domestic oil consumption is found neutral of the world oil price, and the domestic income growth is found to put pressure on the world oil price to rise. The implications of the study are that domestic energy conservation should be cautiously managed as reductions in the domestic oil consumption can have damaging consequences for the economic growth, and the authorities should monitor and evaluate the sustainability of the neutrality of domestic oil consumption market from the world oil market shocks.