Effect of the 1973 oil price embargo: A non-parametric analysis

Abstract

This paper focuses on the effect of the oil shock of 1973 on US gasoline demand by examining the price elasticities of demand before and after the 1973 embargo. Price elasticities provide useful input to the development of public policy dealing with taxation and polution control. Understanding the consequences of the 1973 shock should provide useful lessons if such a shock were to recur in the future. The extensive data used include state level observations for nearly three decades spanning 1952–80. We apply non-parametric regression methods that are more appropriate to our investigation than traditional parametric techniques. Unlike standard regression techniques, non-parametric methods neither assume a functional form for the demand relation nor restrict the distribution of the dependent variable. Our results show that the mean price elasticity of gasoline demand for the USA was -0.243 for 1952–73 and the corresponding number for 1973–80 was -0.576, statistically different at the 5% level of significance. The relatively higher price elasticity in the post-embargo period is consistent with the hypothesis that consumers sought substitutes and restricted their consumption in response to prices as well as social responsibility. The policy implications of these results are also discussed.