How much do asymmetric changes in income and energy prices affect energy demand?

Abstract

This paper uses a large unique panel data set of 91 OECD and non-OECD countries and recently developed panel regression estimation techniques to answer the question by how much energy demand changes when income and energy prices display asymmetric effects. Both long run and short run impacts are studied. For the full sample, we find the short run impact of a 1% increase in GDP increases energy consumption by 0.35% while a 1% decrease in GDP decreases energy consumption by 0.68%. These values are similar across different country groupings. GDP decreases have a larger impact on energy consumption than increases in GDP by a factor of approximately 2 to 1. We do not, however, find any evidence of asymmetric long run GDP effects. The result that energy demand falls more proportionally when GDP falls then when GDP rises has implications for energy policy and energy demand forecasting. There is evidence of long run price asymmetry for the OECD countries.