Measuring the Effects of World Oil Price Change on Economic Growth and Energy Demand in Malaysia: An ARDL Bound Testing Approach

Abstract

This paper investigates the effects of world oil price change on economic growth and energy demand in Malaysia by using an ARDL bounds testing co-integration approach. The results revealed that changes in world oil price benefitted the Malaysia's real GDP in the short term. Interestingly, the estimated results showed that energy demand is found to be an oil price inelastic and income elastic of demand, consistently in the short and long run. In addition to that, there was a bidirectional causality effect between energy demand and GDP, which would have important implications for energy policy, where the energy policy may be implemented without convey adverse effects to both energy sector and economy performance. Given the dominant effects of oil price on energy demand and economic growth, this study suggests that policy planner should confer prompt response and choose the right mechanism of energy conservation and fiscal policy, especially to keep environmental friendly with sound macroeconomic balances. Also, in order to retard the fuel import growth, inter fuel substitution towards indigenous resources, mainly green energy resources would be required critically.