Oil price shocks and energy consumption in GCC countries: a system-GMM approach

Abstract

A close association prevails among energy consumption, energy prices, and income levels. This association has implications for the growth of an economy. Hence, incorporating energy consumption properties in an economy is crucial for policy design purposes especially in the case of energy-exporting countries of the Gulf Cooperation Council (GCC). This paper studies the correlates of energy consumption with an emphasis on shocks in crude oil prices, changes in GDP per capita, carbon dioxide emissions, trade, population growth, and other key indicators using a panel of GCC countries over 30 years of data period (1985–2014). The study provides direct evidence of the oil price shocks and energy consumption using a static panel (POLS and FE) and dynamic panel (system-GMM) estimation technique. The finding shows that oil price shocks affect energy consumption negatively. The greatest positive effect on energy consumption is observed with an increase in GDP per capita, as a percent increase in it increases energy consumption by 0.65 percent. It is followed by trade openness which increases energy consumption by 0.14 percent. While the greatest negative effect on energy consumption is observed by a rise in oil prices, as a percent increase in oil prices reduces energy consumption by approximately 0.22 percent. The study also finds that higher energy consumption increases carbon dioxide emissions as energy consumption is growing with population growth. Thus, it is important to upscale the adoption of renewable energy sources, adopt energy-efficient technologies, reduce energy subsidies, and practice demand-side management.