Towards Energy Security: Price Sensitivity and Oil Demand in Pakistan
DOI:
https://doi.org/10.55737/qjss.vi-ii.25339Keywords:
Demand Elasticity, Cross Price Elasticity, ARDL, Crude Oil Consumption, Import Substitution, Renewable EnergyAbstract
Pakistan relies heavily on imported crude oil to meet its energy needs. Fluctuations in oil demand and prices have a direct impact on a country’s trade balance, inflation, and overall economic stability. This study investigated the key factors of crude oil demand in Pakistan. Using time series data from 1996 to 2024, the study estimated price, income, and cross-price elasticities to understand how these factors influenced crude oil consumption. The Autoregressive Distributed Lag (ARDL) model was applied to explore both long-run and short-run relationships, with the bounds testing approach confirming a stable long-run association among the variables. Diagnostic tests verified that the model was robust. The empirical results revealed that oil was a luxury good and its demand was highly elastic because a 1% decrease in oil prices led to a 1.22% increase in oil demand, highlighting a strong and significant negative relationship. A week cross price elasticity of oil was observed, describing that a 1% rise in gas prices resulted in a 0.90% increase in oil demand, and it suggested a weak substitution effect. Income growth also had a positive impact, with a 1% rise in income increasing oil demand by 0.16%. Therefore, the income elasticity revealed that the oil could be regarded as a non-cyclic normal good in Pakistan. The short-run error correction model showed that deviations from the long-run equilibrium were corrected within approximately 1.15 years. The study concluded that oil demand in Pakistan was highly sensitive to oil price changes and moderately influenced by gas prices and income. The promotion of energy diversification, improvement in energy efficiency, and investment in domestic energy infrastructure was underlined. A long-term, balanced energy policy was deemed essential to manage demand and reduce dependence on imported oil.
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