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.
References
Akhtar, M. H., Iqbal, N., Tariq, B., & Ab-Rahim, R. (2020). Determinants of residential electricity demand: empirical evidence from Pakistan. Int J Acad Res Bus Soc Sci, 10(12), 162-177. https://doi.org/10.6007/IJARBSS/v10-i12/8283
Altinay, G. (2007). Short-run and long-run elasticities of import demand for crude oil in Turkey. Energy Policy, 35(11), 5829-5835. https://doi.org/10.1016/j.enpol.2007.07.015
Atif, R. M., Pervaiz, B., Fatima, M., Manzoor, M. Q., Javed, A., & Gull, R. H. (2024). Impact of Financial Development, Energy Consumption, Trade Openness, and Population on CO2 Emissions in Pakistan: Application of STIRPAT Model. Empirical Economic Review, 7(1). https://doi.org/10.29145/eer.71.06
Batool, S., Iqbal, J., Ali, A., & Perveen, B. (2022). Causal relationship between energy consumption, economic growth, and financial development: evidence from South Asian countries. Journal of Environmental Science and Economics, 1(4), 61-76. https://doi.org/10.56556/jescae.v1i4.319
Bentzen, J., & Engsted, T. (2001). A revival of the autoregressive distributed lag model in estimating energy demand relationships. Energy, 26(1), 45-55. https://doi.org/10.1016/S0360-5442(00)00052-9
Cooper, J. C. (2003). Price elasticity of demand for crude oil: estimates for 23 countries. OPEC review, 27(1), 1-8. https://doi.org/10.1111/1468-0076.00121
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American statistical association, 74(366a), 427-431. https://doi.org/10.1080/01621459.1979.10482531
Energy-Outlook. (2024). Energy Outlook 2024, British Energy, Statistical Review of World Energy. https://www.bp.com/en/global/corporate/energy-economics.html
Gao, J., Peng, B., & Smyth, R. (2021). On income and price elasticities for energy demand: A panel data study. Energy Economics, 96, 105168. https://doi.org/10.1016/j.eneco.2021.105168
Ghosh, S. (2009). Import demand of crude oil and economic growth: Evidence from India. Energy Policy, 37(2), 699-702. https://doi.org/10.1016/j.enpol.2008.10.021
GoP. (2024). Economic Survey of Pakistan, Finance Division, Government of Paksitan, Islamabad. https://www.finance.gov.pk/survey_2024.html
IAE. (2023). World Energy Outlook 2023. https://www.iea.org/reports/world-energy-outlook-2023
Jamil, M., Hakim, M., & Satti, R. A. (2018). Fuel Demand Elasticity in Pakistan: An Analysis Based on Household Integrated Economic Survey (HIES). NUML International Journal of Business & Management, 13(2), 76-89. https://doi.org/10.52015/nijbm.v13i2
Jebran, K., Abdullah, Elhabbaq, M. M., & Ali, A. (2017). Income and price elasticities of crude oil demand in Pakistan. Global business review, 18(6), 1373-1383. https://doi.org/10.1177/0972150917713049
Jobling, A., & Jamasb, T. (2017). Price volatility and demand for oil: A comparative analysis of developed and developing countries. Economic Analysis and Policy, 53, 96-1 13.https://doi.org/10.1177/0972150917713049
Khan, M. A., & Ahmed, A. (2011). Macroeconomic effects of global food and oil price shocks to the Pakistan economy: A structural vector autoregressive (SVAR) analysis. The Pakistan Development Review, 491-511. https://www.jstor.org/stable/23617714
Kim, H. S., & Baek, J. (2013). Assessing dynamics of crude oil import demand in Korea. Economic Modelling, 35, 260-263. https://doi.org/10.1016/j.econmod.2013.07.010
Malik, A. (2008). Crude oil price, monetary policy and output: The case of Pakistan. The Pakistan Development Review, 425-436. https://www.jstor.org/stable/i40056828
Malik, S. N., & Sukhera, O. R. (2012). Management of natural gas resources and search for alternative renewable energy resources: A case study of Pakistan. Renewable and Sustainable Energy Reviews, 16(2), 1282-1290. https://doi.org/10.1016/j.rser.2011.10.003
Marbuah, G. (2014). Understanding crude oil import demand behaviour in Ghana. https://doi.org/10.1016/j.joat.2017.11.002
Munir, K., & Nadeem, S. (2022). Disaggregate energy consumption and economic growth in Pakistan: a sectoral analysis. International Journal of Energy Economics and Policy, 12(1), 296-306. https://doi.org/10.32479/ijeep.11615
Munir, N. (2024). The Price of Progress: Understanding the Impact of Oil Shocks on Pakistan's Economic Trajectory. Journal of Economic Sciences, 3(2), 199-212. https://doi.org/10.55603/jes.v3i2.a6
Nawaz, S., Iqbal, N., & Anwar, S. (2013). Electricity demand in Pakistan: a nonlinear estimation. The Pakistan Development Review, 479-491. https://www.jstor.org/stable/24397910
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Rehman, S. A. U., Cai, Y., Fazal, R., Das Walasai, G., & Mirjat, N. H. (2017). An integrated modeling approach for forecasting long-term energy demand in Pakistan. Energies, 10(11), 1868. https://doi.org/10.3390/en10111868
Sahir, M. H., & Qureshi, A. H. (2007). Specific concerns of Pakistan in the context of energy security issues and geopolitics of the region. Energy Policy, 35(4), 2031-2037. https://doi.org/10.1016/j.enpol.2006.08.010
Şişman, M. Y., & Öztürk, Ö. (2021). An Empirical Analysis of Energy Demand in Turkey: Estimating Price and Income Elasticities of Crude Oil with Different Data Frequencies. Dumlupınar Üniversitesi Sosyal Bilimler Dergisi (69), 335-344. https://doi.org/10.51290/dpusbe.940651
