Oil demand and price elasticity of energy consumption in the GCC countries: A panel cointegration analysis

This paper examines the cointegrating relationship between oil demand and price elasticity of energy consumption in the Gulf Co-operation Council (GCC) countries during the period 1980-2010. The paper has applied the recently developed panel cointegration techniques, Dynamic Ordinary Least Squares (DOLS) and panel DOLS in a panel of GCC countries. The region is being recognized as the major region of oil production and export in the global economy. In recent times, the region is emerging as a fastest growing oil consuming region globally. This fast increase in the level of oil consumption in the major oil exporting countries raises the energy security implications in the sphere of the growing oil demand in the world economy. This is likely to bring many pitfalls in the form of price distortions and reduced growth rates in and outside the oil export region. The empirical finding reveals a cointegrating relationship among the variables and indicates an income elastic and price inelastic demand for oil in the long-run in the GCC countries. The outcomes of income elastic and price inelastic demand for oil are also consistent in the short-run. The income and price inelastic demand for oil though exists for a full panel of countries but vary across the GCC countries. The result of the Granger Causality test also depicts a unidirectional causality running from income to oil consumption and bidirectional causality running between oil prices and income in the GCC countries. Moreover, the outcomes reveal that demand for oil varies positively with the growth of income and negatively with the price level in the economy.