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Asymmetric Price Responses and the Underlying Energy Demand Trend: Are they Substitutes or Complements? Evidence from Modelling OECD Aggregate Energy Demand

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  • Olutomi I Adeyemi

    (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)

  • David C Broadstock

    () (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)

  • Mona Chitnis

    () (Surrey Energy Economics Centre (SEEC) and Research Group on Lifestyles Values and Environment (RESOLVE), University of Surrey)

  • Lester C Hunt

    () (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)

  • Guy Judge

    () (Department of Economics, University of Portsmouth)

Abstract

A number of energy demand studies have considered the importance of modelling Asymmetric Price Responses (APR), for example, the often-cited work of Gately and Huntington (2002). Griffin and Schulman (2005) questioned the asymmetric approach arguing that this is only capturing energy saving technical progress. Huntington (2006), however, showed that for whole economy aggregate energy and oil demand there is a role statistically for both APR and exogenous energy saving technical change. In a separate strand of the literature the idea of the Underlying Energy Demand Trend (UEDT) has been developed, see for example Hunt et al. (2003a and 2003b) and Dimitropoulos et al. (2005). They argue that it is important, in time series energy demand models, to allow for stochastic trends (or UEDTs) based upon the structural time series/dynamic regression methodology recommended by Harvey (1989, 1997). This paper attempts to bring these strands of the literature together by conducting tests for the UEDT and APR in energy demand models within both a panel context (consistent with the Huntington, 2006 approach) and the structural time series modelling framework. A set of tests across a range of specifications using time-series and panel data are therefore undertaken in order to ascertain whether energy saving technical change (or the more general UEDT) and APR are substitutes for each other when modelling energy demand or whether they are actually picking up different influences and are therefore complements. Using annual whole economy data for 17 OECD countries over the period 1960 – 2004 the results suggest that in general the UEDT and ARP are complementary estimation methodologies when modelling aggregate energy demand. It is argued therefore that energy demand modellers should not assume at the outset that one method is superior to the other. Moreover, wherever possible, a general model (be it in a time series or panel context) that includes a ‘non linear UEDT’ and APR should be initially estimated, and only if accepted by the data should symmetry and/or a more restrictive UEDT be imposed.

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Bibliographic Info

Paper provided by Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey in its series Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) with number 121.

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Length: 26 pages
Date of creation: Oct 2008
Date of revision:
Publication status: Published in Energy Economics, 32(5), 2010, pp. 1157-1164. (Revised Version)
Handle: RePEc:sur:seedps:121

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Keywords: Energy Demand; OECD; Asymmetric Price Responses; Underlying Energy Demand Trend.;

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References

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  1. John Dimitropoulos & Lester Hunt & Guy Judge, 2005. "Estimating underlying energy demand trends using UK annual data," Applied Economics Letters, Taylor and Francis Journals, vol. 12(4), pages 239-244.
  2. Francois Lescaroux & Olivier Rech, 2008. "The Impact of Automobile Diffusion on the Income Elasticity of Motor Fuel Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 41-60.
  3. Olutomi I Adeyemi & Lester C. Hunt, 2006. "Modelling OECD Industrial Energy Demand: Asymmetric Price Responses and Energy – Saving Technical Change," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 115, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  4. Hunt, Lester C. & Judge, Guy & Ninomiya, Yasushi, 2003. "Underlying trends and seasonality in UK energy demand: a sectoral analysis," Energy Economics, Elsevier, vol. 25(1), pages 93-118, January.
  5. Dargay, Joyce & Gately, Dermot, 1997. "The demand for transportation fuels: Imperfect price-reversibility?," Transportation Research Part B: Methodological, Elsevier, vol. 31(1), pages 71-82, February.
  6. Kouris, George, 1983. "Fuel consumption for road transport in the USA," Energy Economics, Elsevier, vol. 5(2), pages 89-99, April.
  7. Dermot Gately, 1993. "The Imperfect Price-Reversibility of World Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 163-182.
  8. Majid Ahmadian & Mona Chitnis & Lester C. Hunt, 2007. "Gasoline demand, pricing policy and social welfare in the Islamic Republic of Iran," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 31(2), pages 105-124, 06.
  9. James M. Griffin & Craig T. Schulman, 2005. "Price Asymmetry in Energy Demand Models: A Proxy for Energy-Saving Technical Change?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-22.
  10. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January.
  11. Beenstock, Michael & Wilcocks, Patrick, 1983. "Energy and economic activity: a reply to Kouris," Energy Economics, Elsevier, vol. 5(3), pages 212-212, July.
  12. Dermot Gately & Hiliard G. Huntington, 2002. "The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 19-55.
  13. Arqam Al-Rabbaie & Lester C. Hunt, 2006. "OECD Energy Demand: Modelling Underlying Energy Demand Trends using the Structural Time Series Model," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 114, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  14. Hillard G. Huntington, 2006. "A Note on Price Asymmetry as Induced Technical Change," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-8.
  15. Lester C. Hunt & Yasushi Ninomiya, 2003. "Unravelling Trends and Seasonality: A Structural Time Series Analysis of Transport Oil Demand in the UK and Japan," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 63-96.
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Citations

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Cited by:
  1. A. Talha Yalta, 2013. "Small Sample Bootstrap Inference of Level Relationships in the Presence of Autocorrelated Errors: A Large Scale Simulation Study and an Application in Energy Demand," Working Papers 1301, TOBB University of Economics and Technology, Department of Economics.
  2. Yaw Osei Adofo & Joanne Evans & Lester Charles Hunt, 2012. "How sensitive to time period sampling is the asymmetric price response specification in energy demand modelling?," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 138, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.

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