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Accounting for asymmetric price responses and underlying energy demand trends in OECD industrial energy demand

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  • Olutomi I Adeyemi

    ()
    (Alexander Brookes Associates Limited, London, UK.)

  • Lester C. Hunt

    ()
    (Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.)

Abstract

This paper explores the way technical progress and improvements in energy efficiency are captured when modelling OECD industrial energy demand. The industrial sectors of the developed world involve a number of different practices and processes utilising a range of different technologies. Consequently, given the derived demand nature of energy, it is vital that when modelling industrial energy demand the impact of technical progress is appropriately captured. However, the energy economics literature does not give a clear guide on how this can be achieved; one strand suggests that technical progress is ‘endogenous’ via asymmetric price responses whereas another strand suggests that it is ‘exogenous’. More recently, it has been suggested that potentially there is a role for both ‘endogenous’ and ‘exogenous’ technical progress and consequently the general model should be specified accordingly. This paper therefore attempts to model OECD industrial energy demand using annual time series data over the period 1962 -2010 for 15 OECD countries. Using the Structural Time Series Model framework, the general specifications allow for both asymmetric price responses (for technical progress to impact endogenously) and an underlying energy demand trend (for technical progress and other factors to impact exogenously, but in a non-linear way). The results show that almost all of the preferred models for OECD industrial energy demand incorporate both a stochastic underlying energy demand trend and asymmetric price responses. This gives estimated long-run income elasticities in the range of 0.34 to 0.96; long-run price-maximum elasticity in the range of -0.06 to -1.22; long-run price-recovery elasticity in the range of 0.00 to -0.71; and long-run price-cut elasticity in the range of 0.00 to -0.13. Furthermore, the analysis suggests that when modelling industrial energy demand there is a place for ‘endogenous’ technical progress and an ‘exogenous’ underlying energy demand trend; consequently, it is argued that, any modelling strategy should start by including both and only imposing restrictions if accepted by the data.

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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 142.

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Length: 34 pages
Date of creation: Sep 2013
Date of revision:
Publication status: Published in Energy Economics, 45, 2014, pp. 435-444. (Revised Version)
Handle: RePEc:sur:seedps:142

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Keywords: OECD industrial energy demand; Asymmetric Price Responses (APR); Underlying energy demand trend (UEDT);

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References

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  1. Huntington, Hillard G., 2010. "Short- and long-run adjustments in U.S. petroleum consumption," Energy Economics, Elsevier, vol. 32(1), pages 63-72, January.
  2. 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.
  3. Dargay, Joyce M. & Gately, Dermot, 2010. "World oil demand's shift toward faster growing and less price-responsive products and regions," Energy Policy, Elsevier, vol. 38(10), pages 6261-6277, October.
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  5. 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.
  6. 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.
  7. Harvey, Andrew C & Koopman, Siem Jan, 1992. "Diagnostic Checking of Unobserved-Components Time Series Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 377-89, October.
  8. Olutomi I Adeyemi & David C Broadstock & Mona Chitnis & Lester C Hunt & Guy Judge, 2008. "Asymmetric Price Responses and the Underlying Energy Demand Trend: Are they Substitutes or Complements? Evidence from Modelling OECD Aggregate Energy Demand," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 121, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
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  11. Zafer Dilaver & Lester C Hunt, 2010. "Industrial Electricity Demand for Turkey: A Structural Time Series Analysis," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 129, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
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  13. John Dimitropoulos & Lester C. Hunt & Guy Judge, 2004. "Estimating Underlying Energy Demand Trends using UK Annual Data," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 108, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  14. 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.
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  16. Lester C Hunt & Guy Judge & Yasushi Ninomiya, 2003. "Modelling Underlying Energy Demand Trends," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 105, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  17. 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.
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  19. Beenstock, Michael & Wilcocks, Patrick, 1983. "Energy and economic activity: a reply to Kouris," Energy Economics, Elsevier, vol. 5(3), pages 212-212, July.
  20. I.O. Walker & Franz Wirl, 1993. "Irreversible Price-Induced Efficiency Improvements: Theory and Empirical Application to Road Transportation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 183-205.
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