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The role of income and substitution in commodity demand
[Modelling OECD industrial energy demand: asymmetric price responses and energy-saving technical change]

Author

Listed:
  • John Baffes
  • Alain Kabundi
  • Peter Nagle

Abstract

We estimate income elasticities of demand for three energy and six base metal commodities and their group aggregates. The elasticities, which vary with income levels, are estimated using a panel autoregressive distributed lag model covering the period 1965–2017, for up to 63 countries. We report three findings. First, most income elasticities are inversely proportional to income and decline rapidly as income rises. This implies commodity demand growth slows as economies develop, consistent with the dematerialization hypothesis. At median per capita income levels, the elasticity for metals (in aggregate) was 0.9, while that of energy was 0.7. Second, there is significant heterogeneity between commodities, both in terms of income elasticities and in terms of the performance of the model, with larger commodities and group aggregates performing better. Finally, we find evidence of substitution between commodities (e.g. oil/coal, aluminum/copper), estimated by the inclusion of the prices of similar commodities.

Suggested Citation

  • John Baffes & Alain Kabundi & Peter Nagle, 2022. "The role of income and substitution in commodity demand [Modelling OECD industrial energy demand: asymmetric price responses and energy-saving technical change]," Oxford Economic Papers, Oxford University Press, vol. 74(2), pages 498-522.
    • Handle: RePEc:oup:oxecpp:v:74:y:2022:i:2:p:498-522.
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    File URL: http://hdl.handle.net/10.1093/oep/gpab029
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    Citations

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    Cited by:

    1. World Bank Group, 2020. "Commodity Markets Outlook, April 2020," World Bank Publications - Books, The World Bank Group, number 33624, April.
    2. Carol A. Dahl, 2020. "Minerals: What Are They and What Makes Them Critical?," Working Papers 2020-04, Colorado School of Mines, Division of Economics and Business.
    3. Yan, Zheming & Sun, Zao & Shi, Rui & Zhao, Minjuan, 2023. "Smart city and green development: Empirical evidence from the perspective of green technological innovation," Technological Forecasting and Social Change, Elsevier, vol. 191(C).
    4. World Bank Group, 2021. "Commodity Markets Outlook, April 2021," World Bank Publications - Books, The World Bank Group, number 35458, April.
    5. Felix Kapfhammer & Vegard H. Larsen & Leif Anders Thorsrud, 2020. "Climate risk and commodity currencies," Working Paper 2020/18, Norges Bank.
    6. Schischke, A. & Papenfuß, P. & Brem, M. & Kurz, P. & Rathgeber, A.W., 2023. "Sustainable energy transition and its demand for scarce resources: Insights into the German Energiewende through a new risk assessment framework," Renewable and Sustainable Energy Reviews, Elsevier, vol. 176(C).
    7. Baffes, John & Kabundi, Alain, 2023. "Commodity price shocks: Order within chaos?," Resources Policy, Elsevier, vol. 83(C).
    8. Krzysztof Dmytrów & Joanna Landmesser & Beata Bieszk-Stolorz, 2021. "The Connections between COVID-19 and the Energy Commodities Prices: Evidence through the Dynamic Time Warping Method," Energies, MDPI, vol. 14(13), pages 1-23, July.
    9. El Montasser, Ghassen & Malek Belhoula, Mohamed & Charfeddine, Lanouar, 2023. "Co-explosivity versus leading effects: Evidence from crude oil and agricultural commodities," Resources Policy, Elsevier, vol. 81(C).
    10. World Bank, 2020. "Global Economic Prospects, June 2020," World Bank Publications - Books, The World Bank Group, number 33748, April.
    11. Mensi, Walid & Nekhili, Ramzi & Vo, Xuan Vinh & Kang, Sang Hoon, 2021. "Oil and precious metals: Volatility transmission, hedging, and safe haven analysis from the Asian crisis to the COVID-19 crisis," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 73-96.
    12. Tröster, Bernhard, 2020. "Commodity-dependent countries in the COVID-19 crisis," Briefing Papers 25, Austrian Foundation for Development Research (ÖFSE).
    13. Zhu, Yongguang & Xu, Deyi & Ali, Saleem H. & Cheng, Jinhua, 2021. "A hybrid assessment model for mineral resource availability potentials," Resources Policy, Elsevier, vol. 74(C).
    14. Bernhard Tröster & Karin Küblböck, 2020. "Unprecedented but not Unpredictable: Effects of the COVID-19 Crisis on Commodity-Dependent Countries," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 32(5), pages 1430-1449, December.
    15. Ahmed, Maruf Yakubu & Sarkodie, Samuel Asumadu, 2021. "COVID-19 pandemic and economic policy uncertainty regimes affect commodity market volatility," Resources Policy, Elsevier, vol. 74(C).
    16. Wheeler,Collette Mari & Baffes,John & Kabundi,Alain Ntumba & Kindberg-Hanlon,Gene & Nagle,Peter Stephen Oliver & Ohnsorge,Franziska Lieselotte, 2020. "Adding Fuel to the Fire : Cheap Oil during the COVID-19 Pandemic," Policy Research Working Paper Series 9320, The World Bank.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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