Demographic Change, Price Subsidy and the Rising Oil Demand in OPEC

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1 Demographic Change, Price Subsidy and the Rising Oil Demand in OPEC Hasanov Fakhri and Xun Xu 40th Annual IAEE International Conference, Singapore June 19, 2017

2 Outline Motivation and Objective Contribution and Conceptual Framework Literature Survey and Data Method Empirical Findings Concluding Remarks and Policy Implications

3 Motivation and Objective OPEC s domestic oil consumption has rapidly increased to one fourth of its total production during the past four decades (Gately et al, 2013 among others). Consequences: Greater price volatility in the international oil market Reduction and more volatility in government revenues and worsening fiscal stance Causes: Income rise, improvement of living standards and change of lifestyle Subsidized energy prices Total population (2.3% pa), especially share of young age group (age of 1564 from 53% to 63%) in OPEC has grown significantly in Objective: To analyze the role of demographic change and energy subsidy together with income in the growing domestic oil consumption in OPEC.

4 Contribution and Conceptual Framework Contribution: Accounting for both time series and cross sectional properties of the panel data. Combination of STIRPAT with Demand side modeling framework. Conceptual Framework: Modified STIRPAT IPAT by Ehrlich and Holdren (1971) I=PAT STIRPAT By Dietz and Roza (1994, 1997) I i = ap i b A i c T i d e i Modified STIRPAT ln oil it = a i + b i ln pop it + c i ln gdp it + d i ln age1564 it + e i ln sub it + ε it

5 Literature Survey Demand-side Framework Chakravorty et al. (2000), Al-Yousef (2013) and Gately et al. (2013) for OPEC Eltony and Al-Mutairi (1995) for Kuwait Al-Sahlawi (1997) and Gately et al. (2012) for KSA Ahmadian et al. (2007) for Iran Eltony (1996) and Al-faris (1997) for GCC Narayan and Smyth (2007) for ME STIRPAT Framework Shi (2003), Martinez-Zarzoso et al. (2007), York (2007), Liddle and Lung (2010), Liddle (2011), Poumanyvong et al. (2012), Menz and Welsch (2012), Nouri et al. (2012), Liddle (2014), Hasanov et al. (2016)

6 Data Data Type: Panel Period: OPEC members: Algeria, Iran, Kuwait, Libya, Qatar, Saudi Arabia, United Arab Emirates and Venezuela Dependent variables: Gasoline consumption (gas) Distillate oil consumption (dis) Explanatory variables: Total population (pop) Share of working age population (age1564) Price subsidy for gasoline and distillate oil (subg, subd) Real GDP per capita (gdp) Sources: OPEC Annual Statistical Bulletins, GIZ, Coady et al. (2010), EIA, UN, IMF and WB

7 Method Cross Sectional Dependency (CD) Tests: Pesaran (2004) and Pesaran et al. (2008) The first generation methods: PUR Tests: Im et al. (2003), Breitung (2000), Hadri (2000), Maddala and Wu (1999) PC Test: Pedroni (2004) P Estimators: FMOLS The second generation methods: PUR Test: Pesaran (2007) PC Test: Westerlund (2007) P Estimators: Common Correlated Effects Mean Group (CCEMG) estimator by Pesaran (2006)

8 Empirical Findings Cross Sectional Dependency (CD)Tests Results: For Distillate oil specification: no CD For Gasoline specification: results are not straightforward, but basically indicate no CD Therefore, we opt to conclude that there is no significant evidence of CD. However, we still use the second generation methods for the sake of robustness. PUR Tests Results: We can conclude that all variables are I(1). Our finding is consistent with earlier OPEC studies (Narayan and Smyth, 2007; Gately et al., 2013; Hasanov et al., 2016) PC Test Results: There is a cointegrating relationship for both gasoline and distillate oil specifications.

9 Empirical Findings: long-run elasticities FMOLS CCEMG Robustness Check: FMOLS with interaction terms gasoline distillates gasoline distillates gasoline distillates (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) pop *** *** *** *** *** *** *** *** (0.000) (0.000) (0.398) (0.642) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) age *** *** *** *** (0.000) (0.392) (0.726) (0.242) (0.000) (0.000) (0.000) (0.240) (0.363) (0.274) subsidy *** *** ** ** ** ** *** *** *** (0.009) (0.000) (0.037) (0.436) (0.033) (0.031) (0.030) (0.002) (0.000) (0.000) gdp *** *** *** *** (0.745) (0.000) (0.195) (0.951) (0.640) (0.659) (0.653) (0.000) (0.000) (0.000) sub*pop (0.775) (0.112) sub*gdp (0.669) (0.701) sub*age (0.772) (0.265)

10 Concluding Remarks and Policy Implications Population has higher impact for distillate oil consumption than gasoline consumption The share of age group of is important for gasoline consumption Subsidy exerts higher impact for distillate oil consumption than gasoline consumption Income provides explanatory power for distillate oil consumption but not gasoline consumption Distinction between gasoline and distillate oil subsidies may be important to policymakers when they consider subsidy reforms across different sectors. Demographic change should deserve more attention because rapid population growth and young age structure will likely persist in the near future. Future economic growth will likely induce more distillate oil consumption but necessarily so for gasoline.

11 THANK YOU FOR YOUR TIME

12 Backup Slides

13 Consumption growth of oil gasoline and distillates by selected OPEC countries Algeria Iran Kuwait Libya Qatar Saudi UAE Venezuela Gasoline % 8.78% 3.53% 4.89% 6.66% 3.45% 9.11% 0.16% % 4.87% 4.69% 5.48% 7.96% 4.74% 9.76% 1.22% Distillates % 0.13% 4.39% 4.82% 6.78% 3.88% -3.10% -0.93% % 2.07% 12.05% 2.42% 14.39% 5.15% 3.29% 4.85%

14 Gasoline and diesel prices as percentages of US prices, 2012

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