Estimation Of Petroleum Products Demand Functions: An Aggregate And Sectoral Analysis For Pakistan
Author: Zaheer Ahmed

This study focuses on the analysis and estimation of demand functions for petroleum products in major petroleum consuming sectors and at the aggregate level for Pakistan. The theoretical model is built on the standard neo-classical microeconomic theory, specifically the models of consumer and producer choices according to which petroleum products demand depends on the level or size of output/income, own price and cross price(s). The analysis takes the advantage of fairly long annual data series over the time period 1971-72 to 2011-12 and is able to obtain the estimates of long-run and short—run demand elasticities of petroleum products employing ARDL approach to co-integration. However, due to limited data simple linear equation is estimated for the demand estimates for transport sector. The estimation results show that economic activity has significant and positive impact on petroleum products demand in all the sectors in the long-run, however, the magnitude of elasticities vary across sectors. The demand for petroleum products is found to be highly output elastic at the aggregate level and in the manufacturing and power sectors. On the contrary, it is output inelastic in the transport sector. In the short-run petroleum products demand is output elastic at aggregate level but inelastic for the power sector. Petroleum price has highly significant and negative impact on its demand in the manufacturing sector for short and long-run but the magnitude of the response is small. Similar results are found at the aggregate level but the relationship is significant for the short-run only. For power sector, although the price elasticity is negative but it is statistically insignificant in the long-run. Transport sector also shows inelastic response of petroleum demand to price. Natural gas and electricity appear to be substitutes of petroleum products in the manufacturing sector in the long-run. In the power sector there appears to be the option of using coal as an alternative and cheap fuel subject to environmental concerns. For transport sector, CNG is found to be a substitute during the period of analysis but caution may be applied due to sharply declining domestic gas reserves and uncertainty associated with gas pipeline coming from neighboring countries. The main conclusion emerging from the study is that petroleum products demand is driven by the output level or the size of economic activity of the sector under consideration with prices having limited role to play with fewer options of alternative energy sources having sector specific nature. The varying elasticity estimates across sectors indicate heterogeneity in the use of petroleum products. Supervisor:- Dr Eatzaz Ahmad

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Supervisor: Eatzaz Ahmed

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