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Price and Income Elasticities of Demand for Oil Products in African Member Countries of OPEC: A Cointegration Analysis

Suleiman, Sa’ad and Muhammad, Shahbaz (2012): Price and Income Elasticities of Demand for Oil Products in African Member Countries of OPEC: A Cointegration Analysis.

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Abstract

This paper analyses the demand for petroleum products in African member countries of OPEC namely Algeria, Angola, Libya and Nigeria over the period of 1980-2007. For this purpose, econometric models based on time series data are generated for individual products so as to capture product specific factors affecting demand. In doing so, the ARDL bounds testing approach to cointegration is applied to examine the long run relationship among the variables. Four specifications such as total petroleum product demand function, gasoline demand function, diesel demand function and kerosene demand functions have been estimated. The review of trends in the consumption and real prices of the various products suggest that demand for oil products has risen fast due to fast rise in income levels of individuals in these countries as compared to price level. Furthermore, results of estimation show mixed evidence about cointegration between the variables in all the countries studied. The evidence from the estimates show that the diesel demand specification provided satisfactory results in terms of producing expected signs than other specifications. The results for the kerosene model was the least satisfactory as most of the coefficients were found with unexpected signs. Finally the overall result indicates that demand for oil products are more responsive to changes in income than the real prices, both in the short and long run. This result is consistent with the previous studies on developing countries. Finally, the policy implication for result show the need for diversification, increase refining capacity and demand management policies in these countries to promote energy efficiency, conservation as well as discourage cross border smuggling of products and encourage private investment into the oil sector.

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