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MEASURING LONG-RUN DEMAND ELASTICITIES FOR PETROLEUM

PRODUCTS IN OPEC

Carol A. Dahl, Professor, Mineral and Energy Economics Program, Colorado School of Mines, Golden Colorado, USA and Visiting Professor,

Department of Economics, King Saud University and

Afaf A. Abaalkhail, Lecturer, Department of Economics, College of Business Administration, King

Saud University, Riyadh, Saudi Arabia,

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Coming Attractions:

Global Growth in Oil Products compared to OPEC

Only Asia Pacific has grown faster

Compare model types

Talk about scope of project

time periods

products

countries

Issues from initial analysis

Some observations on Saudi Arabia

3Global Growth in Oil Products compared to

OPEC

4Models

Charemza and Deadman (1997)

Where O = the consumption of the oil product

P =the price of the energy productY = some measure of economic activity such as GDPt = an indice for the observation, which is time in a time series estimatet – 1 = the variable last period

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Scope of Project

1980-2009Gasoline, Kerosene, Diesel, Residual Total Oil ProductsCountries

Algeria, Angola, Ecuador, Indonesia, Iran, Kuwait,Libya, Nigeria, Qatar, UAE, Venezuela

Today talk about project in context of Saudi Arabia

6Saudi Arabia Battling Russia for the Lead

(Source: BP Statistics)

7Oil's Importance to Saudi Arabia (2009)

(Source: Saudia Arabian Monetary Authority)

>80% of merchandise exports >80% of government revenues >15% of gross fixed capital formation ~1/4 Gross Domestic Product (GDP)

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Issues to Consider

Measure of income?GDP erratic from oil cycles

permanent incomenon oil income

Population composition?women joining labor forceguest workers

What price?What currency?

local PPP better than exchange rates

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Which Income?

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Saudi Product Consumption

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Domestic and Guest Workers

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Oil and Product Prices

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0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00 Real GDP Per Capita (1000 Riyals)

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Which Price

15Gasoline 1980-2009

1. LnQ/Pop = β1 + β2LnP + β3LnY/Pop2. LnQ = β1 + β2LnP + β3LnY

1. Dep=ln(G/Pop) Coefficient t-Statistic C -0.657 -0.715Pg -0.199 -3.654Y/Pop -0.704 -4.043R2 = 0.39

2. Dep=ln(G) Coefficient t-Statistic C -6.947 -7.678Pg 0.173 2.690Y 1.486 9.639R2 = 0.810

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Gasoline 1981-2009 (LE)

3. LnQ = β1 + β2LnP + β3LnY + β4LnE-13. Dep = Ln(G) Coefficient t Statistic LR

C -1.050 -3.051 Pg -0.045 -2.820 -0.33Y 0.240 3.507 1.84G-1 0.887 19.557R2 = 0.996

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Kerosene 1980-2009

1. LnQ/Pop = β1 + β2LnP + β3LnY/Pop2. LnQ = β1 + β2LnP + β3LnY 1. Dep=ln(K/Pop) Coefficient t-Statistic

C 1.932 3.510Pk -0.001 0.249Y/Pop -2.019 0.005R Square = 0.452

2. Dep=ln(K) Coefficient t -Statistic C -12.305 -5.253Pk 0.667 3.234Y 2.108 5.157R Square = 0.671

18Kerosene LE 1981-2009

~3/4 domestic jet, ~1/4 residential

3. LnK = β1 + β2LnP + β3LnY + β4LnK-13. Dep = Ln(K) Coefficient t Statistic LR

C -0.586 -0.333Pk -0.068 -0.542 -0.56Y 0.155 0.512 1.27K-1 0.878 8.543

19Diesel/Gasoil (1980-2009)

~ 50% Electricity and Industry, Transport 50%1. LnQ/Pop = β1 + β2LnP + β3LnY/Pop2. LnQ = β1 + β2LnP + β3LnY1. Dep=ln(D/Pop) Coefficient t-Statistic

C -0.719 -2.459Pd -0.151 -3.951Y/Pop -0.423 -3.083R Square = 0.605

2. Dep=ln(D) Coefficient t -StatisticC 4.785 -5.31Pd 0.126 2.183Y 1.185 7.617R Square = 0.761

20Diesel/Gasoil (1981-2009)

3. LnQ = β1 + β2LnP + β3LnY + β4LnE-13. Dep = Ln(D) Coefficient t Statistic LRC -1.323 -3.462Pd -0.038 -1.951 -0.176Y 0.327 3.908 1.498D-1 0.782 12.505

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Residual (Heavy) Fuel Oil (1981-2006)

1. LnQ/Pop = β1 + β2LnP + β3LnY/Pop2. LnQ = β1 + β2LnP + β3LnY1. Dep=ln(R/Pop) Coefficient t-Statistic

C -8.361 -1.954P r -0.178 -0.546Y/Pop 1.076 1.333R-squared 0.326

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Heavy Fuel Oil (1981-2006)

3. LnR = β1 + β2LnP + β3LnY + β4LnR-13. Dep = Ln(R) Coefficient t Statistic LR

C -0.788 -0.707Pr -0.126 -1.399 -1.07Y 0.210 1.166 1.78R-1 0.882 8.908

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Sum Up

Preliminary Work Suggest Some Interesting IssuesAt least in GulfOil GDP is erraticComposition of population should be investigatedWhich price

may not matter at very low prices