Price and income elasticities of crude oil demand : the case of ten IEA countries

Abstract: This master thesis attempts to estimate the short-run and long-run price and income elasticities of crude oil demand in ten IEA member-countries for the time period 1980-2009. Specifically, the price and income elasticities for Sweden, Denmark, Spain, Portugal, Turkey, Finland, Italy, Germany, USA, and Japan are estimated. Crude oil consumption is a function of four explanatory variables: real oil prices, real GDP per capita, oil consumption lagged one year and a time trend representing technological improvements. The econometric model that is used is a multiple regression model derived from an adaption of Nerlove’s partial adjustment model. Empirical results reveal that elasticities (both price and income) are lower in the short-run and hence more inelastic, indicating that countries need time to respond to changes in price or income. Econometric estimations illustrate that oil consumption is highly price inelastic both in short-run and long-run. Income elasticities are more elastic than price elasticities and close to unity in the long-run, indicating that countries are more sensitive to income changes.