Gasoline demand in Saudi Arabia: are the price and income elasticities constant?

ABSTRACT

The paper investigates gasoline consumption in case of oil-exporting country applying Time-varying Coefficient Cointegration approach to the data from 1980 to 2017. Empirical estimations show that long-run income and price elasticities are not constant and are responsive to price and income fluctuations in the period considered. The income elasticity of gasoline demand increased until 2014, peaking at 0.151, following growth in disposable income, before declining to 0.136 in 2017. However, consumers do not stop driving when their disposable incomes fall, resulting in a less elastic response of gasoline demand to income. Price elasticities sit in the range of −0.31 to −0.05, becoming less elastic when prices are low and vice versa.

The findings of the study may be useful in successful implementation of energy price reforms and implementation of environmental policies.

KEYWORDS:

• Gasoline demand
• time-varying coefficient
• cointegration
• Saudi Arabia
• elasticity

Acknowledgments

The authors would like to thank Fatih Karanfil, Walid Matar, Anwar Gasim, and Olivier Durand-Lasserve for their valuable comments and suggestions, which helped improve the quality of the paper. The views expressed in this paper are those of the authors and do not necessarily represent the views of their affiliated institutions. We also thank the attendants of the 21st Dynamic Econometrics Conference and especially to Sir David F. Hendry for their valuable comments.