Analysis of Price and Income Elasticities of Energy Demand in Ecuador: A Dynamic OLS Approach

TL;DR

This paper estimates long-term price and income elasticities of energy demand in Ecuador from 1970 to 2015 using a Dynamic OLS approach, revealing high income elasticity and no price effect.

Contribution

It provides the first long-term estimates of energy demand elasticities in Ecuador using cointegration and structural break analysis.

Findings

Energy demand is highly income elastic in the long run.

No significant relationship between energy demand and price.

Inverse relationship between energy demand and industrial production.

Abstract

Energy consumption in Ecuador has increased significantly during the last decades, affecting negatively the financial position of the country since large energy consumption subsidies are provided in its internal market and Ecuador is mostly a crude oil exporter and oil derivatives importer country. This research seeks to state the long run price and income elasticities of energy demand in Ecuador, by analyzing information spanning the period from 1970 to 2015. A cointegration analysis and an estimation by using a Dynamic Ordinary Least Squares approach considering structural breaks is carried out. Results obtained are robust and suggest that in the long run energy demand in Ecuador is highly income elastic, has no relationship with its price and has an almost unitary but inverse relationship with the industrial production level. Conclusions and economic policy suggestions are also provided.