Understanding Energy Consumption Dynamics in Malaysia: An Empirical Analysis

Abstract

This paper examines the factors influencing energy consumption in Malaysia, focusing on scale and technique effects, composition, trade openness, and urbanization over the period from 1970 to 2019 using quarterly data. To explore the long-term relationships between these variables, the study employs the bounds testing approach, taking into account structural breaks to ensure robustness in the findings. The empirical results reveal several key insights into the dynamics of energy consumption in Malaysia. Firstly, the growth effect, which includes both the scale and technique effects, shows divergent impacts on energy consumption. The scale effect, representing economic expansion, positively impacts energy consumption, indicating that as the economy grows, energy demand increases. On the other hand, the technique effect, which refers to improvements in technology and efficiency, has a negative impact on energy consumption, suggesting that technological advancements and efficiency improvements help reduce energy demand. Additionally, the composition effect, which relates to the structural changes in the economy such as shifts towards more energy-intensive industries, stimulates energy demand in Malaysia. This indicates that changes in the industrial composition towards sectors that are more energy-dependent contribute to higher energy consumption. Trade openness and urbanization are also found to positively influence energy consumption. Greater trade openness typically leads to increased industrial activity and economic growth, thereby raising energy demand. Urbanization drives energy consumption through increased infrastructure development, higher population density, and greater demand for energy services in urban areas. These findings have significant policy implications for Malaysia. To sustain economic growth while improving environmental quality, policymakers need to design and implement comprehensive energy and trade policies. Given that economic growth (scale effect) drives energy consumption, efforts should be directed towards enhancing the technique effect by promoting energy-efficient technologies and practices across all sectors of the economy. This can be achieved through incentives for energy-efficient investments, regulations that mandate energy efficiency standards, and support for research and development in green technologies. Moreover, the positive impact of trade openness on energy consumption suggests that trade policies should be integrated with environmental considerations. Promoting exports of energy-efficient and environmentally friendly products can help mitigate the environmental impact of trade-driven economic activities. Additionally, policies aimed at managing urbanization effectively, such as urban planning that incorporates green spaces, public transportation, and sustainable infrastructure, can help balance the energy demands of growing urban populations. The composition effect indicates a need for industrial policies that encourage a shift towards less energy-intensive industries. Diversifying the industrial base to include more service-oriented and high-tech industries can reduce overall energy consumption while maintaining economic growth.