Temporal Dynamics of Oil Demand Elasticities in OECD Economies

Abstract

This study investigates the long-run income and price elasticities of oil demand in 21 OECD countries, utilizing quarterly data spanning the period from 1980 to 2023. The findings indicate that oil demand is inelastic for both income and prices, suggesting that changes in these variables result in proportionally smaller adjustments in oil consumption. This inelasticity underscores the essential nature of oil in the economies of OECD countries, where demand remains relatively stable despite fluctuations in income levels or oil prices. The cointegration tests conducted in the study reveal that oil price elasticities exhibit instability over time. This instability may reflect shifts in economic structures, technological advancements, energy policies, and global oil market dynamics over the decades. These findings highlight the complexity of understanding oil demand behavior and underscore the importance of considering temporal variability when analyzing the relationship between oil prices, income, and demand. The study provides valuable insights for policymakers and energy market analysts in designing strategies that account for these persistent and evolving demand patterns. The time-varying panel data estimates corroborate these findings, revealing significant variations in income and price elasticities over time, influenced by oil market dynamics and global events. Notably, the sign of oil price elasticities shifted from negative to positive after 2015, a deviation from the traditional law of demand. This unexpected shift is likely attributable to the period of declining oil prices, which may have encouraged increased consumption, investments in oil-dependent industries, or changes in market behavior. The most pronounced positive and statistically significant price elasticity occurred in early 2020, coinciding with the onset of the COVID-19 pandemic. During this time, disruptions in oil supply chains, unprecedented declines in global demand, and price volatility may have contributed to atypical consumer and producer responses, amplifying the sensitivity of oil demand to price changes. These results highlight the dynamic and context-dependent nature of oil demand elasticities, underscoring the importance of considering temporal and situational factors in policy and market analysis. This analysis provides valuable insights into the dynamics of oil demand and underscores the influence of economic and oil market factors on income and price elasticities. By revealing the inelastic nature of oil demand and the temporal variability in elasticities, particularly the unexpected shifts in price elasticity post-2015, the study enhances our understanding of how global events, market dynamics, and economic conditions shape oil consumption patterns. These findings contribute to the broader literature on energy economics and offer critical implications for policymakers and market analysts. They emphasize the need for adaptive strategies that account for evolving demand behavior, especially in the context of volatile oil markets and global economic shifts. This analysis serves as a foundation for designing informed energy policies, managing market uncertainties, and forecasting future oil demand trends.