Accounting for non‐economic factors in demand for transportation fuels: a comparative study of South Korea and Indonesia

• Published date: 01 March 2019
• Author: Mohammed Nma Ahmed,Suleiman Sa'ad,Davo Dahoro
• DOI: http://doi.org/10.1111/opec.12140
• Date: 01 March 2019

Accounting for non-economic factors in

demand for transportation fuels: a

comparative study of South Korea and

Indonesia

Suleiman Sa’ad*, Davo Dahoro* and Mohammed Nma Ahmed**

*Department of Economics, Nigerian Defence Academy, Kaduna, Nigeria. Email: suleimansaad@gmail.com;

Email: dadahoro@gmail.com

**Department of Accounting, Nigerian Defence Academy, Kaduna, Nigeria.

Abstract

This paper demonstrates the importance of capturing the influence of non-economic factors such

as changes in economic structure and life style in estimating energy demand functions for

transportation fuels. Using annual time series data for South Korea and Indonesia from 1971 to

2016 in an Unrestricted Error Correction Model, the paper estimates the energy demand

functions for transportation fuels as well as the growth of the underlying demand trend (which

captured the effects of non-economic factors). The estimated elasticities are in the range of 1.103

to 1.82 for long-run income elasticity and 0.024 to 0.009 for price elasticity in the long-run.

However, the estimated coefficient of the linear trend variable ranged from 0.36 to 0.009. The

overall result suggests that demand for transportation fuels are more elastic to changes in real

income than real prices in the long run. The relative magnitude and sign on the coefficient of the

trend variables (both linear and stochastic) suggest that South Korea is more efficient in transport

sector energy consumption than Indonesia, on the other hand, Non-technical exogenous factors

(such as motorisation and traffic congestion) tend to outweigh energy efficiency improvements in

Indonesia.

1. Introduction

The transportation sector is the dominant sector in consumption of petroleum products

(sometimes referred to as energy) in Asian developing countries. However, there are

many differences in the structure and patterns of fuel consumption among these

countries. These differences are due to economic factors including real per capita

incomes and energy prices. Non-economic factors such as structural transformation,

individual lifestyles and efficiency of transportation system (including motor vehicles

and road networks) also contribute to these differences.

©2018 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

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Over the years, energy demand modellers assume that economic factors such as fuel

prices and real consumer disposable income are the main factors accounting for

disparities in consumption of transportation fuels among countries. Recently,

Researchers at the Surrey Energy Economics Centre are questioning the conventional

wisdom of assuming that all happenings in the demand for energy (including

transportation fuels) can be interpreted by merely estimating price and income

elasticities. According to the new view, non-economic factors sometimes tend to have

a tremendous influence on the consumers demand for energy.

These factors as highlighted by Wohlgemuth (1997) include change in economic

structure which involves geographic as well as socio-demographic factors such as

gender, family structure and size, population age and density. There are also endogenous

and exogenous energy efficiency improvements, such as price induced technical

progress and exogenous energy efficiency standards which will also influence the

consumption pattern for a particular fuel.

These factors can influence the magnitudes of energy demand functions among

countries that are heterogeneous in terms of both economic and non-economic factors.

Furthermore, these factors together with real energy prices and real income cannot only

influence the movement along the energy demand curves but can also shift the demand

curve inward or outward.

The motivations for this study is to investigate how non-economic factors account

for differences in energy demand functions for transportation fuels between countries

that are heterogeneous in factors that influence the demand for transportation fuels.

Secondly, due to the seeming conflicting influence between technical energy efficiency

improvements and these structural factors (sometimes referred to as exogenous factors in

energy demand literature), the study will unravel which of the conflicting factors have

more influence on fuel consumption in each country.

Although there are some studies in the OECD countries that attempted to address

these issues in the transportation energy demand literature Hunt and Ninomiya (2003),

Broadstock and Hunt (2010) and Broadstock and Papathanasopoulou (2015) with the

exception of Sa’ad (2009) Sa’ad (2010), there is no known study that attempts to address

these important issues in developing countries. This study is an attempt to extend the

ongoing debate on the role of non-economic factors in demand for transportation fuels to

developing Asian countries; by specifically comparing South Korea and Indonesian

transportation sectors. The objective of this paper is to use an Unrestricted Error

Correction Model (UECM) to estimate and compare transportation fuels demand

function for the South Korea and Indonesian transportation sectors for the period 1971 to

2016. It will also specifically isolate the effects of Underlying Energy Demand Trend in

demand the sectors. Section Two is the review of the trends in the transportation demand

for gasoline and diesel as well as real incomes, prices, stock of vehicles and population

©2018 Organization of the Petroleum Exporting Countries OPEC Energy Review March 2019

Accounting for non-economic factors in fuel consumption 51