Asymmetries in US demand for gasoline

• Author: Ismail Genc,Hamid Baghestani,Samer Kherfi
• Date: 01 June 2016
• DOI: http://doi.org/10.1111/opec.12062
• Published date: 01 June 2016

Asymmetries in US demand for gasoline

Hamid Baghestani, Ismail Genc and Samer Kherfi

Professors, Department of Economics, School of Business Administration, American University of Sharjah,

P.O.Box 26666, Sharjah, UAE. Email: hbaghestani@aus.edu

Abstract

Many studies have investigatedthe asymmetric responses of energy demand to changes in income

and price. In estimating the US demand function for gasoline, we also consider consumer sentiment

as a determining factor. In line with the income ratchet effect in consumption, our findings for

1991Q1–2015Q1 indicate that gasoline demand asymmetrically responds to deviation of income

from its long-run trend. Similar asymmetric responses are found with respect to deviation of con-

sumer sentiment from its long-run trend. In contrast, gasoline demand responds symmetrically to the

deviation of price from its long-run trend and to the gap between actual and desired spending.

Further results indicate that gasoline demand is price-inelastic, income-inelastic and inelastic with

respect to consumer sentiment both in the short and long run.

1. Introduction

There exists vast literature on modelling energy demand in general, and on modelling the

demand for crude and refined oil in particular. Studies in this area have paid special atten-

tion to investigating the asymmetric responses of energydemand to changes in such deter-

mining factors as price and income. For instance, Gately(1992) finds a smaller response of

US gasoline demand to price declines than to price increases, and Dargay and Gately

(1997) find a smaller response of energy demand to income declines than to income

increases. Ignoring such asymmetries could seriously bias elasticity estimates and demand

projections, which are necessary inputs for successful energy and environmental policy

analysis and design.

This study adds to the literature by considering consumer sentiment as an additional

determining factor of the US demand for gasoline over the period 1991Q1–2015Q1.

Research has shown that consumer spending asymmetrically responds to changes in con-

sumer sentiment. For instance, Baghestani and Kherfi (2015) show that US consumers

reduce spending on durable goods, nondurable goods and services in response to a drop in

consumer sentiment, but do not adjust such spending when sentiment improves. This is

consistent with psychological negativity bias which maintains that people tend to give

JEL Classification: Q41, Q43

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