Causal relationship between crude oil price, energy consumption and carbon dioxide (CO2) emissions in Ecuador

• DOI: http://doi.org/10.1111/opec.12102
• Author: Chinazaekpere Nwani
• Date: 01 September 2017
• Published date: 01 September 2017

Causal relationship between crude oil price,

energy consumption and carbon dioxide

(CO

2

) emissions in Ecuador

Chinazaekpere Nwani

Department of Economics, Banking and Finance, Gregory University, UturuP.M.B. 1012 Abia, Nigeria.

Email: c.nwani@rgu.ac.uk

Abstract

This study examines the causal relationship between crude oil price, energy consumption and CO

2

emissions in Ecuador over the period 1971–2013 incorporating indicators of economic

performance. ARDL bounds testing approach to cointegration provides evidence of cointegration

between the variables in the presence of structural break in the series. The long-run effect of energy

consumption on CO

2

emissions in the oil-dependent economy is found to be positive and

statistically significant. The long-run and short-run causal effects of crude oil price on energy

consumption and CO

2

emissions in the economy are found positive and statistically significant,

suggesting that higher crude oil prices create economic conditions that generate more energy

consumption and CO

2

emissions in the Ecuadorean economy. The direction of causality among the

variables examined using Toda-Yamamoto Granger causality test procedure suggests that a

unidirectional causality runs from crude oil price to energy consumption and economic growth,

and bidirectional causality between energy consumption and CO

2

emissions. A unidirectional

causality that flows from CO

2

emissions to economic growth through financial development is also

observed in the economy.

1. Introduction

Energy is unarguably one of the key drivers of modern technological, economic and

social activities (Kebede et al., 2010; Oyedepo, 2014). In the households, energy is

required for cooking, heating and lighting purposes. Commercial and industrial activities

such as transportation, communication services, education and healthcare delivery,

banking activities and other social and economic activities all depend on energy.

Whereas energy consumption stimulates economic, social and technological activities, it

also generates carbon dioxide (CO

2

) emissions, which contributes significantly to

greenhouse gas (GHG) emissions. With the increasing importance of energy in modern

social, economic and technological activities and the growing global concern on the

influence of CO

2

emissions from energy use on the environment, the understanding of

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201

the linkages among energy consumption variables, drivers of economic and social

activities and environmental quality is gaining increasing attention from researchers and

policy makers. The understanding of the dynamic linkages existing among these

variables is crucial for making sound economic, environmental and energy policy. This

study seeks to contribute to this strand of literature by extending the case of Ecuador

with the inclusion of crude oil price to account for the influence of oil wealth on

economic activities in the economy.

The Ecuadorean economy has witnessed significant increase in the level of energy

consumption in recent years. Table 1 shows that about 357.98 kgoe of energy per capita

were consumed in the economy in 1971. By 2013, the level of energy consumption per

capita in the economy increased to 979.75 kgoe. With energy use in the economy

relying solely on fossil fuels (oil and natural gas), and CO

2

emissions per capita

increasing from 0.68 metric tons in 1971 to 2.78 metric tons in 2013 appropriate policy

instruments and options towards reducing emission levels to enhance environmental

quality is highly needed in the economy. Achieving this goal will involve understanding

factors that drive economic and social activities that generate demand for energy in the

economy. Among many factors that drive social and economic activities, crude oil price

remains a key factor in net oil-exporting economies. Crude oil receipt forms a major part

of revenue in most net oil-exporting countries including Ecuador. It is therefore expected

that crude oil price will influence fiscal spending in the economy (Poghosyan and Hesse,

2009; Sturm et al., 2009), which in turn determines the level of social, economic and

technological activities (Sturm et al., 2009). Higher crude oil prices would mean higher

revenue and more economic, social and technological activities and possibly higher level

of energy consumption while lower crude oil prices would suggest lower level of these

activities that generate demand for energy (see Fuinhas and Marques, 2013).

Table 1 Energy consumption mix and CO

2

Emissions in Ecuador (selected years)

Energy use

(kg of oil

equivalent

per capita)

Fossil fuel

energy

consumption

(% of total

energy use)

Combustible

renewables

and waste

(% of total

energy use)

Alternative

and nuclear

energy

(% of total

energy use)

CO2

emissions

(metric tons

per capita)

1971 357.98 49.06 49.25 1.69 0.68

1980 626.38 78.86 19.64 1.50 1.69

Average 1981–1999 636.68 79.31 14.80 5.89 1.90

Average 2000–2009 775.67 86.35 6.45 6.54 2.08

2010 919.42 89.83 4.21 5.43 2.55

2013 979.75 89.77 3.64 6.24 2.78

Source: Data collected from World Development Indicators Database, World Bank (Online).

OPEC Energy Review September 2017 ©2017 Organization of the Petroleum Exporting Countries

202 Chinazaekpere Nwani