Electricity consumption and economic growth in OPEC countries: a cointegrated panel analysis

• Published date: 01 March 2015
• Date: 01 March 2015
• DOI: http://doi.org/10.1111/opec.12038

Electricity consumption and economic

growth in OPEC countries: a cointegrated

panel analysis

Ghahreman Abdoli,* Yazdan Gudarzi Farahani** and

Seyedmasood Dastan***

*Associate Professor in Economics, Faculty of Economics, University of Tehran,Tehran, Iran

**PhD student in Economics, Department of Economics, University of Tehran,Shomali Kargar,

1411734115 Tehran,Iran. Email: yazdan.gudarzi@ut.ac.ir

***PhD Student in Economics, Department of Economics, University of Georgia State, Atlanta, GA, USA

Abstract

This paper uses empirical evidence to examine the causality relationship between electricity

consumption and economic growth in OPEC countries by using annual data (1980–2011); this

paper also utilises the panel cointegration and panel-based error correction approach models

and framework. To the best of the authors’ knowledge, most of the studies in this field have

applied the error correction models, auto regressive distributed lag and panel data based on fixed-

effect model in which coefficients obtained by these models cannot be deemed as a general

finding applicable for other countries. The superiority of our article is in applying full modified

ordinary least square estimation method for heterogeneous panels; our study also has stable and

consistent coefficients and is also a dynamic model. Moreover, with regard to previous studies,

our paper includes more countries which increase the reliability of the results. The results indicate

that a long-run relationship exists between real gross domestic product (GDP), electricity con-

sumption and trade activities that involve export and import (control variable). The short-run

results also indicate the importance of electricity consumption to economic growth and vice versa,

supporting the feedback hypothesis which asserts that energy policies oriented towards improve-

ments in electricity consumption efficiency would not adversely affect real GDP. It also apears

that policies for energy efficiency have no statistically significant impact on economic growth in

long run.

1. Introduction

OPEC countries have plentiful and rich energy resources.These countries have appropri-

ate and privileged condition in comparison with many other countries due to existence of

big reservoirs and potential energy resources. These great inputs could be accounted as an

important economic developing factor if they are used in an optimum and appropriate

way; otherwise, the energy section probably acts as an unbalanced and inconsistent part

1

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according to other economic sections, and this leads to an inappropriate growth of some

sections and consequently causes an unbalanced economic condition.

Accepting the reality of energy’s crucial role in economical development of countries,

it is necessary to preserve energy resources and exploit them accurately and economically.

Hence, it seems necessary to investigate the relation between energy consumption and

produced goods in every country. Is there any relationship between energy consumption

and economic growth?An answer to this question is important because lack of relationship

between production and energy consumption may cause energy dissipation and ineffi-

ciency of energy consumption as a production factor.

The literature concerning the causality relationship between electricity consumption

and economic growth has led to the emergence of four opposite views. One point of

view suggests that if the causality runs from electricity consumption to economic

growth, then electricity conservation policies should be discouraged as it would be

counter-productive. The other point of view suggests that the electricity conservation

policies can only be safely adopted if the causality runs instead from economic growth

to electricity consumption. The third point of view suggests that if there is an existence

of bidirectional causality between the two variables (feedback effect) which implies that

reduction in electricity consumption may adversely affect economic growth and vice

versa, then a different policy approach would be needed (Muhammad and Lean, 2011,

p. 2). The last and fourth approach utilising electricity consumption is neutral to growth.

Therefore, if the neutral hypothesis holds true or if it is proven that there is no causal

relationship between the two variables,therefore such a conclusion would reveal the sur-

prisingly minor role of electricity consumption and its effects in the economic growth of

a country.

The direction of causation between electricity consumption and economic growth has

significant policy implications for energy-dependent countries, enjoying implicit gener-

ous subsidies (low domestic prices) for energy. If, for example, there exists unidirectional

Granger causality running from income to electricity consumption, it may be implied that

electricity conservation policies such as phasing out energy subsidies or elimination of

energy price distortions have little adverse or no effectson economic g rowth.On the other

hand, if unidirectional causality runs from electricity consumption to income, reducing

electricity consumption, for example through bringing domestic energy prices in line with

market prices, could lead to a fall in income or employment.

The direction of causation between electricity consumption and economic growth has

significant policy implications for energy-dependent countries, enjoying implicit gener-

ous subsidies (low domestic prices) for energy. If there is unidirectional causality runs

from economic growth to electricity consumption, it can be implied that increase in

income or economic growth causes increase in electricity consumption, or if there is uni-

directional causality runs from electricity consumption to economic growth, increase in

Ghahreman Abdoli, Yazdan Gudarzi Farahani and Seyedmasood Dastan2

OPEC Energy Review March 2015 © 2015 Organization of the Petroleum Exporting Countries