Modelling demand for liquefied petroleum gas (LPG) in Ghana: current dynamics and forecast

• Date: 01 December 2014
• Author: Justice Tei Mensah
• Published date: 01 December 2014
• DOI: http://doi.org/10.1111/opec.12032

Modelling demand for liquefied petroleum

gas (LPG) in Ghana: current dynamics

and forecast

Justice Tei Mensah

PhD Candidate, Department of Economics, Swedish University of Agricultural Sciences (SLU), Box 7013,

S-750 07 Uppsala, Sweden. Email: justice.tei.mensah@slu.se; myjumens@gmail.com

Abstract

Gas is fast becoming an integral component of the energy mix in Ghana and holds huge prospects

for the future. However, there is still great uncertainty surrounding the size of this potential market

and often results in supply shortfalls. The recurrent shortages in the supply of liquefied petroleum

gas (LPG) for domestic and industrial consumption pose a great challenge to the goal of promoting

access and utilisation of modern and efficient energy to engender sustainable development in

Ghana. As a result, this paper investigatesthe long- and short-r un demand driversof LPG in Ghana

and presents a 10-year forecast of future trends in the demand using the autoregressive distributed

lag and partial adjustment model techniques. Results identify income, price and urbanisation as the

main drivers of demand. Projections from all three scenarios reveal that demand for LPG will

reach a minimum of 5.9 million metric tons by the year 2022. This result has serious implications

on both demand and supply side management, and thus calls for stringent efforts to attract the

requisite infrastructure to ensure stable and reliable supply of LPG to meet domestic and industrial

demands.

1. Introduction

The quest for economic growth exerts a positive effect on demand for energy sources.

However, giventhe finite limits on supply of traditional energy sources (biomass and fossil

fuels) and their attendant pollution effects, sustainable developmentimplies a switch away

from environmentally polluting (traditional) energy towards modern and efficient energy

sources.

Since the dawn of the 1990s, demand for natural gas especially liquefied petroleum

gas1(LPG) in Ghana for both domestic and industrial use has soared. Energy experts opine

that this surging demand can be partly attributed to the relative success of the National

LPG Promotion Program (NLPGPP) which sought to promote the use of LPG especially

for domestic cooking. The programme introduced in 1990 had the objective of ensuring

wider use of LPG as a primary household cooking energy, therebycausing a switch away

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from biomass energy (charcoal and firewood) which hitherto were the main sources of

household cooking energy.Toachieve this goal, the programme sought to expand access to

the gas nationwide, especially in the urban and peri-urban centres, through the Unified

Petroleum Price Fund scheme which sought to compensate oil marketing companies

which transport petroleum products like LPG to rural and distant locations, outside a

radius of 200 km from the refinery for their transpor t cost (Mensah andAdu, 2012). Within

the first 5 years of the implementation of the programme, LPG consumption increased

from 5,000 metric tons (m.t) in 1989 to 34,000 m.t by 1995 (Edjekumhene, 2011). By

2009, demand for LPG was estimated to be 268.4 thousand m.t (NPA, 2013). Overall,

between 1990 and 2012, demand for LPG in Ghana increased at an averageannual growth

of 20.6 per cent.

Despite this impressive growth in demand, the overall performance has been very

modest because the penetration rate is still low, with less than 10 per cent of Ghanaian

households using LPG as their primary source of cooking fuel (GSS, 2006). The inability

of LPG to enjoy huge patronage among Ghanaian households can be largely attributed to

supply constraint and poverty as the gas is relatively expensive than the other alternatives.

Like other subsectors such as electricity and petroleum, the LPG subsector is fraught with

numerous challenges which results in erratic shortages in supply over the entire country.

This inherent uncertainty in the supply of the gas poses a great challenge to end-users who

rely entirely on it for cooking energy, thereby creating disincentives for households to

switch entirely from firewoodand charcoal2towards LPG use. The main factors behind the

recurrent shortages in LPG supply include the excess demand (fuelled by high urban

sprawl) overthe production capacity of installed infrastructure and consequently, the shut-

down of theTema Oil refinery.3Anotheremerging issue has been the increasing demand of

LPG by the transport sector owing to the efficiency and relatively low price4of LPG com-

pared with gasoline and diesel. Estimates suggest that nearly 37 per cent of LPG consump-

tion is attributed to the transport sector (Edjekumhene, 2011). The combined effects of

these factors reveal that even though demand prospects are high, the country is not

adequately prepared to meet the looming demand for LPG.

Thus, the vision of the country’s energy policy in promoting access and use of modern

and efficient energy like LPG under the overarching objective of ensuring a cleaner and

efficient energy economy with reliable supplyof high-quality energy services to all sectors

of the economy as well as becoming a net-exporter of oil and power by 2012 and 2015,

respectively (MoE, 2010), remains elusive.

To this end, the question that beckons is: what are the key drivers of LPG demand in

Ghana? Now, in a country constantly bombarded with demand outstripping production

capacity, it is not enough to only identify the long- and short-run drivers of demand but

also to provide a future outlook of demand. This is necessary to inform policy makers on

the potential market outlook over the medium to long term, and thus make the necessary

Modelling demand for LPG in Ghana 399

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