Price, income and exchange rate asymmetric elasticities of oil consumption in Greece, Ireland, Italy, Portugal and Spain

• Published date: 01 March 2022
• Author: Emmanuel Uche
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/opec.12222

Price, income and exchange rate

asymmetric elasticities of oil consumption

in Greece, Ireland, Italy, Portugal and Spain

Emmanuel Uche

Department of Economics, Faculty of Economics and Management Sciences, Abia State University, Uturu

P. M. B. 2000 Abia State, Nigeria. Email: uche.emmanuel@abiastateuniversity.edu.ng

Abstract

The dynamic relationship between oil price variations, changing income, exchange rate deviations

and oil consumption has preoccupied the minds of many energy researchers albeit contradicting

submissions. On this note, this study seeks to evaluate the possible asymmetric impact of the

aforementioned variables on oil consumption in selected European countries, including Greece,

Ireland, Italy, Portugal and Spain between 2000Q1 and 2018Q4. To that effect, after ascertaining

the existence of cointegration, the study applied the nonlinear ARDL technique in evaluating the

asymmetric effects of oil price, income and exchange rate on oil consumption in these countries.

The cointegration tests reveals a long-run relationship among the variables in all the countries.

Also discovered is an asymmetric pass-through from oil prices to oil consumption in Portugal,

Ireland and Spain. Whereas in Ireland, Italy and Spain, an asymmetric relationship exists between

oil consumption and national income, while asymmetric effects flow from the exchange rate to oil

consumption in Ireland and Spain. Therefore, to ensure optimal resource allocations in these

countries, the existence of asymmetric effects must not be taken for granted. Meanwhile, a one-

size-fits-all strategy may not yield the expected results in these countries.

1. Introduction

The provision of profound policies for oil consumption and its determinants requires

adequate and precise measurements of its sensitivities to the movements of oil prices,

income and exchange rate. The provisions of such knowledge-based policy guidelines

are necessary to guide against general welfare losses. Although, previous studies

examined the sensitivities of oil consumption to oil prices and income differentials.

However, their findings are inconclusive. Suffice to say that with the exception of a very

few studies, Schryder and Peersman (2013), researchers predominantly ignored the

sensitivities of oil consumption to exchange rate variations. Ideally, oil had maintained

its pride of place since its discovery in the late 1970s when it became an integral part of

the the modern economy. Equally, the quest for growth and development is seen as a

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47

strong contributing factor to the heavy demand for oil among the world economies.

Prominent among such factors identified in the literature are global oil prices and

economic growth (Hamilton, 2003; Chang et al., 2019). Recently, factors such as the

exchange rate had been identified as a contributing factor to the changing levels of oil

demand (Schryder and Peersman, 2013). Meanwhile, it is notable that most economies

depend on oil imports for their local consumptions, to that effect, the relative value of her

local currency with the US Dollars will invariably determine and affect her capacities for

oil demand. Therefore, neglecting such an important factor (exchange rate) is capable of

truncating oil consumption policy formulations leading to general welfare losses.

As pointed out earlier, the knowledge of price and income elasticities of oil

consumption are well documented in the literature, see (Liddle and Huntington, 2020;

Liddle and Sadorsky, 2020) among others. Despite this large volume of studies,

researchers are yet to find a common ground on how oil consumption changes in

response to exchange rate differentials. While the probe on the possible asym metric

impacts of crude oil prices and income on oil consumption had received adequate

attention, there are very few that considered the possibility of asymmetric pass-through

of the exchange rate to oil demand. Few among these include Shahbaz et al. (2018) ,

Ghoddusi et al. (2019). Suffice it to say that their findings are equally divergent, and

none considered the economies of Greece, Ireland, Italy, Greece, Portugal and Spain

(GIIPS afterwards). These observed limitations in extant literature incentivized this

study. Intuitively, the prices of crude oil, changing national income and exchange rate

variations are expected to influence the relative volumes of oil consumed/demanded.

Considering the GIIPS countries, some are oil exporters (Italy and Spain) while some are

net-importers, and some fall in-between the two divides. The oscillations of oil prices at

the global level, national incomes and exchange rate movements will invariably exert

some levels of impacts on the size of oil demand/consumption. Explicitly, the core

objective of this current study is to provide an empirical clear-cut explanation of possible

differential effects of changing oil prices, national income and exchange rate movements

on oil consumption in these five European countries. Among these economies, Italy and

Spain are among the top 20 European oil-producing nations.

Additionally, most previous studies were subsumed within linear and symmetric

assumptions. This include Kanjilal and Ghosh (2018); Ghoddusi et al. (2019).

According to Hamilton (2003), Liddle and Sadorsky (2020), the assumption of

symmetric and linearity in economic relationships has the potential to bias the elasticity

estimates and invariably leads to erroneous conclusions. Asymmetry is established when

the effects of positive change(s) in the explanatory variable on the explained variable

differ significantly from the effects of negative change(s). As it relates to the current

study, if the effects of positive changes in oil price, exchange rate and national income

on oil consumption level differ significantly from negative effects, the relationship,

OPEC Energy Review March 2022 ©2022 Organization of the Petroleum Exporting Countries

48 Emmanuel Uche