A VARX modelling of energy intensity interactions between China, the United States, Japan and EU

• Published date: 01 March 2015
• DOI: http://doi.org/10.1111/opec.12044
• Date: 01 March 2015

A VARX modelling of energy intensity

interactions between China, the United

States, Japan and EU

Mustafa Akal

Professor, Faculty of Economics and Administrative Sciences, Department of Economics, Sakarya

University, Adapazarı, Turkey.E-mail: akal@sakarya.edu.tr

Abstract

This study attempts to predict energy intensity interactions between China, the United States, Japan

and EU by developing a restricted VARX model by proposing energy intensities of the countries

interact with each others, and gross domestic product (GDP) levels per capita and Organization of

Petroleum Exporting Countries (OPEC) oil-based current energy prices affect energy intensities of

the countries based upon the direction of group causalities.There exist significant causal interactions

between energy intensities of the countries up to lag five either increasing efficiencyor not. China’s

current GDP level affects its ownenergy use and EU’s energy intensity positively, on the other way;

EU’s current GDP level affects only China’s energy intensity whileJapan’s cur rent GDP levelonly

affects its own energy intensity negatively, ceteris paribus. It is found that OPEC oil-based current

energy prices only affect the United States’ energyintensity but not others’ energy intensity, ceteris

paribus, for the period of 1971–2009. Evaluating cumulative effects of energy intensities of all

countries, it is found that each country has experienced higher energy intensity and consumed

energy less efficientlyeven there have been existing new technology-embodiedequipments used and

alternative energy sources developedin energy consumption for the years.

1. Introduction

Sa’ad (2010) emphasises the importance of the long-run equilibrium and causality rela-

tionship between energy consumption and other economic variables for policy implica-

tions. There have been important increases in use of oil, gas and coal consumption in the

world since 1965. As industrialisation has progressed, the amount of per capita energy

consumption became 1.7 toes per person in 2006, which was 1.2 toes per person in 1966 in

the world (Chefurka, 2007). It is a record that the United States’ energyuse was about 8.35

toes and Japan’s energy use was about 4.13 toes per person on the average between 1966

and 2006 (Chefurka, 2007).

The energy use of China increased by 146 per cent, the United States’ by

20 per cent, European Union’s (EU) 27 countries by 7 per cent between 1990 and 2008,

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and the world’s energy consumption increased more than 5 per cent in 2010 (Wikipedia

Encyclopedia, 2012). On the other hand, the calculated long-run growth rates based on

the series of kt of oil equivalent per US$1000 output indicated that the energy use of

China grew by 4.7 per cent, the United States’ use grew by 0.8 per cent, Japan’s use

grew by 1.5 per cent, EU’s use grew by 0.67 per cent, and the world’s energy use

increased by 2.02 per cent annually on the average during the sampling period of 1971–

2009. These observations imply that China is the least efficient country in energy using

at the expansion of energy. According to the 2011 British Petrol Statistical Review of

World Energy (British Petrol, 2011), China uses more than 20 per cent of the world’s

energy consumption, the United States uses about 19 per cent of it, and today, China is

the world’s largest energy consumer (Garthwaite, 2012). China’s energy use mostly

comes from coal while the United States’ energy use mostly comes from oil. As the

world’s energy use increases, there exists a potential for more pollution to affect the

entire world. It seems China has the highest contribution to environmental pollution

because of having the highest inefficient energy use or energy intensity even the supply

of wind energy improves tremendously in China.

Two objectives of International Energy Agency (IEA) are to increase the efficiencyof

energy or energy-using products and improve the world’s energy supply by developing

alternative energy sources and improve demand structures by new technologies that

exhaust less energy. IEA shows that there have been substantial improvements in energy

efficiency in all major energy-intensive industries and in all world regions and in energy

savings about 58 per cent from 1971 to 2005 as a consequence of the introduction of new

efficient technology,designing supply and demand structures, integration of environmen-

tal and energy policies, etc. (IEA, 2008).

On the other hand, the economic structure of an economy affects energy intensity

and energy efficiency of a country. Post-industrial economies with large service sectors

will, a priori, have considerably lower energy use than economies characterised by

heavy, traditional industrial activities (European Commission, 2011). Electric power is

essential for economic development. Swan and Ugursal (2009) point out that residential

energy consumption and efficient use of energy is highly affected by climate, physical

dwelling characteristics, appliance and system characteristics, ownership and occupant

behaviour. While coal, petroleum and natural gas are directly used by industry, on the

other hand, electricity is needed to operate machines, equipment and appliances (Kim,

1984).

This study aims to explain whether the energy use of China, America, Japan and EU

affects each other and which countries’ income and the Organizationof Petroleum Export-

ing Countries (OPEC)-based world energyprice affect the use of energy of these countries

by basing on a perspective that globalisation enlarges aggregate demand for traded goods

for which energy is required for production, which may lead high-energy intensity or

Mustafa Akal104

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