Energy demand, energy substitution and economic growth : evidence from developed and developing countries

This thesis contributes to the literature on energy demand in three ways. Firstly, it examines the major determinants of energy demand using a panel of 23 developed countries and 16 developing countries during 1978 to 2003. Secondly, it examines the demand for energy in the industrial sector and the extent of inter-fuel substitution, as well as substitution between energy and non-energy inputs, using data from 5 advanced countries and 5 energy producer's developing countries. Third, the thesis investigates empirically the relationship between energy consumption and economic growth for these groups of countries over a 26-year period. The empirical results of this study confirm the majority of the findings in energy demand analysis. Income and price have shown to be important determinants for energy consumption in both developed and developing countries. Moreover, both economic structure and technical progress appear to exert significant impacts on energy consumption. Income has a positive impact on energy demand and the effect is larger in developing countries. In both developed and developing countries, price has a negative impact but these effects are larger in developed countries than in developing countries. The share of industry in GDP is positive and has a greater impact on energy demand in developing countries, whereas technological progress is found to be energy using in developed countries and energy saving in developing countries. With respect to the analysis of inter-factor and inter-fuel substitution in industrial energy demand, the results provide evidence for substitution possibilities between factor inputs and fuels. Substitutability is observed between capital and energy, capital and labour and labour and energy. These findings confirm previous evidence that production technologies in these countries allow flexibility in the capital-energy, capital-labour and labour-energy mix. In the energy sub-model, the elasticities of substitution show that large substitution took place from petroleum to coal, natural gas and especially to electricity. In addition, the evidence for significant inter-fuel substitution between coal and natural gas implies that there is a possibility of replacing the use of coal with natural gas in the industrial sector. The existence of moderate input substitution suggests that there is some flexibility in energy policy options and energy utilization. Finally, the empirical evidence presented in this study suggests that the direction of causality between energy consumption and economic growth varies substantially across countries. There is a unidirectional causality running from GDP to energy consumption in 12 developed countries and in 5 developing countries. A unidirectional causality from energy to GDP exists in Netherlands and bidirectional causality exists in Slovak Republic.