No. 9005
U.S. OIL DEMAND AND CONSERVATION
by
S.P.A. Brown*
and
Keith R. Phillips*
February 1990
Research Paper
Federal Reserve Bank. of Dallas
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])
ilo.9005
U.S. OIt DEIIAND
AilD COIISERVATIOI{
by
S.P.A. Brown*
and
Keith R. Phillips*
February 1990
* A s s i s t a n tV j c e P r e s i d e n t& S e n i o r E c o n o m i satn d E c o n o m i srte s p e c t i v e l y ,
F e d e r a lR e s e r v eB a n ko f D a l I a s . T h e v i e w se x o r e s s e d
in this art'icle are
s o l e l y t h o s e o f t h e a u t h o r sa n d s h o u l dn o t b e ' a t t r i b u t e d t o t h e F e d e r a l
ReserveBankof Dallas or to the FederalReserveSystem.
U.S. OIL DE]iIAI{D
ANDCOI{SERVATION
S . P . A . B r o w na n d K e i t h R . P h i l l i p s *
Recenthistory has lent casual support to three popular theories about
U , S . o i l d e m a n d :U , S . o j l c o n s u m p t i oi ns v e r y i n s e n s i t i v e t o c h a n g i n go i l
p r i c e s ; n o n - p r i c ec o n s e r v a t i o nh a s r e d u c e dU , S . o i l d e m a n da; n d U . S . o i l
c o n s u m p t i ofna l l s m o r ew h e no i l p r i c e s r i s e t h a n i t r i s e s w h e np r i c e s f a 1l .
Togetherthese theories suggestthat oil consumption
could be held constant
without mucheconomicsacrifice.
Our econonetricevidencedoes not support
t h e s e t h e o r i e s , l l e f j n d t h a t U . S . o i 1 c o n s u m p t i oins f a i r l y r e s p o n s i v et o
c h a n g e si n p r i c e o v e r t h e l o n g r u n , b u t w i t h a c o n s i d e r a b l e1 a g . T h e l a g
accountsfor the data that seemsto support the popular theories. Sharpoi1
p r i c e i n c r e a s e s( o r t h e i r e q u i v a l e n t )w i l l b e r e q u i r e dt o h o l d o i l c o n s u m p t i o n
c o n s t a n td u r i n g t h e I 9 9 0 s .
I.
IilTRODUCTION
Recentgrowth of U.S. energyconsumption
has renewedconcernsabout
e n e r g ys e c u r i t y , t h e t r a d e d e f i c i t , a n d t h e e n v i r o n m e n tr;e v i v i n g c a l l s f o r
energy conservation. Althoughthe benefjts and costs of energy conservation
are controversial, someadvocateshave arguedthat extremeenergy
conservatj on--that is holding energyconsumption
constant as the economy
g r o w s - - c a nb e a c h i e v e dw i t h o u t e c o n o m i sc a c r i f i c e .
( F o r i n s t a n c e ,s e e
ChandlerG
, e l l e r a n d L e d b e t t e r ,1 9 8 8 . )
Perhapsenergyconservationseemscostless becauserecent history has
l e n t c a s u a l s u p p o r tt o t h e t h e o r y t h a t U . S , o i l c o n s u n p t i o ni s v e r y
i n s e n s i t j v e t o o i l p r i c e s . 0 i 1 p r i c e s i n c r e a s e ds h a r p l y i n l a t e 1 9 7 3a n d
1 9 7 4 ,b u t U . S . o i l c o n s u m p t i orno s e f r o m 1 9 7 5t o 1 9 7 9 , F r o m1 9 8 1t h r o u g h
1 9 8 5 ,b o t h o i 1 p r i c e s a n d U . S . o i l c o n s u m p t i of ne l l .
T h e n ,a f t e r o i 1 p r i c e s
z
p l u n g e di n 1 9 8 6 ,U . S . o i l c o n s u m p t i oi n c r e a s e do n l y s 1i g h t l y d u r i n g t h e n e x t
few years,
T h e m o v e m e nitns c o n s u m p t i oann d o i l p r i c e s s i n c e 1 9 8 0h a v ea l s o l e n t
casual support to other, related theories about U,S. oil demand, Onetheory,
w h i c hm i g h t b e c a l l e d " n o n - p r i c ec o n s e r v a t i o n , "i s t h a t c h a n g e si n g o v e r n m e n t
po1icy and technologyhave reducedU.S. oil demandindependentlyof the
i n f l u e n c eo f p r i c e . A n o t h e rt h e o r y i s t h a t U . S . o i l c o n s u m p t i orne s p o n d s
a s y m m e t r i c a l ltyo c h a n g e si n i t s p r i c e ; i t f a l l s m o r ew h e np r i c e r i s e s t h a n i t
r i s e s w h e np r i c e f a l l s ( S w e e n e y1,9 8 6 ) . I f c o r r e c t , t h e s e t h e o r i e s w o u l d
' i n p l y t h a t e x t r e m eo i l c o n s e r v a t i o n
c a n b e a c h i e v e dr e l a t i v e l y p a i n l e s s l y .
Becausesubstantial changesin the ratio of oil consumption
to output
r e q u i r e n e wc a p i t a l i n v e s t m e n tp, r e v j o u ss t u d i e s h a v ef o u n dt h a t o i l
c o n s u m p t i orne s p o n d sv e r y s l o w l y t o p r i c e c h a n g e s . ( S e eH o g a n ,l 9 B 9 ; G a t e l y
a n d R a p p o p o r t1, 9 8 8 ;H u n t i n g t o n ,1 9 8 6 ;a n d B r o w na n d P h i l l i p s , 1 9 8 4 , ) T h a t
s l o w r e s p o n s ec o u l d c r e a t e t h e j l l u s i o n t h a t U . S . o i 1 c o n s u m p t i oins v e r y
i n s e n s i t i v e t o c h a n g i n go i 1 p r i c e s , t h a t n o n - p r i c ec o n s e r v a t i o nh a s o c c u r r e d ,
or that consumption
respondsasymmetricallyto changesin price.
If oil
c o n s u m p t i oins s e n s i t i v e t o p r i c e , b u t r e s p o n d s l o w l y , n o r m a lr a t e s o f
economicgrowth will provide a strong impetusfor increasedoi1 consumption
d u r i n g t h e 1 9 9 0 s . E x t r e m eo i l c o n s e r v a t i o nc o u l d p r o v e q u i t e c o s t l y .
II.
A,
ECOilOIIETRIC
AHATYSIS
E s t i m a t i o no f t h e B a s i c i l o d e l
To investigate these cornpetingexplanationsfor the recent behavior of
U . S . o i l c o n s u m p t i o nw, e c o n s t r u c t e da n e c o n o m e t r im
c o d e lo f U , S . o i l d e m a n d .
U s i n gq u a r t e r l y d a t a , w e e s t i m a t e dU . S . o i l c o n s u m p t i oans a f u n c t i o n o f p a s t
a n d p r e s e n tr e a l p r i c e s o f c r u d eo i 1 , r e a l g r o s s n a t i o n a l p r o d u c t , a n d t h e
3
s h a r eo f G N Pi n t h e i n d u s t r i a l s e c t o r . l F o r p u r p o s e so f e s t i n a t i o n , w e u s e d
n a t u r a l l o g s o f a l I v a r i a b l e s , T h e a v a i l a b l e o i l c o n s u m p t i odna t a l i m i t e d
estination to an interval from first quarter 1972through first
quarter 1988.
T o a c c o u n tf o r t h e l a g s i n p r i c e , b u t b e p a r s i m o n i o uisn e s t i m a t i n gt h e
model, we modeledthe effects of price as a polynomialdistributed 1ag. lie
used statistical
tests to determinethe appropriate nurnberof lags and the
degreeof the polynomial. To allow for an erratic adjustmentprocess, we
a l l o w e dt h e p o l y n o m i atl o h a v ea d e g r e ea s h i g h a s 1 2 . A f t e r f i n d i n g 3 8 l a g s
( 9 1 / 2 y e a r s ) o f p r i c e o p t i m a,l o u r s e l e c t i o n p r o c e d u r es e l e c t e da n i n t h degreepolynomial .'?
The results of modelestimation are shownin Table l.
As indicated by a
h i g h R ' ? a n ds i g n i f i c a n t F v a 1 u e ,t h e m o d e lf i t s t h e d a t a w e l l .
Furthermore,
the restrjction imposed
o n t h e c o e f f j c i e n t s b y t h e n i n t h - d e g r e ep o l y n o m i a l
cannot be reiected at the .05 percent 1evel.
(An F-statistic of .54 was
3 )a s
c a l c u l a t e df o r t h e r e s t r i c t i o n w h i l e a h u r d l e v a l u e o f 1 . 9 4 ( F ? e . aw
required for rejecti on.)
The coefficient on price and the combinedcoefficients on laggedprices
are negative, as expected,and significant.
l,feestimatedthe short-run (same-
q u a r t e r ) p r i c e e l a s t i c i t y o f o i l d e m a nadt - 0 . 0 8 a n d t h e l o n g - r u n ( 3 8 q u a r t e r )
p r i c e e l a s t i c i t y o f d e m a nadt - 0 , 5 6 . O u r p r i c e e l a s t i c i t y e s t i m a t e sa r e
g e n e r a l l y c o n s i s t e n tw i t h p r e v i o u ss t u d i e s , ( S e eH o g a n ,1 9 8 9 ;G a t e l y a n d
R a p p o p o r1t 9 8 8 ;H u n t i n g t o n ,1 9 8 6 ;B r o w na n d P h i l l i p s , 1 9 8 4 ;a n d B o h i 1 9 8 1 . )
T h o u g ho i l c o n s u m p t i oins f a i r l y r e s p o n s i v et o p r i c e o v e r t h e l o n g r u n ,
adjustnent is quite s1ow. The slow adjustmentcreated the appearance
that
U . S . o i l c o n s u m p t i owna s i n s e n s i t i v e t o p r i c e d u r i n g t h e 1 9 7 0 sa n d 1 9 8 0 s .
T h e c o e f f i c i e n t o n G N Pi s p o s i t i v e , a s e x p e c t e d ,a n d s i g n i f i c a n t . T h o u g h
4
rre estjmatedthe elasticity of dernand
with respect to real GNPat 1.13, the
coefficient is not significantly different fromone,
The coefficient on industrial production as a share of GNPis not
significantly different from zero. l'lewere sonewhatsurprised to find this
v a r i a b l e w a s n o t s i g n i f i c a n t i n e x p l a i n i n go i 1 c o n s u m p t i o n .l , l eh a d e x p e c t e d ,
other things being equal, greater industrial productionwould be associated
w i t h g r e a t e r o i l c o n s u m p t i o n .A c l o s e r e x a m i n a t i o o
n f t h e d a t a r e v e a l e dt h a t
the series hadlittle
little
v a r i a t i o n d u r i n g t h e e s t i m a t i o np e r i o d , a s w e l l a s
regression
e f f e c t o n c o n s u m p t i o n .T h i s i s e v i d e n t i n t h e s t a n d a r d i z e d
c o e f f i c i e n t f o r t h e v a r i a b l e , w h i c hi s - . 0 1 . T h es t a n d a r d i z e d
regression
c o e f f i c i e n t s f o r r e a l G N Pa n d p r i c e a r e 2 . 0 3 a n d - 3 . 6 3 , r e s p e c t i v e l y , 3
B. Testinq for Non-priceConservation
Because
i t i s f r e q u e n t l yt h o u g h tt o b e t h e r e s u l t o f t e c h n o l o g i c a d
l rift,
n o n - p r i c ec o n s e r v a t i o ni s c o m m o nm
l yo d e l e da s a f u n c t i o n o f t i m e . I n o u r
model, therefore, the effects of non-Driceconservationwould be evident as
t h e o m i s s i o no f a t i m e - d e p e n d e vnat r i a b l e . a I f a n i m p o r t a n to m i t t e dv a r i a b l e
c a n b e c h a r a c t e r i z e da s a f u n c t i o n o f t i m e , i t s o m i s s i o nc a n l e a d t o
j c i ty of the emor terms. (SeeMaddala,1988, pp. 208-9.)
heteroscedast
Non-priceconservationis not supportedby the evidence, A test for
j c i ty fajled to reject the hypothesisthat the error terms of the
heteroscedast
r e g r e s s i o na r e h o m o s c e d a s t i c(. F o r a d i s c u s s i o no f t h i s t e s t , s e e M a d d a l a ,
p p . 1 6 2 - 3 . ) I n s h o r t , p r i c e a n d t h e o t h e r v a r i a b l e sa r e a b l e t o e x p l a i n t h e
time trends found in the consumption
data, Laggedadjustmentto past price
i ncreases--ratherthan non-price conservation--explainswhy both the price of
o i l a n dU . S . o i l c o n s u n p t i o n
fell during the early 1980s,
f,
C. Testino for Asvmmetrv
Asymmetry
would be evident as instability
in the estirnatedcoefficients
a c r o s sp e r i o d so f r i s i n g a n d f a l l i n g o i 1 p r i c e s . I n s t a b i li t y i s i n d i c a t e d i f
the estimatedcoefficients changeacross selected sub-periodsfor which the
modelwas estinated.
During the period we studied, the price of oi1 generally rose through
secondquarter 1981, and then generally declined. Nevertheless,the period
c a n n o tb e d i v i d e d a t s e c o n dq u a r t e r 1 9 8 1t o t e s t f o r i n s t a b i l i t y .
G i v e nt h e
l o n g l a g s f o u n d i n e s t i m a t j o no v e r t h e f u l l p e r i o d , t h e e a r l y y e a r s i n t h e
s e c o n ds u b - p e r i o dw o u l dr e f l e c t t h e i n f l u e n c eo f r i s i n g , a s w e l l a s f a l l i n g
prices.
In fact, as of fourth quarter 1985, prices remainedabovethe levels
posted prior to third quarter 1979. During the first
3 quarters of 1986,
however,prices droppedsharply. Since then, real prices have remainedbelow
p o s t 1 9 7 4 -el v e 1 s .
I f c o n s u m p t i orne s p o n d sd i f f e r e n t l y t o r i s i n g p r i c e s t h a n t o f a - l 1 i n g
p r i c e s , a m o d e lf i t t o d a t a f o r t h e p e r i o d p r i o r t o 1 9 8 6w o u l db e u n s t a b l ei n
t h e f o l l o w i n g p e r i o d . G i v e nt h e 9 o b s e r v a t i o n si n t h e s e c o n ds u b - p e r i o d ,
e s t i m a t i o no f c o e f f i c i e n t s f o r t h e s e c o n dp e r i o d i s n o t p o s s i b l e . I n s t e a d ,w e
used a predictive test of stabil ity developedby G. C. Chowfor use whenthe
nurnberof regressors in the secondperiod is greater than the numberof
o b s e r v a t i o n s . ( F o r a d i s c u s s j o no f t h j s t e s t , s e e M a d d a l ap, p . 1 3 0 - 7).
Using the test deve'loped
by Chow,we failed to reject that the model
e s t i m a t e sa r e s t a b l e a c r o s sp e r i o d so f r i s i n g a n d f a l l i n g o i 1 p r i c e s . O u t of-sampleforecasts of U.S. oil consumption
from first
first
quarter 1986through
quarter 1988, madewith coefficients estimatedwith data prior to 1986,
are not sign'ificantly different at the S-percentlevel from the actual
o
consumption
figures recordedfor those quarters. (The calculated F-statistic
) q u i r e dt o r e i e c t s t a b i l i t y , )
w a s . 2 0 a g a i n s t a h u r d l e v a l u e o f 1 . 6 4 ( F 6 5 . nr, e
responds
Therefore, we find no evidencethat U.S. oil consumption
a s y m m e t r i c a l ltyo r i s i n g a n d f a 1l i n g o i l p r i c e s . S l o wa d j u s t m e n t - - n o t
asymmetry--expl
ai ns why U.S. oil consumption
increasedonly moderatelyin the
t w o y e a r s f o l l o w i n g t h e 1 9 8 6p l u n g ei n o i 1 p r i c e s .
III.
HO}ICOSTLY
COilSERVATIOil?
Our econometricfindings suggestthat rneaningfuloil conservationis
l i k e l y t o p r o v e c o s t l y i n t h e 1 9 9 0 s . O i l c o n s e r v a t i o ni n t h e I 9 7 0 s a n d 1 9 8 0 s
w a st h e r e s u l t o f s h a r p i n c r e a s e si n t h e p r i c e o f o i l .
A s h a s b e e ne v i d e n t i n
t h e p a s t f e w y e a r s , c u r r e n t o i l p r i c e s a r e s t i m u l a t i n g a n dw i l l s t i n u l a t e
reneweg
d r o w t hi n U . S . o i l c o n s u m p t i o n .S h a r pp r i c e i n c r e a s e s( o r t h e i r
e q u i v a l e n t )w i l l r e q u i r e dt o h o l d U , S . o i l c o n s u n p t i o cn o n s t a n td u r i n g t h e
1 9 9 0 s . T h en a r k e t i s u n li k e l y t o g e n e r a t es u c h i n c r e a s e s .
A.
Past 0il Demand
and Conservation
F r o mt h i r d q u a r t e r 1 9 7 3t h r o u g ht h e e n d o f 1 9 8 5 ,U . S . o i l c o n s u m p t i o n
generally grew more slowly than was implied by non-price factors.
In-sample
sinulations basedon our econometricnodel revealed that two episodesof
rapidly rising oi1 pnices--onefrom late 1973through 1974and another from
pressure
1979to early l98l--combinedwith slow adjustmentto exert downward
o n o i l c o n s u m p t i otnh r o u g h o ut h e p e r i o d .
E v e nt h o u g hr e a l o i l p r i c e s
d e c l j n e da f t e r 1 9 8 1 ,l a g g e da d j u s t m e ntto p a s t o i l p n i c e i n c r e a s e sc o n t i n u e d
pressureon U.S. oi1 consumption.
to put downward
T h e 1 9 8 6p l u n g ei n o i 1 p r i c e s r e m o v e tdh a t p r e s s u r e . S i n c e f i r s t q u a r t e r
1 9 8 5 ,o i l p r i c e s h a v ee x e r t e du p w a r dp r e s s u r eo n U . S . o i l c o n s u m p t i o n .O u r
s i m u l a t i o n ss u g g e s t h a t a s o f 1 9 8 8 ,a n o i l p r i c e o f l e s s t h a n $ 2 6 . 6 3p e r
I
barrel would put upwardpressureon the oi I -consumpt
i on-to-GNPratio over the
n e x t t e n y e a r s . ( A 1 1p r i c e s c i t e d a r e t h e c o m p o s i t er e f i n e r a c q u i s i t i o n c o s t
for crude oil in 1988dol lars per barrel .)
B.
Future 0il Demand
and Conservation
Given reasonableassumptionsabout U.S. economicgrowth, out-of-sanple
s i m u l a t i o n sb a s e do n o u r e c o n o m e t r im
c o d e li n d i c a t e t h a t e i t h e r o i l
c o n s u m p t i oonr p r i c e s w j l l r i s e s h a r p l yd u r i n g t h e l 9 9 0 s . u F o r a c o n s t a n t
price of $25 per barrel and economicgrowth of 2.5 percent annually, we
e s t i m a t et h a t U . S . o i 1 c o n s u m p t i owno u l db e n e a r l y 4 0 p e r c e n th i g h e r i n 2 0 0 0
t h a n i t w a s 1 9 8 8 . l l i t h e c o n o m igc r o w t ho f 3 . 0 p e r c e n ta n n u a l l y , U . S . o i l
consumption
would be nearly 50 percent higher in 2000than it was in 1988.
l ' l u c hh i g h e r o i l p r i c e s ( o r t h e i r e q u i v a l e n t )w o u l db e r e q u i r e dt o h o l d
U . S . o i l c o n s u m p t i oant i t s 1 9 8 8l e v e l .
l l i t h e c o n o m igc r o w t ho f 2 . 5 p e r c e n t
a n n u al ly , a p r i c e o f $ 4 5 p e r b a r r e l w o u l db e r e q u i r e dt o h o l d o i l U . S , o i l
c o n s u m p t i ocno n s t a n ta t i t s 1 9 8 8l e v e l o f a b o u t 1 7 m i l l i o n b a r r e l s p e r d a y .
liith economicgrowth of 3.0 percent annually, a price of $50 per barrel would
be requi red.
H o l d i n gU . S . o i l c o n s u m p t i oant i t s 1 9 8 8l e v e l w i l I b e c o s t l y u n l e s st h e
market generatesabout a doubling of real world oil prices by 2000. Prices
that high appearunl ikely.
Participants in EnergyHodelingForumll recently
forecast oil prices for 2000in a range frorn $15 to $35 per barrel (See
Huntington, 1989). Forecastsrnadewith demandassumptions
that correspondto
our econometricfindings range from $28 to $35 per barrel .
C . A c h i e v i n g0 i l C o n s e r v a t i o n
T h o u g hh o l d i n g U . S . o i l c o n s u n p t i o a
n t i t s 1 9 8 8l e v e l w i l l r e q u i r e a
domesticprice that is about $15 to $20 per barrel higher than is forecast for
I
2000, the required tax would be greater becauseU.S. conservationefforts
would depressworld oil prices,
If non-tax methodsare used to further oil
conservation,the opportunity costs of conservationare likely to be higher
than the tax.
Althoughengineeringstudies can suggestwaysto reduceenergy
use, Brown(1982) has shownthat past attenpts to legislate specific
c o n s e r v a t i o nt e c h n o l o g i e sw e r e j n e f f i c i e n t .
T h e m a r g i n a lc o s t p e r u n i t o f
energy savedvaried considerablyacross the 1egis1ated technologies. And, the
1egis1ation ignoredsomelow-cost methodsof conservation.
IV.
SU]IIIARY
E s t i m a t j n gt h e l o n g - r u np r i c e e l a s t i c i t y o f o i 1 d e m a n ad t - 0 . 5 6 , w e f i n d
U . S . o i l c o n s u m p t i oins f a i r l y r e s p o n s i v et o c h a n g e si n p r i c e , b u t i t r e q u i r e s
nearly a decadeto adjust fully.
t,lefind no evidencethat non-price
conservationhas shifted U.S. oil demandinward or that consumption
responds
asymmetricallyto changesin price,
has created
The slow adjustnent in demand
t h e a p p e a r a n cteh a t U , S . o i 1 c o n s u m p t i oi ns i n s e n s i t i v e t o c h a n g e si n p r i c e ,
that non-price conservationhas occurred, and that consumptjon
responds
a s y m n e t r i c a l l yt o c h a n g e si n p r i c e .
O u r f i n d i n g s i m p l y t h a t i f e f f e c t i v e o i l c o n s e r v a t i o np o l i c i e s a r e n o t
inplemented,low oil prices and normaleconomicgrowth can be expectedto
s t i n u l a t e s t r o n g g r o w t hi n U . S . o i l c o n s u m p t i odnu r i n g t h e 1 9 9 0 s . S h a r pp r i c e
i n c r e a s e s( o r t h e i r e q u i v a l e n t )w i l l b e r e q u i r e dt o h o l d o i l c o n s u m p t i o n
c o n s t a n t . T h a t s u g g e s t st h a t m e a n i n g f uol i l c o n s e r v a t i o nw i l l b e c o s t l y .
9
REFEREIICES
Bohi, D, R., Analyzing DenandBehavior: A Study of EnergyElasticities, The
Johns HopkinsUniversity Press for Resourcesfor the Future, Baltimore,
l.ld., I98l .
B r o w n ,S . P , A , " R e d u c i n U
g . S . V u l n e r a b i l i t y t o I ' l o rdl 0 i l S u p p l yD i s r u p t i o n s , "
Federal ReserveBankof Dallas Economi
c Review,May 1982, 1-13,
B r o w n ,S . P . A , a n d K . R . P h i l 1 i p s , " T h e E f f e c t s o f O i l P r i c e s a n d E x c h a n g e
Rateson trlorld 0il Consumption."Federal ReserveBankof Dallas fcononic
R e v i * t , J u l y 1 9 8 4 ,l 3 - 2 1 .
Chandler,Il. U., H, S. Ge11er,and M. R. Ledbetter, EnergyEfficiency:
A New
Agenda,The AmericanCouncil for an Energy-Effjc i ent Economy,
llashington,
D.C., July 1988.
Gately, D. and P. Rappoport,"The Adjustmentof U.S. 0il Denrand
to the Price
Increasesof the 1970s." The EnergyJournal, April 1988, 93-107.
-putty Modelof AggregateEnergyDemand,"
Hogan,ll. 1,1.,"A DynamicPutty-Semi
EnergyEcononics,January1989, 53-69.
HuntingtonH
, . G . , " T h eU . S , D o l l a r a n d t h e l , l o r l d0 i . l M a r k e t , " E n e r g y
Policy, August 1986, 299-306.
l o m p a r i s oFni g u r e s", E n e r g yM o d e l i n gF o r u ml l ,
, e d . , " M o d eC
Stanford University, presentedat lrlorkingGroupl'leeting#2, John F.
KennedySchoolof Government,
HarvardUniversity, 1989,
l,faddala,G. 5., Introduction to Econonetrics,lilacl.lillanCo., NewYork, New
York, 1988.
Sweeney,
J. L. and D, Fenichel, "Price Asynmetri
es in the Denandfor Energy,"
Center for Economic
Po1icy Research,Publication No. 75, June 1986.
TableI
RegressionResults
f o r U .S . 0 i l C o n s u m o t i o n
I n d e p e n d e nVta r i a b l e s( i n n a t u r a l l o g s )
I ndustrial
Real
Production
Real
Oil Price in
as share
Oil Price in
o e r i o d st - I
period t
Intercept
Real GNP of GNP
to t-38
1.13
-.23
1L81
-1.73
.01
.01
,09
-3.10
2.03
-.09
Coefficient
2.01
-.08
-.48
t-statistic
2.62
-5.64
70.22*
.01
.01
-.48
Level of
significance
Standardized
Coefficient
Summary
Stati sti cs
0verall F-Value
77.86
*
Adj R'
.93
Durbin-l{atson
1.69
F-Value for
Polynomial
.54
T h e v a l u e r e p o r t e df o r t h e l a g s o f o i l p r i c e i s a n F - s t a t i s t i c .
FOOTNOTES
*ResearcD
h e p a r t n e n tF
, e d e r a lR e s e r v eB a n ko f D a l l a s , D a l l a s , I X 7 5 2 2 2 '
l , l ew o u l dl i k e t o t h a n k L i n d a H u n t e r ,D a v i dK l i n e , D o nN o r m a nJ, e r r y 0 ' D r i s c o 1 l
and Jim Sweeney
for helpful comments
without implicating them in our
c o n c l u s i o n s . A n e a r l i e r v e r s i o n o f t h i s p a p e rw a sp r e s e n t e da t t h e 6 4 t h
Annuali.lesternEconomic
Association International Conference,LakeTahoe,
Nevada,June 1989, in a session organizedby DonaldA. Norman,American
P e t r o l e u nI n s t i t u t e .
T h e v i e w se x p r e s s e d
in this article are thoseof the
authors and should not be attributed to the Federal ReserveBankof Dallas or
the Federal ReserveSystem.
l.
M o n t h l yo i 1 c o n s u m p t i odna t a f o r t h e U n i t e d S t a t e s w e r eo b t a i n e df r o m
the U.S, Central IntelI igenceAgency. The data were transformedto quarterly
v a l u e so f a v e r a g eb a r r e l s p e r d a y a n d t h e n s e a s o n a l l ya d j u s t e dw i t h t h e X l l
p r o c e d u r ec o n t a i n e di n t h e S t a t j s t i c a l A n a l y s i sS y s t e n( 5 A S ) .
A quarterly serjes of real oil prices was constructedby taking quarterly
a v e r a g e so f t h e m o n t h l yp r o d u c e rp r i c e i n d e x f o r c r u d e o i l a v a i l a b l e f r o m U , S .
D e p a r t m e notf L a b o ra n d d e f l a t i n g i t w i t h t h e f i x e d - w e i g h tG N Pd e f l a t o r
a v a i l a b l e f r o m U . S . D e p a r t m e notf C o m m e r c eT. h e p r i c e s e r i e s i s n o t
seasonal
ly adjusted.
The real GNPseries was obtained from the U.S. Departnentof Commerce.
T h e r e a l G N Ps e r i e s i s s e a s o n a l l ya d j u s t e db y t h e s o u r c e .
A quarterly series of the share of GNPaccountedfor by industrial
p r o d u c t i o nw a s o b t a i n e db y t a k i n g q u a r t e r l y a v e r a g e so f t h e m o n t h l yU . S .
industrial production index available from the Boardof Governorsof the
Federal ReserveSystemand dividing jt by real GNP. The industrial production
s e r i e s i s s e a s o n a l l ya d j u s t e db y t h e s o u r c e .
?.
llle determinedthe numberof lags by selecting the numberthat
maximizedthe adjusted R" without any polynomialrestrictions.
lie selected
the degreeof the polynomialby starting at 12. If the highest degreeof the
p o l y n o m i aw
l a s f o u n d i n s i g n i f i c a n t a t t h e S - p e r c e n tl e v e l, w e d r o p p e di t i n
t h e s u b s e q u e nets t i m a t i o n . l , l ec o n t i n u e dt h i s p r o c e d u r eu n t i l r e a c h i n ga
d e g r e et h a t w a s s i g n i f i c a n t .
F o r a m o r ed e t a i l e d d e s c r i p t i o no f t h e s e
p r o c e d u r e ss, e e M a d d a l a l,9 B B , p p . 3 5 4 - 6 1 .
3.
Thestandardized
r e g r e s s i o nc o e f f i c i e n t o f a v a r i a b l e i s c o m p u t ebdy
m u l t i p l y i n g t h e v a r i a b l e ' s s t a n d a r dd e v i a t j o n b y i t s r e g r e s s i o nc o e f f i c i e n t ,
a n d t h e n d i v i d i n g t h a t p r o d u c tb y t h e s t a n d a r dd e v j a t i o n o f t h e d e p e n d e n t
v a r i a b le .
4.
T h o u g hf r e q u e n t l ym o d e l e da s a f u n c t i o n o f t i m e , i f i t o c c u r s , n o n -
p r i c e c o n s e r v a t i o nn e e dn o t b e c o r r e l a t e dw i t h t i m e . I n o u r m o d e, l t h e
e f f e c t s o f n o n - p r i c ec o n s e r v a t i o n
m i g h t b e e v i d e n te i t h e r a s i n s t a b i l i t y i n
m o d e le s t i m a t e so r a n o m i t t e dv a r i a b l e t h a t i s a f u n c t i o n o f t i m e . B e c a u sw
ee
r u l e - o u t i n s t a b i l i t y i n t h e e s t i m a t e dc o e f f i c i e n t s b e 1 o w o
, n l y t h e o m i s s i o no f
a time-dependent
variable needbe consideredhere.
5.
F o r t h e p u r p o s e so f o u t - o f - s a m p l es i r n u l a t i o n ,w e a s s u m endo c h a n g ei n
the i ndustri a1-producti on-to-GN
P ratio and a GNPel asticity of oil demand
equal to uni ty,
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