MEASURING LONG-RUN DEMAND ELASTICITIES FOR PETROLEUM PRODUCTS IN OPEC 1 Carol A. Dahl, Professor, Mineral and Energy Economics Program, Colorado School of Mines, Golden Colorado, USA and Visiting Professor, Department of Economics, King Saud University and Afaf A. Abaalkhail, Lecturer, Department of Economics, College of Business Administration, King Saud University, Riyadh, Saudi Arabia,

2 Coming Attractions: Global Growth in Oil Products compared to OPEC Only Asia Pacific has grown faster Compare model types Talk about scope of project time periods products countries Issues from initial analysis Some observations on Saudi Arabia

Global Growth in Oil Products compared to OPEC 3

Models Charemza and Deadman (1997) 4

Scope of Project Gasoline, Kerosene, Diesel, Residual Total Oil Products Countries Algeria, Angola, Ecuador, Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, UAE, Venezuela Today talk about project in context of Saudi Arabia 5

Saudi Arabia Battling Russia for the Lead (Source: BP Statistics) 6

Oil's Importance to Saudi Arabia (2009) (Source: Saudia Arabian Monetary Authority) >80% of merchandise exports >80% of government revenues >15% of gross fixed capital formation ~1/4 Gross Domestic Product (GDP) 7

Issues to Consider Measure of income? GDP erratic from oil cycles permanent income non oil income Population composition? women joining labor force guest workers What price? What currency? local PPP better than exchange rates 8

Which Income? 9

Saudi Product Consumption 10

Domestic and Guest Workers 11

Oil and Product Prices 12

13

Which Price 14

Gasoline LnQ/Pop = β1 + β2LnP + β3LnY/Pop 2. LnQ = β1 + β2LnP + β3LnY 1. Dep=ln(G/Pop) Coefficientt-Statistic C Pg Y/Pop R 2 = Dep=ln(G) Coefficient t-Statistic C Pg Y R 2 =

Gasoline (LE) 3. LnQ = β1 + β2LnP + β3LnY + β4LnE-1 3. Dep = Ln(G) Coefficient t Statistic LR C Pg Y G R 2 =

Kerosene LnQ/Pop = β1 + β2LnP + β3LnY/Pop 2. LnQ = β1 + β2LnP + β3LnY 1. Dep=ln(K/Pop) Coefficientt-Statistic C Pk Y/Pop R Square = Dep=ln(K) Coefficient t -Statistic C Pk Y R Square =

Kerosene LE ~3/4 domestic jet, ~1/4 residential 3. LnK = β1 + β2LnP + β3LnY + β4LnK-1 3. Dep = Ln(K) Coefficient t Statistic LR C Pk Y K

Diesel/Gasoil ( ) ~ 50% Electricity and Industry, Transport 50% 1. LnQ/Pop = β1 + β2LnP + β3LnY/Pop 2. LnQ = β1 + β2LnP + β3LnY 1. Dep=ln(D/Pop) Coefficientt-Statistic C Pd Y/Pop R Square= Dep=ln(D) Coefficient t -Statistic C Pd Y R Square=

Diesel/Gasoil ( ) 3. LnQ = β1 + β2LnP + β3LnY + β4LnE-1 3. Dep = Ln(D) Coefficient t Statistic LR C Pd Y D

Residual (Heavy) Fuel Oil ( ) 1. LnQ/Pop = β1 + β2LnP + β3LnY/Pop 2. LnQ = β1 + β2LnP + β3LnY 1. Dep=ln(R/Pop) Coefficientt-Statistic C Pr Y/Pop R-squared

Heavy Fuel Oil ( ) 3. LnR = β1 + β2LnP + β3LnY + β4LnR-1 3. Dep = Ln(R) Coefficient t Statistic LR C Pr Y R

Sum Up Preliminary Work Suggest Some Interesting Issues At least in Gulf Oil GDP is erratic Composition of population should be investigated Which price may not matter at very low prices 23