Estimation of crude oil import demand of OECD countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIE THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ESTIMATION OF CRUDE OIL IMPORT DEMAND OF OECD COUNTRIES BY HOANG TUNG DIEP MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, SEPTEMBER 2016 UNIVERSITY OF ECONOMICS HO CHIMINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ESTIMATION OF CRUDE OIL IMPORT DEMAND OF OECD COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HOANG TUNG DIEP Academic Supervisor: DR PHAM THI BICH NGOC HO CHI MINH CITY, SEPTEMBER 2016 DECLARATION I declare that: “Estimation of crude oil import demand of OECD countries” is my own work; it has not been submitted for any degree at other universities I confirm that I have made all possible effort and applied all knowledge for finishing this thesis to the best of my ability Ho Chi Minh City, September 2016 Hoang Tung Diep iii ACKNOWLEDGEMENTS I would like to express deepest gratitude to my academic supervisor, Dr Pham ThiBich Ngoc who gives me helpful comments, excellent guidance Her patience and caring brings the motivation for me I would like to send my special thanks to Dr Truong Dang Thuy who always gives me good advices whenever I got stuck Additionally, he is the person push me to finish this thesis and always cares of my thesis process I am also grateful to Prof Dr Nguyen Trong Hoai and Dr Pham Khanh Nam and all of Vietnam – Netherland staffs who always support us for the two-year of studying Last but not least, my sincerest thanks are for my family, my friends Without their frequent encouragement as well as spiritual support, I would not have been able to complete this thesis iv ABSTRACT Crude oil is considerably the most important energy for world economy and most of all countries were affected by the crude oil price no matter they are played as the producers or consumers or both Applying the data of 27 OECD countries from 1988 to 2013, this thesis conducts the import demand model to estimate the income elasticity and price elasticity for OECD together with the impact of financial crisis on 2008, the domestic crude oil production, the exchange rate, the population growth The estimation of price elasticity for the whole region is -0.155 suggests that OECD is not sensitive with the increase in crude oil import price Additionally, the income elasticity of whole region is 0.562 implies that income raise would lead to the increase in economic activities, so that the demand for crude oil increases Finally, the impact of world financial crisis is confirmed in the estimation Keywords: crude oil, demand, import, OECD, price elasticity, income elasticity, crisis v ABBREVIATIONS OECD Organization of Economic Cooperation and Development IEA International Energy Agency EEC European Economic Community IMF International Money Fund UK United Kingdom USA United State of America GDP Gross Domestic Product GNP Gross National Product OLS Ordinary Least Square FE Fixed effects RE Random effects ARDL Autoregressive Distributed Lags FM Fully Modified UECM Unrestricted Error Correction Model RE GLS Random effect Generalize Least Square vi TABLE OF CONTENTS CHAPTER INTRODUCTION 1.1 Problem statement 1.2 Research Objective 1.3 Research questions 1.4 Research scope, data and methodology 1.5 Thesis structure CHAPTER LITERATURE REVIEW 2.1 Some concepts 2.1.1 Crude oil 2.1.2 Import demand 2.1.3 Price elasticity and income elasticity 2.2 Theoretical literature 2.2.1 The traditional trade theory 2.2.2 The new trade theory 2.2.3 The standard trade model 2.3 Empirical literature 2.3.1 Impact of import price and income on import demand 2.3.2 Impact of financial crisis on oil import demand 10 2.3.3 Applied control variables 12 2.3.4 Import demand estimation approach 13 2.4 Analytical Framework 17 CHAPTER RESEARCH METHODOLOGY 18 3.1 Model specification 18 viii 3.1.1 The crude oil import demand model 18 3.1.2 Price elasticity and income elasticity 20 3.1.3 Variables and expected signs 21 3.2 Research methodology 23 3.2.1 Estimation models 23 3.2.2 Hypothesis tests 26 3.3 Data description 27 3.3.1 Data source 27 3.3.2 The OECD economic development and oil demand 27 3.3.3 Data description 28 CHAPTER EMPIRICAL RESULTS 33 4.1 The OLS, FE and RE results: 33 4.2 Hypothesis tests 35 4.2.1 Hausman test for Fixed versus Random effects model 35 4.2.2 Random effects Generalized Least Square estimation 35 4.2.3 Cointegration test for panel data 36 4.3 Estimation of the price elasticity and income elasticity 37 CHAPTER CONCLUSION 40 5.1 Main findings 40 5.2 Policy implications 41 5.3 Limitations and further research 42 REFERENCES 43 ix LIST OF TABLES Table 2.3 Summary of empirical researches 16 Table 3.1 Variables expected signs 23 Table 3.3.3 Variables summary 29 Table 3.3.4 Mean of Import price (in logarithm) and Income (in logarithm) 30 Table 4.1 Summarized Estimation of specification 33 Table 4.2 Hausman test 35 Table 4.2.2 Random effects Generalized Least Square model 36 Table 4.2.3 Cointegration test for panel data 37 Table 4.3.1 Results of individual income elasticity and price elasticity 37 Table 4.3.2 Summarized of price elasticity and income elasticity of crude oil import demand 38 x LIST OF FIGURES Figure 2.1.2 Import demand curve Figure 2.2.3a General equilibrium theory Figure 2.2.3b Consumer behavior theory Figured 3.3.2 OECD versus Worldcrude oil import from 1988 to 2012 28 Figure 3.3.3 Total Crude oil import to OECD from 1988 to 2013 30 Figure 3.3.4a Interrelationship between crude oil import and income 31 Figure 3.3.4b Interrelationship between crude oil import and crude oil price 32 xi Ln(exchange rate): the estimation of exchange rate does not exposed any sign that expected and it yields the significant result at 1% level of confident for OLS model This result conflicts with the theory and the results in the research of Schryder and Peersman, 2012 Dummy variable (D): the international financial crisis in 2008 appears to be had influence to the demand for crude oil imported of FE and RE model The dummy variables (D) is significant at 10 % level of confidence with the values are -0.0649 and -0.0647 for RE and FE model; implies that the crisis made the crude oil import demand shift down The inversed effect of economic downturn on energy import demand also confirmed in the research of Kolluri and Torrisi (1987),Kim and Beak (2013), Yaprakli and Kaplan (2015) In summary, the empirical results are generally support the theoretical expectation In compare with other researches, the findings are considerably equivalent 4.2 Hypothesis tests 4.2.1 Hausman test for Fixed versus Random effects model The selection of the most appropriate for panel data model solely depends on the Hausman test The Hausman test is the choice between the fixed effects model and random effects model Table 4.2Hausman test Model Chibar2 4.53 Oil import demand Prob> chibar2 0.6057 Better Model RE As we seen on the Tables 4.2 the p-value of Hausman test is larger than 0.6 It means we cannot reject the null hypothesis even at 10% level of confidence As the result, the timeinvariant individual effect αit and the set of dependent variables xit are assumed to be uncorrelated Hence, the random effects model is the better model 4.2.2 Random effects Generalized Least Square estimation The Hausmantest reveals that RE model is an appropriate model for the estimation of income and price elasticity To overcome the problem of heteroskedaticity and autocorrelation of variables, the thesis will generate the Random effects General Least Square (RE GLS)estimation with and without country effect The results of RE GLS with country effect estimation seem to 35 be more appropriate, therefore they will be used to calculate the individual income elasticity and price elasticity in the next section Table 4.2.2 Random effects Generalized Least Square model VARIABLES lnEX lnIncome lnPOP lnPRO lnP D Constant Observations Number of id RE GLS without country RE GLS with country lnIM 0.014 (0.114) 0.538** (0.241) 0.431 (0.397) -0.041 (0.075) -0.153** (0.6) -0.064* (0.033) -1.507 (-6.661) 336 15 lnIM 0.00645 (-0.121) 0.562** (-0.251) 0.334 (-0.386) -0.0478 (-0.0788) -0.155** (-0.0625) -0.0649* (0.034) -0.663 (-6.343) 336 15 Standard errors in parentheses *** p