A Panel Cointegration Analysis of the Demand for Oil in the Middle East

Abstract

This article applies recently developed panel unit root and panel cointegration techniques to estimate the long-run income and price elasticities for oil in the Middle East. The results for the panel indicate that demand for oil is highly price inelastic and slightly income elastic in the Middle East. There is considerable variation in the results for the income variable across countries, with the coefficient on the income variable statistically insignificant for several countries. The coefficient on the price variable is statistically significant in all cases with the expected sign and the price elasticity is uniformly low. While the results for the income variable differ across countries, the results for the panel as a whole suggest that the demand for oil in the Middle East is being driven largely by strong economic growth, while consumers are largely insensitive to price changes.