A Century of Interfuel Substitution

International Center for Emerging Markets Research, RUDN University, Forthcoming

32 Pages Posted: 9 Oct 2017

See all articles by A K M Nurul Hossain

A K M Nurul Hossain

University of Calgary

Apostolos Serletis

University of Calgary - Department of Economics

Date Written: October 6, 2017

Abstract

We investigate the demand for energy and the degree of substitutability among fossil fuels in the United States using the Normalized Quadratic (NQ) expenditure function and (to our knowledge) the longest span prices and quantities that have ever been studied before, from 1919 to 2012. In doing so, we merge the empirical energy demand systems literature with the recent financial econometrics literature, relaxing the homoskedasticity assumption and instead assuming that the covariance matrix of the errors of the flexible demand system is time-varying. We generate inference, in terms of a full set of elasticities, consistent with neoclassical microeconomic theory and the data generating process. Our results are in line with earlier findings in the literature based on shorter duration samples and different methodologies. They have important implications for climate policy intervention designed to reduce greenhouse gas emissions. We show that there is a small but statistically significant substitution possibility between crude oil and natural gas, but not between crude oil and coal. We also provide evidence that natural gas is a substitute for coal when the price of coal changes, but coal is not a substitute for natural gas when the price of natural gas changes.

Keywords: Flexible functional forms, NQ expenditure function, Volatility, Interfuel elasticities of substitution

JEL Classification: C3, Q3

Suggested Citation

Hossain, A K M Nurul and Serletis, Apostolos, A Century of Interfuel Substitution (October 6, 2017). International Center for Emerging Markets Research, RUDN University, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3048661 or http://dx.doi.org/10.2139/ssrn.3048661

A K M Nurul Hossain

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Apostolos Serletis (Contact Author)

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403 220-4091 (Phone)
403 282-5262 (Fax)

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