Revisiting Energy Demand Relationship: Theory and Empirical Application

Abstract

In this paper, we revisit the theoretical framework for energy demand. We then use this theoretical framework to empirically model the Saudi Arabian industrial electricity demand. We show, in the case of Saudi Arabian data, that imposing parsimonious energy demand specification on data without testing relevant assumptions can lead to biased estimations and noticeably poor approximations, while imposing general energy demand specification without accounting for the data properties can lead to redundant estimations and lower approximation than what could be obtained otherwise. Combining the theory with the data can provide unbiased and irredundant estimations with high levels of approximations. Hence, this paper recommends, based on the empirical findings, that a better strategy would be the combination of theoretical coherence with data coherence in the General to Specific Modeling (GtSM) framework for the empirical analyses of energy demand.