What Is the Temporal Path of the GDP Elasticity of Energy Consumption in OECD Countries? An Assessment of Previous Findings and New Evidence

Abstract

This paper answers the question: what is the path of the GDP elasticity of economy-wide energy consumption for OECD countries over the period 1960–2019? To do so, this study first considers the arguments as to why this elasticity might change over time, and then reviews the previous evidence on whether this elasticity has changed over time. Lastly, the paper compiles and uses a new dataset to analyze whether the GDP elasticity of energy demand in OECD countries (i) has changed between the periods before and after the major energy crises (e.g., 1974–1985); and (ii) has been stable since 1986. Elasticity stability is analyzed via rolling window regressions using dynamic mean group cross-correlated errors. We argue that (i) the GDP elasticity for economy-wide energy consumption was around unity for OECD countries prior to the first energy crisis; and (ii) the reactions to the extreme oil price experiences that occurred over 1974–1985 led to a substantially lower GDP elasticity for economy-wide energy consumption of around 0.6 that has been stable at that level since the end of the second energy crisis (circa 1986). This demonstration of the path of the GDP elasticity is in contrast to some recent work that has suggested the GDP elasticity of energy has not changed (or changed very little) since the 1970s or even since the 1960s. Furthermore, this evidence that reactions to those extreme oil price experiences led to a step-function-like lowering of the GDP elasticity runs counter to other arguments that dematerialization, inverted-U-based development paths, or Kyoto Protocol ratification are responsible for continued declines in the GDP elasticity.