Price elasticity of fuel demand: an econometric approach

Abstract

The purpose of this paper is to quantify, through the use of Bayesian VAR (BVAR) econometric models, the elasticity of demand for automotive fuels (gasoline, diesel and liquid propane gas - LPG) in response to a shock in both their respective prices at the pump and other and other variables that affect the production of these commodities (such oil price, exchange rate etc.). The data used consist of time series on consumption and prices of the goods described above as of January 2002 for Italy. First, the existing literature, which focuses mainly on Anglo-Saxon countries, was analysed in order to obtain terms of comparison that would allow a comparison between the results obtained (described below) and the aforementioned similar studies. Second, after a description of the data used and their contextualization to the Italian case, the econometric approach used to estimate elasticities is described. The consequences of in terms of policy are interesting, since these are goods with rigid demand, little susceptible to price changes (whether induced by a change in the price of crude oil or a change in the excise rates in force in the country) and substantially characterized by a certain stability over the years. The analysis displays also the response of the above-mentioned fuels to Brent’s price shocks, delivering as additional result that these fuels are very sensitive to the fluctuations of their raw material whose price’s increase is capable of generating a bottleneck in the global value chain imposing negative shifts in the quantity consumed and an increase in price of the fuels analysed