UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIE VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ESTIMATION OF CRUDE OIL IMPORT DEMAND OF OECD COUNTRIES BY HOANG TUNG DIEP MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, SEPTEMBER 2016 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHIMINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ESTIMATION OF CRUDE OIL IMPORT DEMAND OF OECD COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HOANG TUNG DIEP Academic Supervisor: DR. PHAM THI BICH NGOC HO CHI MINH CITY, SEPTEMBER 2016 TIEU LUAN MOI download : skknchat@gmail.com DECLARATION I declare that: “Estimation of crude oil import demand of OECD countries” is my own work; it has not been submitted for any degree at other universities. I confirm that I have made all possible effort and applied all knowledge for finishing this thesis to the best of my ability. Ho Chi Minh City, September 2016 Hoang Tung Diep iii TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENTS I would like to express deepest gratitude to my academic supervisor, Dr Pham ThiBich Ngoc who gives me helpful comments, excellent guidance.
Her patience and caring brings the motivation for me. I would like to send my special thanks to Dr. Truong Dang Thuy who always gives me good advices whenever I got stuck. Additionally, he is the person push me to finish this thesis and always cares of my thesis process.
I am also grateful to Prof. Nguyen Trong Hoai and Dr. Pham Khanh Nam and all of Vietnam – Netherland staffs who always support us for the two-year of studying. Last but not least, my sincerest thanks are for my family, my friends.
Without their frequent encouragement as well as spiritual support, I would not have been able to complete this thesis. iv TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Crude oil is considerably the most important energy for world economy and most of all countries were affected by the crude oil price no matter they are played as the producers or consumers or both. Applying the data of 27 OECD countries from 1988 to 2013, this thesis conducts the import demand model to estimate the income elasticity and price elasticity for OECD together with the impact of financial crisis on 2008, the domestic crude oil production, the exchange rate, the population growth. The estimation of price elasticity for the whole region is -0.155 suggests that OECD is not sensitive with the increase in crude oil import price.
Additionally, the income elasticity of whole region is 0.562 implies that income raise would lead to the increase in economic activities, so that the demand for crude oil increases. Finally, the impact of world financial crisis is confirmed in the estimation. Keywords: crude oil, demand, import, OECD, price elasticity, income elasticity, crisis v TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS OECD Organization of Economic Cooperation and Development IEA International Energy Agency EEC European Economic Community IMF International Money Fund UK United Kingdom USA United State of America GDP Gross Domestic Product GNP Gross National Product OLS Ordinary Least Square FE Fixed effects RE Random effects ARDL Autoregressive Distributed Lags FM Fully Modified UECM Unrestricted Error Correction Model RE GLS Random effect Generalize Least Square vi TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER 1 INTRODUCTION .4 Research scope, data and methodology. 3 CHAPTER 2 LITERATURE REVIEW .3 Price elasticity and income elasticity .1 The traditional trade theory.2 The new trade theory .3 The standard trade model .1 Impact of import price and income on import demand.2 Impact of financial crisis on oil import demand .3 Applied control variables .4 Import demand estimation approach.
17 CHAPTER 3 RESEARCH METHODOLOGY. 18 viii TIEU LUAN MOI download : skknchat@gmail.1 The crude oil import demand model .2 Price elasticity and income elasticity .3 Variables and expected signs .2 The OECD economic development and oil demand. 28 CHAPTER 4 EMPIRICAL RESULTS. The OLS, FE and RE results: .1 Hausman test for Fixed versus Random effects model .2 Random effects Generalized Least Square estimation.3 Cointegration test for panel data .3 Estimation of the price elasticity and income elasticity.3 Limitations and further research.
43 ix TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 2.3 Summary of empirical researches .1 Variables expected signs .4 Mean of Import price (in logarithm) and Income (in logarithm) .1 Summarized Estimation of specification .2 Random effects Generalized Least Square model .3 Cointegration test for panel data .1 Results of individual income elasticity and price elasticity .2 Summarized of price elasticity and income elasticity of crude oil import demand. 38 x TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 2.2 Import demand curve .3a General equilibrium theory .3b Consumer behavior theory .2 OECD versus Worldcrude oil import from 1988 to 2012 .3 Total Crude oil import to OECD from 1988 to 2013 .4a Interrelationship between crude oil import and income .4b Interrelationship between crude oil import and crude oil price. 32 xi TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1 INTRODUCTION 1.1 Problem statement It is no doubt about the vital role of crude oil in the world economy and most of all countries were affected by the crude oil price no matter they are played as the producers or consumers or both (Natural resource Canada, 2010)(1). Oil has provided about 38 % energy needs in 2014 and it will contribute to the world economy in further (Berdzenadze, 2015).
Although there is new trend of using the renewable energy which is friendly with environment, it seems that we still not find energy that can replace for the oil due to its unique attribution such as easy to access or low cost of refinery. According to the IEA statistic, Global demand for crude oil in 2014 was about 92.6 million barrels a day and daily demand for crude oil turned to 94 million in 2015. The increase in oil demand could be explained by the development of economic activities and human income which push expenditure on vehicles and other energy application (Zhao and Wu, 2007). OECD stands for Organization of Economic Cooperation and Development includes 35 members and their mission is: “promote policies that will improve the economic and social well- being of people around the world.” The majority of OECD is the developed countries which tend to use large amount of oil for economic activities.
In the 20th century, OECD oil demand was accounted 70 – 80% of total world demand. The IEA reported that OECD oil demand held 53 percent of total world demand in 2010 and the majority of oil was imported. Empirical research suggested that energy demand was affected intensely by the financial crisis. The Global Financial crisis in 2008 was recorded the greatest financial crisis since the Great Depression (1930s) (Zang et al, 2009) when the crude oil price dropped off more than 72% percent within five months, from the all-time high at $145.31 per barrel on July 3rd, 2008 to the lowest value at $41 per barrel on December 5, 2008.
The economists found that the financial crisis started from the raise of subprime mortgages in America in 2007 which leaded to the reduction in economic activities of OECD. Yet, the economic slowdown made the OECD cut off their expense hence the crude oil demand declined. Natural resource Canada is an organization seeks to enhance the responsible development and use of Canada’s (1) natural resources and the competitiveness of Canada’s natural resources products. 1 TIEU LUAN MOI download : skknchat@gmail.com There are many researches related to oil such as oil consumption, oil export/import in various forms of estimation.
The most popular approach is to analyze income elasticity and price elasticity of oil import. Empirical researches proved that income is inelastic in short run and more elastic in long run (Ghosh, 2009; Kim and Beak, 2013; Narayan and Smyth, 2007…) whereas the price elasticity is inelastic both in short and long run (Ziramba, 2010; Yaprakli and Kaplan, 2015; Altinary, 2007…). It is interesting that energy demand studies often estimate the particular demand of one country whereas oil demand often analyze the demand for group of countries or region (Altinary, 2007). Although there are numerous researches that estimate the energy import demand for particular country, the OECD crude oil import demand is completely rare in empirical research.
Additionally, due to vital role of OECD in the world economy and the high demand of oil consumption together with high rate of crude oil import, the model of crude oil demand of OECD needed to be employed to help exporters make prediction of impact of pricing on future oil consumption and help the importer regulator decide to tax or subsidy on imported oil. That was the motivations for author to conduct a study of estimation for crude oil import demand of OECD with the effects of financial crisis in 2008. The results of this thesis are consisted with previous studies which stated that the price and income has impact to the quantity of crude oil imported to OECD. Additionally, the author found that financial crisis made the demand for crude oil import shift down.2 Research Objective The thesis aims to identify the responses of crude oil quantity imported to OECD with the change in crude oil imported price and national income in the period 1988 – 2013.
To achieve the above objective, this thesis is conducting the import demand model to estimate the income elasticity and price elasticity for OECD together with the impact of financial crisis on 2008, the domestic crude oil production, the exchange rate and the population growth.3 Research questions This research is designed to answer: (i) What is a crude oil import demand model of OECD in the period 1988-2013? (ii) What are price elasticity and income elasticity of crude oil import demand of OECD? (iii) Does the financial crisis have effect on the crude oil import demand in OECD? 2 TIEU LUAN MOI download : skknchat@gmail.4 Research scope, data and methodology The reason for choosing OECD countries for conducting the thesis is the huge demand of oil in OECD. The empirical statistic showed that OECD oil consumption was 53 percent of total world demand in 2010, this means the OCDE plays a very important role in the oil market. Understanding the responses of demand for crude oil to the change in import price as well as the change in OECD income would be very helpful for the exporters. In addition, there was few researches paid attention to estimate the OECD crude oil import demand for a long time so that this motivate the author to investigate the thesis in this region.
The empirical analysis section of the thesis will be implemented by employing unbalanced panel data from 27 countries in OECD region over the period from 1988 to 2013. The data was collected from OECD library. To achieve the research objective, this thesis applied the OLS, the Fixed effects, the Random effects and the Random effects Generalized Least Squared methods to estimate the price elasticity and income elasticity of crude oil demand import to OECD and the impact of financial crisis to the import demand.5 Thesis structure The outline of paper is as follow. Chapter I introduces the research objectives, the research questions and the research scope, data and methodology.
Next, Chapter 2 provides literature of import demand and some empirical evidences. Chapter 3 describes the model specification; research methodology including the OLS model, the FE model, the RE model and the Random effects Generalized Least Squared model. The empirical results will be presented in Chapter 4. Finally, Chapter 5 summarizes the conclusions then gives some policy implications and suggestion of further research.
3 TIEU LUAN MOI download : skknchat@gmail.