The Role of Energy in an Energy Constrained Economy

Abstract

The thesis consists of three individual papers on energy and economic development focusing on the energy constrained economies. The first paper examines how energy subsidies influence the relationship between economic growth and electricity consumption. The study constructs a panel data set consisting of 172 countries to see how the level of economic development, energy availability and energy subsidies affect electricity consumption. To address dynamic panel bias, the study uses the panel estimation technique, generalized method of moments. The findings suggest that in energy subsidized economics, electricity consumption augments economic growth in general but is evident in middle income and energy constrained countries. This relationship, however, is reversed for the high-income countries where economic output and price of electricity influence power consumption. These results suggest that energy subsidies as a policy for transfer payments, especially in middle income and energy deficit countries, has no upward pressure on electricity consumption; rather, it acts as an impetus for economic development thereby endorsing the growth hypothesis in energy economics. Conversely, energy subsidies in high-income countries determine how energy-income or inter-fuel substitution affects environmental outcomes. The second paper investigates how an energy constrained economy responds to energy shocks by taking Bangladesh as an example. To explore the long run relationship, Autoregressive Distributed Lag bounds testing approach is used followed by an error correction model estimation. The results appear both in the short and long run, whereby output growth precipitates energy consumption, supporting the energy conservation hypothesis. The results, however, do not confirm that energy consumption supports output growth or the growth hypothesis. We also find that, in the time of lower energy consumption, the relationship between energy and output is very weak, but in higher energy consumption periods, output growth increases energy uptake. The argument of the paper is that in an energy constrained economy, energy conservation policies, such as increasing fuel price or reducing oil supply, may potentially destabilize the socio-political environment. The third paper focuses on oil supply shocks to transportation prices of an emerging economy. The motivation for the analysis is stemmed from the fact that in Bangladesh, despite the combined price of all the other goods and services fluctuating across both the directions, the transport price trends positively only. The study hypothesizes that due to oil supply shocks, the transport price shows this particulate behaviour. Using time series models (ARMA, GARCH and EGARCH), the study finds the evidence of negative impact of oil shocks on transportation. This analysis also concludes that transport price volatility has no impact on its average price, and the volatility itself is not explosive but rather bounded. In tackling the increasing transportation price, importing more oil may be one option but from the environmental perspective, fuel switching or energy efficiency gain would be more sustainable policy options.