Is the demand for crude oil inelastic for India? Evidence from structural VAR analysis

• Published in: Energy policy Vol. 118; pp. 552 - 558
• Main Authors: Dash, Devi Prasad, Sethi, Narayan, Bal, Debi Prasad
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.07.2018; Elsevier Science Ltd
• Subjects: C32; Clean energy; Clean technology; Crude oil; Crude oil demand; Crude oil price; Crude oil prices; Demand; Dependence; Dummy; Dynamic structural analysis; Economic development; Economic growth; Energy; Energy management; Energy policy; Imports; Oil wells; Petroleum; Petroleum production; Price elasticity; Production; Q41; Q43; Structural VAR; Studies; Variation; India; Q43; Crude oil price; C32; Crude oil demand; Economic growth; Structural VAR; Q41
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2018.04.001

We examine the dynamics of crude oil demand, crude oil price, and economic growth over the period of 1997–2016 in case of India. We derive the results from DNS unit root test and it indicates that all variables are stationary in their first order difference. Further, we apply Narayan and Popp (2010) two structure break test and find two break points, one in January 2002 and another one in November 2011 in case of crude oil price. Finally, the Structural VAR analysis depicts that there exists a negative and significant relation between crude oil price dummy and crude oil demand over the period. Further, the price elasticity shows that the percentage changes of crude oil demand response less as compare to the rise in crude oil price. This clearly suggests that crude oil price is moderately inelastic. This overall implies that global crude oil price fluctuation has not brought down India's crude oil import to a greater extent. In order to erase the bulging oil import bill, alternative strategies of producing methanol blended oil, revival of sick oil well production, and adoption of phase wise clean energy system could curb the import dependence of crude oil. •We study the association between crude oil demand, economic growth and crude oil price for India.•The Structural VAR results show that crude oil price is moderately inelastic for India.•We also empirically find direct relation between crude oil demand and economic growth.•India should adopt alternative strategies like clean energy production and reviving indigenous oil production.