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Mohamed Nagy Eltony,
“Transport-Sector Demand for Energy in Kuwait — Revisited,”
Volume 38, Number 2
TRANSPORT-SECTOR DEMAND FOR ENERGY IN KUWAIT — REVISITED
Mohamed Nagy Eltony*
he transportation sector in Kuwait is considered one of the key energyconsuming sectors. For example, Kuwait is a small country but with an excellent road network and one of the highest stock of automobiles per capita in the region. In 2010, more than one-third of all the energy at end-use consumption in Kuwait has been used by the transportation sector and almost 99 percent came from refined oil products, mainly motor gasoline fuel. The transportation sector in Kuwait is comprised of two distinct modes, namely, road and air transport. However, each mode of transportation tends to consume different types of refined oil products. For example, motor gasoline and diesel fuel are used in road transportation, whereas aviation fuel (jet fuel) is used in the air transportation mode. Because of the non-existence of interfuel substitution between the different modes of transportation, each would be examined separately. However, the road mode alone accounted for about 90 percent of the total
*Mohamed Nagy Eltony, Professor of Economics in Qatar University’s Department of Finance & Economics, College of Business & Economics, was earlier the Director of the Industrial Studies and Policies Department of the Gulf Organization for Industrial Consulting and also held positions with the Industrial Bank of Kuwait as Economic Advisor, Senior Economist at the Arab Planning Institute, and the Kuwait Institute of Scientific Research. The author, who earned M.A. and Ph.D. degrees in economics from the University of Alberta (Canada) and University of Surrey (United Kingdom), respectively, has been a postdoctoral fellow at Sauder Business School of the University of British Columbia (Canada). Dr. Eltony’s articles have appeared in The Journal of Transport Economics and Policy, Energy Economics, The Journal of Energy and Development, The OPEC Review, Energy Studies Review, The Middle East Business and Economic Review, Journal of Asian Development, Journal of Economic & Administrative Science, and International Energy Research. The Journal of Energy and Development, Vol. 38, Nos. 1 and 2 Copyright Ó 2013 by the International Research Center for Energy and Economic Development (ICEED). All rights reserved.
THE JOURNAL OF ENERGY AND DEVELOPMENT
energy requirements of the transportation sector in year 2010. In light of its importance, road transportation is accorded the highest attention. Domestic energy prices have been declining in real terms since 1975. For example, the nominal price of premium gasoline at the pump in 2010 is set by the government at 100 fils per liter (about 30 U.S. cents per liter); however, in real terms, it costs only about 20 fils per liter today when compared with its level in 1980. In other words, there is no real price incentive for motorists to conserve on their use of fuels and drive less. Furthermore, while the nominal price at the pump for a liter of premium gasoline is 100 fils, the costs of producing it has been estimated to be around 190 to 220 fils, which means there is a price subsidy of about 90 to 120 fils per liter of motor gasoline sold domestically. In recent years, the Kuwaiti government has considered measures to reduce inefficiency and waste in energy consumption by key sectors, especially by transportation. In that direction, the government has privatized gasoline retail outlets. On a different front, environmental concerns have pressed the authorities to convert all the gasoline outlets to sell only unleaded gasoline in an effort to reduce the emission of harmful gases by the fleet of automobiles. Furthermore, due to massive traffic congestion, the traffic department is looking into restricting automobile registration to automobiles that were made in the last five years only; this would both reduce the number of automobiles on the roads and also improve the technical fuel efficiency of the fleet. Moreover, the municipality of Kuwait city is considering building a transit system such as an underground (subway). Decision makers also are considering raising the price of domestic oil products. One of the key elements of these measures that is currently under discussion is the complete or partial removal of price subsidies for the fuel for road transportation. This study aims to estimate the demand for fuels in the transportation sector in Kuwait. Furthermore, the estimated models are simulated under various scenarios to assess the possible impacts of alternative pricing-structure options and to forecast future energy demand by the transportation sector, especially for the case of the total removal of fuel price subsidies. The forecasts will provide the policy makers with valuable information upon which they can set effective energy policies.
Road Transportation Demand for Fuel
Road Transportation—Gasoline: The energy consumption in the road transport mode covers both private and commercial vehicles. Private vehicles are assumed to consume mainly motor gasoline, while commercial vehicles are assumed to consume both motor gasoline and diesel fuel. Moreover, medium-weight and heavy vehicles, such as large trucks and buses, also consume diesel fuel.
the type of vehicle chosen depends on its expected use. following the convention of earlier models. Moreover. Since these two decisions are made within the household. Pg. and Pg = the price of gasoline per gallon. The model assumes that the household is a utility-maximizing agent. household data should be utilized for estimating the various components of gasoline demand. These two decisions are likely to be dependent. Qatar.KUWAIT: TRANSPORT-SECTOR DEMAND REVISITED 135 Few studies have estimated the gasoline demand in the Gulf Cooperation Council (GCC) countries—Bahrain. S = total automobiles in the fleet. Most of these studies either have failed to recognize all the ways in which consumers can react to gasoline price changes or have implemented pre-1990s data that did not provide good estimates of prices elasticities. The model presented here is of the investment-utilization type and has its theoretical basis in the household production literature.2 The problem with these models is that they do not identify the relationship between the household decisions on vehicle holdings and on usage. In particular. Pn = the price of new automobiles. YÞ * E ð2Þ where Pg/e = price of gasoline per mile. and E = average fuel economy of the fleet (miles per gallon). conditional on the vehicle choice.4 household demand for gasoline is modeled as the outcome of utility-maximization. The equation for the stock of automobiles per household is given by S=H = g ½Pn. the basic identity for aggregate gasoline demand is given by AG = MS * S * E ð1Þ where MS = miles driven per car. and (iii) the frequency of replacement of old cars with new ones.3 The demand for gasoline in the framework of the household is perceived to depend on joint decision-making behavior regarding (i) the average number of cars per household. Kuwait. at the same time. . (ii) the number of miles driven per car in the household. and Y = real per-capita disposable income. E = miles per gallon or 1/e.1 Some models attempted to estimate the components of gasoline demand using aggregated data. ðS=HÞtÀ1 . Oman. and the United Arab Emirates. which is the outcome of the price of gasoline per gallon divided by the fuel efficiency given in terms of miles per gallon. Saudi Arabia. Y ð3Þ where S/H = stock of automobiles per household where H is the number of households.5 The solution of such a model yields the gasoline demand per automobile (GS = MS * E): GS = g ðPg=e. making a joint decision about these three factors. the use of the vehicle depends on its type while.
the proportions of new car and used car sales. The new car sales per household given by NR=H = f ðPn. lnPg = real price of gasoline per gallon. EN. YÞ ð4Þ where NR/H = new car sales per household. EN. in equation (8) is the weighted average of the technical fuel economy of various types of cars with the interior volume (the size) being the proportion of the corresponding types of cars sold. and used cars. S. Therefore. can be determined as follows: NR=S + UC=S = 1 or S = NR + UC ð9Þ This simply states that adding used cars. The data pertaining to these variables are available except for the average fuel economy of the fleet (E). . over the fleet. Previous studies. UC. UC/S. UC. NR. the household decision to buy a new car is modeled. lnS/H = average number of vehicles per household. i. gives the current stock of automobiles in the fleet. A time series for this variable is constructed by defining the fuel economy of the fleet as the harmonic mean of the fuel economy of the new cars.. and lnPn = real average price of new automobiles.6 The estimated equations in log-linear form are as follow: Gasoline Demand per Automobile : lnGS = b0 + b1 lnPGDP + b2 lnE + b3 lnPg + b4 lnS=H Stock of Automobiles : lnS = b0 + b1 lnPGDP + b2 lnPg + b3 lnS=H New Automobile Sales : lnNR = b0 + b1 lnPGDP + b2 lnPn ð7Þ ð6Þ ð5Þ where lnPGDP = real per-capita disposable income.136 THE JOURNAL OF ENERGY AND DEVELOPMENT Furthermore. and new cars. can be determined by the following equation: NR=S = NR=ðNR + UCÞ and UC=S = UC=ðNR + UCÞ = 1 À NR=S ð10Þ The fuel economy of new cars. and the fuel economy of the last year’s stock. the relationship between the new cars ratio. have assumed a log-linear functional form and some demographic variables have been included. Pg=e. The relationship can be expressed as follows: E = EN:ðNR=SÞ + EtÀ1: ðUC=SÞ ð8Þ Furthermore.e. NR/S.
All the coefficients have the correct signs and are statistically significant.W:) = 2. The Empirical Results for Gasoline Demand: The estimated results. the parameters obtained from the above model are substituted in the identity (1) in order to reach an estimate of the aggregate demand. This is because more efficient cars are expected to consume less energy. the average fuel efficiency. AG. lnS/H. . a time-series data on various types of automobiles sold in Kuwait are not available. is expected to take a negative sign because the larger the number of cars per family. the less the usage of each car. and Arizona. It was assumed in this study that the hot weather condition in Kuwait is similar to those in the southern United States such as Texas. Similarly. the available U.98 Standard error of regression (S. also is expected to take a negative sign. Since the decisions are made jointly. The demand is income inelastic as well. therefore. While the data on the technical fuel economy for the j-th size class of automobiles are available.R:) = 0. lnGS = 1:3434 + 0:035 lnPGDP À 0:9120lnE À 0:0402lnPg À 0:8674ln S=SH ð5:14Þ ð2:14Þ ðÀ7:32Þ ðÀ2:05Þ ðÀ15:3Þ R-square adjusted (R2 Adj:) = 0. data were utilized assuming that the composition of new cars by the interior volume (the size) in Kuwait is approximately comparable to the average of those of the southern United States. The main source of the data utilized was the Annual Statistical Abstract of the Kuwaiti Ministry of Planning.035.02 Durbin-Watson (D. Yet. with a short-run elasticity of about 0. are presented below. Finally. New Mexico. this is not surprising given the fact that the public transit system is not very popular in Kuwait (because of the harsh summer heat) and.KUWAIT: TRANSPORT-SECTOR DEMAND REVISITED EN = X ðENj 3 Nj Þ=NR j 137 ð11Þ where ENj = technical fuel economy for the j-th size class of cars and Nj/NR = ratio of the j size cars sold to total new cars sales. Thus. Income and price are the conventional variables in a typical demand function with the expected sign of income to be positive and of price to be negative.S. for gasoline in the road transport sector. the demand for gasoline by private cars is expected to be price inelastic.E. lnE. number of cars per household.4391 ð12Þ The equation seems to fit the data reasonably well. The coefficient corresponding to the price variable is small. corresponding to the demand for gasoline per car equation. However. the model has been estimated simultaneously using the generalized least squares method and data set for all the variables for the period 1975–2010. Kuwait does not manufacture automobiles but imports all its needs from abroad with technical fuel economy set by the manufacturer.
g. Thus. the demand has a near unit elasticity when it comes to changes in technology. The average number of cars per household is near unit elasticity while the income and the price of new cars are inelastic and relatively small. the utilization of each car declines. The coefficient of the price of new cars variable is negative as expected. as the number of cars per household increases. the data also include diesel consumed in marine uses by fishing boats as disaggregated data are not available for each end use.26. The demand for new cars is also income inelastic in the short run with an elasticity of about 0. In Kuwait. the market is largely dominated by agents’ monopoly power each over certain brands of automobiles. diesel fuel is consumed by commercial and industrial vehicles. Ford.23. All the coefficients have the correct signs and are statistically significant. as is reflected in the average fuel economy of the fleet of automobiles. This mainly reflects the need by the Kuwaiti household for more than one car as each car may be used for different purposes. the real per-capita disposable income (lnPGDP). and heavy-load vehicles. Finally. Honda. i.. The estimated equation corresponding to new car sales (lnNR) is presented below. the size of the coefficient is small. and the average number of vehicles per household (lnS/H). The results corresponding to the household decision regarding car holdings are presented below. These results are in line with earlier findings. gasoline demand per car is inelastic for changes in the average number of cars per household.138 THE JOURNAL OF ENERGY AND DEVELOPMENT This is because the share of expenditure on gasoline accounts for a small percentage of the Kuwaiti household budget. trucks. buses. Road Transportation—Diesel Fuel: Historically. However. All the coefficients have the correct signs and are statistically significant. This may be due to the automobile market structure. The estimated model in log-linear functional form is as follows: lnNR = 12:781 + 0:2565 lnPGDP À 0:2285 lnPn ð13:8Þ ð1:89Þ ðÀ1:86Þ ð14Þ D:W: = 1:671 R Adj: = 0:78 2 S:E:R: = 0:09 The equation seems to fit the data reasonably well.e. Nissan. The consumption of diesel . e. Volvo. GM.. the demand for new cars is price inelastic in the short run with an elasticity of 0. the real price of new cars (lnPn). etc. Toyota. However. Mercedes.7 Furthermore. lnS = 13:5873 + 0:0187 lnPGDP À 0:1887 lnPn + 0:9673 lnS=SH ð5:15Þ ð2:11Þ ðÀ1:92Þ ð18:4Þ ð13Þ R2 Adj: = 0:98 S:E:R: = 0:02 D:W: = 2:310 The equation fits the data reasonably well. it has a negative sign indicative of the fact that. However. which means that the demand for new cars is inelastic with respect to changes in their real prices. The stock of cars (S) equation is modeled as a function of the lagged dependent variable.
Second. The estimated equations are as follow: lnDAV = À3:253 + 1:0375 lnAIR À 0:09191 lnPav ðÀ1:82Þ ð2:58Þ ðÀ2:03Þ ð16Þ D:W: = 2:1397 ð17Þ D:W: = 2:1029 R2 Adj: = 0:83 ð25:16Þ ð1:65Þ S:E:R: = 0:10 ðÀ1:97Þ lnAIR = 10:549 + 0:0602 lnNPAIR À 0:2339 lnPair R Adj: = 0:72 2 S:E:R: = 0:08 .29. and the real price of aviation fuel (lnPav). First. the demand is income inelastic in the short run but perfectly elastic in the long run. which is higher than perfect elasticity.20 for the short-run elasticity and about 1.KUWAIT: TRANSPORT-SECTOR DEMAND REVISITED 139 fuel in the road and marine sub-sector (lnDS) is modeled as a function of real GDP generated by the commercial and the non-oil industrial sectors (lnRGDP). which is set by the international market. The results give about 0. Income and price variables are the usual variables that obviously belong to a demand function. The use of a lagged variable makes it a partial adjustment type model reflecting the fact that demand for diesel is a derived demand by the vehicles and other diesel-using equipment.04 for the long run. is modeled as a function of the number of flights landed at Kuwait Airport (lnAIR). the size of the coefficient is small. the demand for aviation fuels. Real per-capita disposable income also was used but was found insignificant and therefore was dropped from the estimated equation. (lnDAV). Thus. Furthermore. real price of diesel (lnPd). with an elasticity of only 0. This means that the demand for diesel cannot adjust instantly in response to a change in the explanatory variable. Air Transportation Model The consumption of aviation fuel is modeled as a system of equations. The two equations were estimated simultaneously using the generalized least squares method of estimation. The coefficient on the price variable is negative as expected. The long-run price elasticity of demand for diesel is about 1. However. the number of flights (lnAIR) is modeled as a function of the number of passengers (lnNPAIR) and an index representing the changes in the price of airline travel (lnPair). The estimated equation is as follows: lnDS = 0:1715 + 0:2051 lnRGDP À 0:0196 lnPd + 0:7683 lnDStÀ1 ð1:638Þ ð2:47Þ ðÀ2:05Þ ð18:05Þ ð15Þ R2 Adj: = 0:92 S:E:R: = 0:02 D:W: = 2:223 The equation seems to fit the data reasonably well. All the coefficients have the correct signs and are statistically significant except for the intercept term.02. the demand for diesel is price inelastic in the short run. and the lagged dependent variable.
However. an annual growth rate of 4 percent for the total population. meanwhile. An annual inflation rate of about 2 percent. A simple set of assumptions is utilized to measure the changes in the key exogenous variables with no changes in current domestic oil products’ prices. An annual growth rate of 2 percent for the real gross domestic product (GDP). the base-line scenario represents the situation when the current conditions—the status quo—continue. which is in line with historical rates. Three scenarios were utilized to solicit the models’ response to long-run changes in the key policy variables. An annual growth rate of 3.10 3. The four scenarios follow. and.9 This growth rate is remarkably low when compared with the 1990s. The assumptions are as follows. For the most part. but with conservative economic rates of growth. All current domestic nominal oil products prices to remain constant throughout the forecast period. geometric growth rates).12 6. which is adopted by the International Energy Agency for the Middle East and Gulf region. An improvement in technical fuel efficiency of automobiles of 1 percent annually. it is more than perfect elasticity with respect to the number of flights landed at Kuwait Airport. 4. These rates also are adopted by the Five-Year Economic Development Plan of the High Planning Council. i. which is adopted by the International Energy Agency for the Gulf region. The demand for aviation fuel is inelastic with respect to its own price in the short run.8 The ex-ante projection simulation covers the period 2010–2020.e. 1. The coefficients on the price variables are negative in both equations. 1. The models are simulated under different assumptions to evaluate their sensitivity to a variety of pricing policy options. The Simulation of the Model The ex-ante projection simulation of the model’s endogenous variables beyond the estimation period is the concern of this section. All other exogenous variables are assumed to grow at their historical growth rates (1975–2010.11 5. the demand for aviation fuel is more responsive to changes in the number of flights—the activity level—than the changes in the price of fuel. All the coefficients have the correct signs and are statistically significant.140 THE JOURNAL OF ENERGY AND DEVELOPMENT The system of equations seems to fit the data reasonably well.5 percent for the Kuwaiti population. It also gives long-run projections of existing conditions regarding transport-sector domestic consumption of oil products. . which is adopted by the Five-Year Economic Development Plan of the High Planning Council. The Base-Line Scenario: The base-line scenario serves as a benchmark for the remaining scenarios and it projects current trends and directions. In other words. 2. it is not lower than historical levels that prevailed during the 1980s..
substantial. The Extreme Scenario: This scenario elicits the model’s response to a de- liberate shock of a 200-percent increase in oil product nominal prices. increase by 100 percent. upward price change for 2010 followed by stabilization throughout the forecast period. Essentially the same set of assumptions that were used for the base-line scenario is utilized. 4. Nevertheless.3 percent. This exercise is timely and very useful in gaining an understanding of the economic consequences associated with the implementation of a full market-based economy. where most of the growth in demand comes from the .. Thus. Meanwhile. The Complete Removal of Fuel Price Subsidies Scenario: The aim of this scenario is to examine the response of the various transport modes to changes in the fuel prices under the assumption of the total removal of energy price subsidies. This mainly is due to the anticipated improvements in technical fuel efficiency embedded in new automobiles. The same set of assumptions implemented for the base-line scenario also is utilized here. the stock of cars also is directly influenced by the improvements in the technical fuel efficiency of new sales of cars as they improve the average fuel economy of the entire fleet. The aim is to remove the subsidies and reflect the international value (opportunity cost) of domestic fuel consumption. The same set of assumptions that was applied to the moderate scenario also is applied to this scenario. It is troublesome to conduct this simulation while the international price for a barrel of oil has exceeded $100 and the gallon of gasoline at the pump in the United States is selling for around four dollars. 3. The Moderate Scenario: This scenario aims at determining consumption when domestic oil product nominal prices double. the growth rate of transportation demand is projected to be around 2.e.KUWAIT: TRANSPORT-SECTOR DEMAND REVISITED 141 2. Simulation Results Results of the Base-Line Scenario: The base-line scenario projects that the demand for fuels by the transportation sector will grow but at slightly lower than historical rates. The major exception is that all domestic nominal oil products’ prices are assumed to increase by 100 percent immediately in 2010 and then remain constant throughout the forecast period. with the exception that all domestic fuel prices are in line with international oil products’ prices at the spot market of Rotterdam. with the only exception that all domestic nominal oil product prices are assumed to upsurge immediately by 200 percent in 2010 and remain constant throughout the forecast period. the simulation path here involves an immediate. in the stock of cars equation. in the gasoline per vehicle equation. For example. which is explicitly modeled in the gasoline demand model. gasoline consumption is directly influenced by the changes in the average fuel economy of the stock of cars. i.
496 32.218 18.750 31.25 –1.399 4.84 (continued) Base-Line Road Gasoline Diesel Air Aviation Fuel Total Moderate Road Gasoline Diesel Air Aviation Fuel Total Extreme Road Gasoline Diesel THE JOURNAL OF ENERGY AND DEVELOPMENT Air Aviation Fuel Total .517 3.246 3.121 24.943 31.741 3.297 29.310 3. 1995-2020 (in million barrels of oil equivalent–mboe) Scenarios 11.246 4.801 21.138 28.490 3.689 17.943 13.399 4.692 3.921 25.884 3.706 21.615 37.310 4.09 –1.478 33.801 21.751 3.832 3.595 3.218 18.219 4.56 2.921 25.832 25.246 13.943 3.370 31.19 –0.98 –1.399 4.36 2.682 3.689 17.153 35.692 3.689 17.25 –0.688 24.218 18.310 4.96 2.688 4.478 21.400 11.490 3.750 31.28 –1.490 3.937 4.27 3.Table 1 142 SIMULATION RESULTS OF TRANSPORT-SECTOR FUEL DEMAND.688 25.400 11.400 21.502 3.179 13.750 3.175 34.921 3.478 4.16 1.801 21.692 3.832 3.344 Mode of Transport 1995 2000 2005 2010 2015 2020 Growth Rate % 3.729 3.833 4.260 3.833 3.198 3.833 3.399 28.
370 3.750 3.295 3.218 18.485 13.16 1.83 –1.943 31.833 3.921 25.400 21.689 17.194 27.32 –1.72 Growth Rate % Road Gasoline Diesel Removal of Subsidies Air Aviation Fuel KUWAIT: TRANSPORT-SECTOR DEMAND REVISITED Total 143 .692 3.Table 1 (continued) SIMULATION RESULTS OF TRANSPORT-SECTOR FUEL DEMAND.399 4.310 4.731 3.277 4. 1995-2020 (in million barrels of oil equivalent–mboe) Scenarios 11.832 3.478 31.617 Mode of Transport 1995 2000 2005 2010 2015 2020 2.801 21.490 3.688 24.246 3.175 34.
1 percent annually while diesel consumption will decline at a rate of –1. the result of this scenario is the most severe among all scenarios.9 mboe from its level in 2010 of about 31. Thus.59 million barrels of oil equivalent (mboe) in 2010 to about 35. there will be little incentive for energy conservation or energy efficiency.4 mboe in 2020. the rate of growth in the transport-sector demand for energy would be reduced significantly from its level in 2010 and would induce consumers to conserve on their consumption of oil products. However. the transport sector’s consumption is lower by about 7 percent and 3 percent than the base-line and the moderate scenarios. Table 1 gives the simulation results for all scenarios. where diesel consumption is projected to decline by –1. a growth rate of about 2. the model predicts that. under the assumption of the baseline scenario. In other words. respectively. However. despite higher fuel prices. if the current fuel price structure continues. Most of the reduction in demand will come from the road transportation mode. if the nominal prices of oil products immediately doubled. if the nominal prices of oil products immediately tripled.6 percent annually.144 THE JOURNAL OF ENERGY AND DEVELOPMENT consumption of gasoline in the road transport mode. Therefore. an annual growth rate of about 1. the oil products’ consumption by the transportation sector will continue growing for years to come. Results of the Complete Removal of Fuel Price Subsidies Scenario: Generally. consumption of diesel is expected to decline as the share of vehicles using diesel fuel is predicted to decline. that will cause the real prices for fuel to decline over time and. . the transportation sector’s consumption will continue to increase from 31. Thus. diesel consumption on the road is projected to decline by about –1. despite the slower growth rate of GDP. Results of the Moderate Scenario: Under the assumptions of this scenario.32 percent annually while aviation fuel is expected to decline by about –1. Results of the Extreme Scenario: Under this scenario.5 mboe. Nevertheless. the rate of growth in the transportation sector demand for fuel would be reduced substantially from its 2010 level. The transportsector consumption is projected to increase in the year 2020 to reach about 34.8 percent. the transport sector’s consumption is lower by about 5 percent and 2 percent than the base-line and the moderate scenarios. an annual growth rate of about 1. the consumption of gasoline on the road alone is predicted to grow by about 3.3 percent annually. the transport-sector consumption is projected to increase in the year 2020 to reach about 34.2 percent annually. Meanwhile.3 annually.7 percent.5 mboe. meanwhile. Most of the reduction in demand will come from the road transportation mode.3 mboe from its level in 2010 of about 31. respectively.
it has a negative sign indicative of the fact that. the demand for aviation fuel shows more than perfect elasticity with respect to the number of flights landed.3 percent by the year 2020. in the long run. baseline scenario).KUWAIT: TRANSPORT-SECTOR DEMAND REVISITED Conclusions and Policy Implications 145 The demand for gasoline in road transportation is both price and income inelastic in the short term. in the short run. as the number of cars per household increases. The results of the model simulation based on the four scenarios addresses several important issues. may not be enough to reduce the consumption of fuel by the transportation sector in Kuwait. the affluent living standards. This indicates that the demand for aviation fuel. the demand for oil products by the transportation sector is expected to grow by about 2.20 in the short run and about 1. the growth rate in aggregate energy consumption will definitely be lower than all other scenarios. as the prices of all types of fuels increases substantially to reflect energy prices without the subsidies.e. the extreme. fuel efficiency of the vehicle. Furthermore. gasoline demand per automobile is inelastic for changes in the average number of cars per household. Finally. With nominal oil products’ prices remaining unchanged and inflation and economic growth continuing their expanding trend (i.04 in the long run. and the large stock of automobiles all contribute to excessive fuel consumption patterns. . and the complete removal of subsidies scenarios showed that the transportation sector will observe a decline in the range of 3 percent to 7 percent from the base-line scenario. For the most part. as a derived demand. However. The results also revealed that there are definite long-run advantages to introducing an upward oil products’ price adjustment. The size of the automobile fleet and improvements in technical fuel efficiency will contribute significantly in that direction. the total energy demand will be lower than the base-line scenario by about 7 percent in 2020.e.. The high real per-capita income. is more responsive to changes in the level of activities at Kuwait Airport than the price of aviation fuel.3. In the results of this scenario (under no price subsidies). it is more than perfect elasticity with a value of about 1. as it has been manifested in the average fuel economy of the automobile fleet. fuel prices for the transportation sector gave the highest prices among all the scenarios. Moreover. the demand for diesel fuel in road transportation is also inelastic with respect to own price in the short run while. The moderate. it appears that a lower than historical average economic growth rate. the demand for diesel fuel is income inelastic in the short run but perfectly elastic in the long run. There is a great potential for energy conservation and fuel efficiency gains by the transportation sector. Moreover.. It has an elasticity of 0. However. The demand for aviation fuel also is inelastic with respect to its own price in the short run. Furthermore. the utilization of each car declines. the gasoline demand elasticity approaches unity in response to changes in the technology. i. Furthermore.
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