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Shaikha Al-Fulaij and Mohammed Hajeeh

**“Energy Price Reforms and Demand for Energy in Kuwait,”
**

Volume 34, Number 1

Copyright 2011

All rights reserved. linear and nonlinear programming. These changes have induced rapid increases in the demand for energy.5 million boe. and statistical methods. the unchecked growth in energy consumption is unsustainable because of its implication for necessary infrastructure and capacity to ensure adequate supply. decision support systems. For instance. Nos. 95 . The author’s research interests are risk assessment. His articles have appeared in such publications as The International Journal of Reliability and Safety. As an oil-based economy. 1 and 2 Copyright Ó 2011 by the International Research Center for Energy and Economic Development (ICEED). earned an undergraduate degree in computer engineering from Kuwait University.ENERGY PRICE REFORMS AND DEMAND FOR ENERGY IN KUWAIT Shaikha Al-Fulaij and Mohammed Hajeeh* ncreasing intensity usage of energy is one of the most striking features of modern life in Kuwait. it I *Shaikha Al-Fulaij. Vol. the overall energy intensity in Kuwait has increased almost consistently and its current level is high compared to other countries in the world. and software development. Although Kuwait is well endowed in hydrocarbon resources. at the Kuwait Institute for Scientific Research (KISR). her research includes reports at KISR journal publications. Ms. which is higher when compared to gross domestic product and population growth rates. between 1975 and 2004 the total annual energy consumption in Kuwait increased more than eightfold. Al-Fulaij’s areas of specialization and interest include database management. Techno-Economic Division. Kuwait has experienced significant structural changes since the beginning of oil exports in 1946. and in information technology. She has participated in several national projects in the area of data analysis and modeling. in operations research (University of Kent). 34. holds both a B. currently the Director of the Techno-Economics Division at KISR.S. object-oriented design.S. The Journal of Energy and Development. a Senior Research Associate in the Quantitative Methods and Modeling Department. averaging a growth rate of 7.4 million barrels of oil equivalent (boe) to 94.D. degree (University of Idaho) in nuclear engineering and a Ph. mathematical modeling and optimization. from 10. In this context. Mohammed Hajeeh.9 percent per annum. As a result. reliability and maintenance scheduling. (Kansas State University) and an M.

89 -3.13 10.88 5.14 6.95 1995-00 3.26 2.14 5.15 12.02 6.75 1985-89 5.60 -1.07 9. While attempts have been made in the past to study energy demand in the country. etc. Table 1 AVERAGE ANNUAL GROWTH RATES FOR ENERGY CONSUMPTION IN KUWAIT BY SECTORS. However.32 2.57 2.37 6. This paper develops and estimates a comprehensive energy demand model for Kuwait.63 Overall 7.54 2000-04 8. 1975-2004 (in percent) Period Total Residential Industrial Transport Mining Commercial Government Electricity 1975-80 33.00 6.23 5.73 7.96 6.91 7.10 7. Table 1 shows that the sharpest increase in total energy consumption occurred between 1975 and 1980 (33 percent per annum).77 2. Typically.14 11. commercial.87 7.33 2. it is imperative to undertake a detailed assessment of energy demand. which are estimated on the basis of annual time series data covering the period from 1975 to 2003. natural gas. industrial.22 2. and during the 1980s and early 1990s the growth rate was relatively slower.37 10.35 .76 7. Energy Consumption Patterns in Kuwait The growth in total as well as sectoral energy consumption has varied widely over the years.) by various sectors of the economy. electricity. energy demand models take account of demand for different types of primary and secondary sources of energy (e.g. The model consists of sector with fuel-specific demand functions.22 2.01 5.36 6. assessing the impact of possible policy options.44 6.6 percent per annum during 2000 to 2004.73 7.89 14.82 1.43 0.43 15.91 13.46 7.62 8.88 1989-95 2.42 5.1 The estimated energy models can be used as tools for evaluating past experiences. Econometric models are constructed and used as a tool for understanding the factors that affect energy demand.21 4.48 17. In view of the importance of ensuring adequate supplies.91 9.62 14.61 22. and transport.03 0. and forecasting future energy demand under various assumptions in energy prices. the growth in energy consumption has increased since 1995 and has reached an average increase rate of 8.40 76.40 7.98 -0. such as residential.03 1980-85 1.. different liquid fuels. most of the studies are either dated or are sector/fuel-specific.96 THE JOURNAL OF ENERGY AND DEVELOPMENT is important to understand the factors that influence energy consumption so that necessary resources can be adopted to manage demand.

Both these fuels are mainly used for generating electricity. 1975-2004 (in percent) .9 million boe in 2004 (table 2). Approximately 40 percent of the primary energy source is natural gas. and industrial urban purposes. commercial. Over the years. During the last two decades (1990-2010). The largest primary sources of energy in Kuwait are thermal. its share in total energy consumption has decreased from 47 percent in 1980 to 37 percent in 2004 (figure 1). The annual consumption of energy in this sector has increased from 1. followed by heavy oil.2 Among all sectors. such as higher incomes and low and fixed energy prices.KUWAIT: PRICE REFORMS AND ENERGY DEMAND 97 The rise in energy consumption has been due to a number of factors. and demographic and urban factors. such as population growth and the use of land for residential. including economic factors.1 million boe in 1975 to 34. heavy oil and crude oil have accounted for around 40 percent of the total energy consumed in the country. including crude oil and natural gas. averaging a growth rate of 12. the industrial sector remains the single largest consumer of energy in Kuwait.62 percent per Figure 1 COMPOSITION OF ENERGY CONSUMED IN KUWAIT BY SECTORS.

4 27.6 6.5 6.5 5.7 1.9 0.4 0.8 2. The energy consumed in this sector has increased almost fourfold since 1975 (from 6.0 9.6 0.8 18.1 5.8 1.2 7.7 2. accounts for around 15 percent of total energy consumed in the country (figure 1).7 4.8 16.0 9.9 0.0 2.4 1.0 0.9 4.7 0.5 3.5 million boe in 2004 (table 2).1 0.9 0.7 11.4 2. The Kuwaiti transportation sector is comprised of three modes of types: road.2 0.0 1.6 0.1 4.0 0. on average.7 34.7 0.0 1.3 7. air.6 13.7 16.3 2.2 0. averaging an annual growth rate of 2 percent per year (table 1).4 0. averaging a growth rate of 7. its share in the total energy consumption has fallen from 66 percent in 1975 to 29 percent in 2004 (figure 1).9 20.0 1.2 2.9 0.98 THE JOURNAL OF ENERGY AND DEVELOPMENT Table 2 SOURCES OF ENERGY CONSUMED IN KUWAIT BY SECTORS.9 0.9 6.8 0. annum (table 1). Residential energy consumption has risen consistently from approximately 2 million boe in 1975 to 15.0 2.8 30.4 0.0 0.3 3.2 6.2 0.0 31.4 percent per annum (table 1).5 1.4 0.4 15. and marine transport.6 3.7 21.4 million boe in 2004).7 1.7 0.0 22.3 19.2 2.3 14.3 26. However.4 42.6 13.8 2.0 1.1 LPG = liquefied petroleum gas.8 0. . it has been dominated by road transportation and.3 1.5 3.5 5.6 0.1 21.7 17.1 0.8 15.3 16.2 1.0 9.8 1.2 8.0 0.8 2.2 22.0 17.3 14.7 0.6 0.1 23.9 0.6 0.6 3.7 3.0 12.0 0.5 23.4 23.0 60.0 0.0 18.3 1.2 12.3 3.3 75.0 0.4 0.0 0.9 6.5 47.5 1.5 12.2 19.6 14.0 7.1 2.9 million boe in 1975 to 27.1 33.9 12.0 0.2 15.8 6.5 4.8 1. over the years.3 16.3 2. 1975-2004 (in million barrels of oil equivalent) 1975 1980 1985 1989 1995 2000 2004 Residential Electricity a LPG Kerosine oil Total energy Industrial Electricity Natural gas Asphalt Total energy Mining & quarrying Natural gas Electricity & water Natural gas Crude oil Heavy oil Gas oil Total energy Transportation Gasoline Diesel Aviation fuel Total energy Commercial Electricity Government Electricity a 1.5 26.2 40.2 10.4 1.5 3.9 12. while the residential sector.0 5.4 0.

For instance.35 percent (table 1). :. in the case of the residential sector.68 million boe in 2004 (table 2). averaging an annual growth rate of 7. Based on theoretical justification and findings in earlier studies. is a significant component of the energy chain. the amount of electricity consumed by a household depends upon the stock of electrical appliances and devices. j = 1. apart from the intensity of use. accounting for less than 3 percent of total energy consumed (figure 1). the size of the residence.19 million boe to 1. accounting for less than 2 percent of the total energy used in the country (figure 1). m. which includes electricity generation and seawater distillation. and the intensity with which the appliances/devices and residence are used. the electricity supply industry. averaging an annual growth rate of 7. Over the years. The Energy Demand Model: Structure. the energy consumed by the power plants has risen from 9. by the purchasing power of the consuming unit. n. . ð1Þ .7 million boe in 2004 (table 2). Over the years.89 percent (table 1).26 million boe to 2. The commercial sector is one of the smallest energy-consuming sectors in Kuwait. Between 1975 and 2004. . the energy demand function is specified to be as follows: Eij = aYij 1 Pij 2 Zij 3 where b b b i = 1.84 million boe in 2004 (table 2). The demand for energy is determined by the primary demand for goods and services that use energy. Specifications. however.48 percent (table 1). the consumption of energy in this sector has increased from 3. prices of other commodities/ services that can fulfill the same needs. Finally. among other factors. averaging an annual growth rate of 7. . and the population. The government sector also is one of the smallest energy-consuming sectors in Kuwait. electricity consumption is affected by changes in appliance stock and residence size as well. . changes in income and prices affect electricity consumption by changing the intensity of use of the current appliance stock and residence.43 percent (table 1). energy consumption in the government sector increased from 0. In the short run.7 million boe in 1975 to 75. :. In the long run. .KUWAIT: PRICE REFORMS AND ENERGY DEMAND 99 The mining and quarrying sector is the only supplier of energy in Kuwait accounting for around 8 to 9 percent of total energy consumed in the country.1 million boe (table 2).61 million boe in 1980 to 12. and Results The actual consumption or demand for a commodity in the country is influenced. Since 1975 energy consumption in the commercial sector has risen from 0. . averaging an annual growth rate of 5. the price of the commodity/service in question.

the different sources of energy considered in the study are electricity.) are intermediate-use consumers. many of the regression were found to suffer from autocorrelation. residential. kerosine oil. such as residential. real average effective price (RAEP).e.5 The other statistics. gasoline. transportation. sectors with fuel-specific demand functions are specified and estimated. explain over 98 percent of the variation in residential electricity consumption in Kuwait. others (such as industry. Based on the energy consumption pattern in the country. In order to estimate the parameters in the energy demand model. The different equations in the model were estimated in double-logarithmic form. While residential and government sectors are end-use consumers. and are discussed individually below. To correct for the consequence.4 Electricity: The explanatory variables included in the regression. industrial. natural gas. nominal gross national product (GNP). an ordinary least-squares (OLS) procedure was used. Yij = level of purchasing power or economic activity for the ith fuel in the jth sector. which use energy as an input in the production process. electricity and water production. b2. dummy variables for some years. a priori it is expected that b1 > 0. commercial. b3 are unknown parameters that need to be estimated. commercial. and government. or first order moving average. and population (POP).. diesel. b1. first order auto-regressive. i. Durbinb b . were included in the regression to take into account the disruption in the economy due to the Iraqi invasion of August 1990 and subsequent occupation. particularly 1990 and 1991. A total of seven sectors are considered in the analysis. namely.e. government. The estimated demand functions are discussed as follow. Energy consumers are generally categorized into different groups. Finally. and b3 > 0. in the case of any demand function. Residential Sector: The residential sector is an end-user of energy and consumes energy in different forms such as electricity. AR(1). The estimated sector with fuel-specific demand functions are reported in table 3. and a. terms were added to the regression. i. mining and quarrying. b2 < 0. LPG. Zij 3 = vector of other explanatory variables for the ith fuel in the jth sector. liquefied petroleum gas (LPG). Pij 2 = price of the ith fuel in the jth sector. etc. which is consistent with the consumers’ optimization behavior. Typically.3 In the preliminary estimation. heavy oil. and crude oil. and kerosine oil. as shown in table 3. transportation. industrial.. MA(1). In order to study the demand for energy in Kuwait and examine factors that influence its consumption of energy. and transport.100 THE JOURNAL OF ENERGY AND DEVELOPMENT Eij = demand for the ith fuel in the jth sector.

AR (1) = first order auto-regression.56 0.18 0.56) (-5.88) 0.82) 6.05 396.21) -0.13 (1.57 (-11. other fuels in million barrels of oil equivalent) Residential Variable Ln(GNP) Ln(Price) Ln(POP) Ln (GDPM) Ln(GDPC) Ln(PSWB) D89 D90 D91 D92 D95 b MA(1) AR(1) b 101 Industrial Kerosine Oil -0.69 0.08 (-.10 51.05) LPG a 0.77 (-11.76 -0.55 0.05) 1. The magnitude of the estimated coefficients indicates the impacts of the explanatory .63 Intercept R b DW b SER F-statistics 2 -20.99 1.70) 0.06 7.98 (5.42) 0.10 0.42 (3.09) 0.85 0.34 (1.73 9.96 (-6.78 (8.05) 0.06 548.99) -0.12 (-1.64) 0.27 (-2.20) -0.38 (-5.28) 0.07 (9.KUWAIT: PRICE REFORMS AND ENERGY DEMAND Table 3 ESTIMATED SECTOR WITH FUEL-SPECIFIC DEMAND FUNCTION (electricity in kilowatt-hours.63 (5.37 0. also indicate a good estimated demand function.26 (9.98 1.99 0.64 (3. a Watson (D. SER = standard error of regression.93) 0.28) -0.34 (4. MA (1) = first order moving average.81 (-8.13) (-13.34 (7.81 (10.43) -1.25 (-6.23 47.31) 7.68) 0.31 (3.79 (5.72 (3.52 0.47) 0.95 (17.89) 0.10) -0.41 (-3.51 (-25.23) 1.64) 0.06) Electricity Natural gas Commercial Government Electricity Electricity Electricity 0.55) -0. c Includes quarrying.13) 0.).77) 0.98 1.91 1.09 373.52 -1.07 (continued) LPG = Liquefied petroleum gas b DW = Durbin-Watson statistics.20 (-2. standard error of regression (SER).50 -11. All the explanatory variables have anticipated signs and are statistically significant at a 99-percent or more confidence level.11 (1.61) -0.32) 0.76) -1.19 (2.92 (8.92 1.10 (-2. and F-statistics.09 361.99 2.18 (1.16) 0.10 173.56) 0.11) 0.W.96 (42.96 2.60) 5.

95 (46.39 (-2.91 (6.40) -8.21 (-5.72) 0.35 40.65 (4.69 1.47 (-1.01 (-0.83 2.88 (-4.28) 0.59 (-3.04) 0.19 90.21) 0.24) 0.02 (-0.15 (1.19) 10.16) -0.66) Natural Gas -2.41 0.75 0.29 (-1.37) 0.45 0.16 (2. As is evident from the estimated regression.82 -6.50 (3.95 1.86 (-3.69 (3.91 1.48) -0.67) -2.87 (-7.95) 0.82) -0.34 17.77 0.13 44.97) -0.91 1.25) 0.40 0.16 (1.86) 0.57) 1.65) -2.20) 0.36 (-3.82 0.31 0.53 (4.63 (-0.63) -0.30) -0.37) 0.08 106.66) 0.83) -2.03 Intercept R a DW a SER F-statistics 2 4. As the regressions are estimated in double-logarithmic form.52 (-2.38 (3.46) -0.59) -0.27 (3.56 (2.94 0.65 (3.97 1.49 (3.45 (0.18) -2. the impact of income and .53) 2.91) Diesel Oil 0.94 (14.102 THE JOURNAL OF ENERGY AND DEVELOPMENT Table 3 (continued) ESTIMATED SECTOR WITH FUEL-SPECIFIC DEMAND FUNCTION Transport Sector Mining c Electricity & Water Production Natural Gas Crude Oil Heavy Oil Variable Ln(GNP) Ln (Price) Ln(CAR) Ln(PASS) Ln(COP) Ln(TEG) Ln (NGCEW(-1)) Ln(WP) Ln (COCEW(-1)) D89 D90 D91 D92 D95 MA(1) a Gasoline 0.20) -1. the estimated coefficients are interpreted as demand elasticities.04) 0.48 variables on residential electricity consumption.04 (-5.11 (1.16 22.32 (-3.80) -5.38 (-2.50 (3.14 0.05) 0.13 (-0.91 16.59 (5.83 1.13 0.87 (-4.74) 0.36 1.00 (7.14) Aviation Fuel 0.08 (5.01) -2.80) -0.63) 0.

Liquefied Petroleum Gas (LPG): The explanatory variables included in the regression—relative price of LPG (defined as the ratio of the nominal price of LPG to the CPI). nominal gross national product (GNP). The sign of the estimated coefficient with respect to income level (GNP) is negative and is statistically significant at a 95-percent confidence level. the insignificance of the price variable suggests that government policy on LPG pricing will not be effective in managing consumption of LPG in the residential sector. The signs of the estimated coefficients with respect . a negative sign and is statistically significant at a 95-percent confidence level. As is evident from the estimated regression. this implies that the residential electricity demand in Kuwait is inelastic with respect to changes in income and price but is highly sensitive (or elastic) to changes in population. more clean and effective sources of fuel for cooking are available. All the explanatory variables have the anticipated signs. The other statistics (Durbin-Watson. which has been used as a proxy to capture the impact of the airconditioning load. and F-statistic) also indicate a solidly estimated demand function. The other statistics (DurbinWatson. respectively) and that of population is greater than unity (1. the impact of income and price variables on LPG consumption is relatively small and that of the population is relatively large. standard error of regression. this is not surprising. Overall.81). as shown in table 3—relative price of kerosine oil (defined as the ratio of the nominal price of kerosine oil to CPI). Given that other.07). and F-statistics) are indicative of a well-estimated demand function.25. is relatively large.12. with the exception of the relative LPG price. and that of population. The estimated coefficients of income and price variables are less than unity (0. The estimated coefficients of income and price variables are less than unity (0. The coefficient with respect to the relative kerosine price had. Kerosine Oil: The explanatory variables included in the regression. which suggests that kerosine oil is an inferior good. respectively) and that of population is greater than unity (1.42 and -0. The significance of the relative price variable suggests that electricity tariff policy can be effective in managing consumption of electricity in the residential sector. and are statistically significant at an 85-percent or more confidence level. and the dummy variables for the years 1990 and 1991—explain around 92 percent of the variation in residential kerosine consumption in Kuwait. population (POP). standard error of regression. nominal gross national product (GNP). which implies that LPG demand in Kuwait is inelastic with respect to changes in income and price but is sensitive (or elastic) to changes in population.KUWAIT: PRICE REFORMS AND ENERGY DEMAND 103 price variables on residential electricity consumption is relatively small. as anticipated.13 and -0. The signs of the estimated coefficients with respect to the dummy variables and their statistical significance suggest that the Iraqi invasion of August 1990 and subsequent occupation adversely affected LPG consumption in Kuwait by disrupting the economic activities in the country. and dummy variables for the years 1990 and 1991—explain over 99 percent of the variation in residential LPG consumption in Kuwait.

with the exception of relative natural gas price. and F-statistics) also indicate a well-estimated demand function. respectively). and the dummy variable for the year 1991—account for approximately 91 percent of the variation in industrial natural gas consumption in Kuwait. The significance of the price variable suggests that the government’s policy on kerosine prices can be effective in managing consumption of kerosine in the residential sector. which is less than unity (0. Industrial Sector: The industrial demand for energy (natural gas and electricity) is a derived demand. the level of economic activity and the price of energy determine the amount of energy consumed by industrial firms. the impact of income and price variables on kerosine consumption is relatively small. Natural Gas: The explanatory variables included in the regression. the evidence suggests that the government’s electricity tariff policy will not be effective in managing demand for electricity by the industrial sector. The other statistics (Durbin-Watson. The coefficient with respect to sectoral valueadded has the anticipated positive sign and is statistically significant at more than a 99-percent confidence level. The estimated coefficients of income and price variables are less than unity (-0.72). The magnitude of the estimated coefficient with respect to sectoral value-added shows the impact of sectoral value-added on industrial natural gas consumption. which does not conform to the theory. The other statistics (Durbin-Watson.104 THE JOURNAL OF ENERGY AND DEVELOPMENT to the dummy variables and their statistical significance show that the Iraqi invasion of August 1990 and subsequent occupation had adversely affected residential kerosene consumption in Kuwait by disrupting the economic activities in the country. In general. The magnitude of the estimated coefficient indicates the impact of sectoral value-added on industrial electricity consumption is relatively small. SER.34) which implies that industrial electricity demand in Kuwait is inelastic with respect to changes in output. All the explanatory variables have the anticipated signs and. nominal manufacturing value-added (GDPM).200 and -0. This implies that industrial natural gas demand in Kuwait is inelastic with respect to changes in . as an input into the production process. The estimated coefficient with respect to the price of electricity is positive and statistically significant. as shown in table 3— the relative natural gas price (defined as the ratio of the nominal natural gas price to the CPI). are statistically significant at a 99percent confidence level. which implies that kerosine demand in Kuwait is an inferior good and inelastic with respect to changes in income and price. Overall. SER. The estimated industrial demand for electricity and natural gas are discussed below. As is evident from the estimated regression. and F-statistics) are indicative of a solidly estimated demand function.095. less than unity (0.6 Electricity: The explanatory variables included in the regression—real average effective price (RAEP) and nominal manufacturing value-added (GDPM)— usually explain around 95 percent of the variation in industrial electricity consumption in Kuwait.

Accordingly. respectively. primarily through electricity.11. The explanatory variables included in the regression—size of the public sector as approximated by the public sector wagebill (PSWB) and population (POP)—are accountable for approximately 98 percent of the variation in government electricity consumption in Kuwait. The magnitudes of the estimated coefficients—output and price variables are less than unity (0. The sign and statistical significance of the dummy variable indicates. However. The sign and statistical significance of the dummy variable suggest that the Iraqi invasion and occupation adversely affected demand for natural gas in the industrial sector by disrupting the country’s industrial activity.18 and 0. Commercial Sector: The commercial sector is an end-user of energy via electricity. The magnitude of the estimated coefficients indicates that a 1-percent increase in the public sector wagebill and population will increase government electricity demand by 0. Thus.18 percent and 0. nominal value-added of the commercial activities (GDPC). once again. and F-statistics) show a well-estimated demand function.11 percent.78 percent and 0. An increase of 1 percent in output and electricity price is expected to increase commercial electricity demand by 0. The explanatory variables included in the regression—real average effective price (RAEP). that the Iraqi invasion negatively affected electricity consumption in the commercial sector as would be expected. All the explanatory variables have the expected positive signs and are statistically significant at a 99-percent confidence level. and F-statistics) indicate a solid estimated demand function. the sign of the estimated coefficient with respect to the electricity price variable is positive. The other statistics (Durbin-Watson. which does not conform with the theoretical suppositions. The sign and statistical significance of the dummy variable suggests that the Iraqi invasion and occupation adversely affected the government’s consumption of electricity. the scale of operation of the government influences its demand for electricity. the evidence suggests that the government’s natural gas price policy would not be effective in managing demand for natural gas in the industrial sector. This sector’s demand for energy is a derived demand and is influenced by the level of economic activity in the sector and the electricity price. . Overall. Government Sector: The Government sector is an end-user of energy. Transportation Sector: In the transportation sector. SER. and the dummy variable for year 1991—explain 99 percent of the variation in Kuwaiti commercial electricity consumption. respectively. All the explanatory variables are statistically significant at a 90-percent or more confidence level.KUWAIT: PRICE REFORMS AND ENERGY DEMAND 105 industrial output levels. SER.98 percent. the main factors that determine energy consumption are the scale of operation and the price of fuel.7 The other statistics (Durbin-Watson. respectively) —implying that the commercial sector electricity demand in Kuwait is inelastic with respect to changes in output and electricity price.

SER.53. Overall. number of passengers (PASS). and the relative price of gasoline.65 and -0. Overall. SER. the evidence suggests that the diesel price cannot be used as an effective policy instrument for managing the demand for diesel in the country. and F-statistics) suggest a well-estimated demand function. as shown in table 3—the nominal income (GNP).16. Not surprisingly. diesel. The other statistics (Durbin-Watson. the other explanatory variables have the anticipated signs.50. indicating that diesel demand in the Kuwaiti transportation sector is inelastic with respect to changes in the levels of income and the relative price of diesel. the evidence suggests that the gasoline price cannot be used as an effective policy instrument by the government to manage the demand for gasoline in the country. explain approximately 97 percent of the variation in gasoline consumption in Kuwait’s transportation sector. The other statistics (Durbin-Watson. Except for the relative price. and 0. nominal income (GNP). All the explanatory variables have the anticipated signs . for income level and relative price). and dummy variables for the years 1990 and 1991. Gasoline: The explanatory variables included in the regression. respectively). The signs and statistical significance of the dummy variables suggest that the Iraqi invasion and occupation adversely affected demand for diesel in the transportation sector. i. all the estimated coefficients are statistically significant at a minimum of a 95-percent confidence level. are statistically significant at the 99-percent confidence level. and the dummy variables for the years 1990 and 1991—account for approximately 83 percent of the variation in aviation fuel consumption in the transportation sector in Kuwait.01. Diesel Oil: The explanatory variables included in the regression. registered cars.e. SER. the number of cars. relative gasoline price (defined as the ratio of the nominal gasoline price and CPI).. and the dummy variables for the years 1990 and 1991—can account for approximately 91 percent of the variation in diesel consumption in Kuwait’s transportation sector. 0. and F-statistics) demonstrate a solidly estimated demand function. and relative price. with the exception of the relative diesel price. All of the estimated coefficients are less than unity (0. Aviation Fuel: The explanatory variables included in the regression—nominal income (GNP). All the estimated coefficients are less than unity (0. and F-statistics) also indicate a solidly estimated demand function. The magnitudes of the estimated coefficients demonstrate the impacts of the explanatory variable gasoline consumption. the relative diesel price (defined as the ratio of the price of diesel to CPI).106 THE JOURNAL OF ENERGY AND DEVELOPMENT for each fuel type (gasoline. the signs and statistical significance of the dummy variables suggest that the Iraqi invasion and occupation adversely affected demand for gasoline in the transportation sector. This implies that gasoline demand in the transportation sector of Kuwait is inelastic with respect to changes in the levels of income. All the explanatory variables have the anticipated signs and. However. The other statistics (Durbin-Watson. number of registered cars (CAR). for income level. respectively. and aviation fuel) separate demand functions are discussed.

Each fuel type and the estimated fuel-specific demand functions are discussed next. Natural Gas: The explanatory variables included in the regression. total water consumption (WC). as an input into the production process. The explanatory variables included in the regression—crude oil production (COP) and the dummy variables for the years 1991 and 1992—explain 95 percent of the variation in natural gas consumption in the mining and quarrying sector in Kuwait. the level of economic activity and the price of energy determine the amount of energy consumed by the mining sector. The other statistics (Durbin-Watson. In addition. The sign and statistical significance of the dummy variables indicates that the Iraqi invasion/occupation adversely affected demand for natural gas in the mining and quarrying sector. Crude Oil: The explanatory variables included in the regression—total electricity consumption (TEC). for income level and number of passengers). respectively. and F-statistics) are indicative of a well-estimated demand function. which indicates that demand for aviation fuel in the transportation sector in Kuwait is inelastic with respect to changes in the levels of income and the number of passengers. The estimated coefficient with respect to crude oil production has the expected positive sign and is statistically significant at a 99-percent confidence level. and heavy oil. NGCEW(-1). SER. the lagged dependent variable. and F-statistics) are indicative of a solidly estimated demand function. The signs and statistical significance of the dummy variables suggest that the Iraq invasion and occupation adversely affected demand for aviation fuel in the transportation sector. SER.KUWAIT: PRICE REFORMS AND ENERGY DEMAND 107 and are statistically significant at a minimum of a 90-percent confidence level. and the dummy variables for the years 1990 and 1991—explain 69 percent of the variation in natural gas consumption in the electricity water sector in Kuwait.56 and 0. Electricity and Water Production Sector: For electricity generation and water desalination three different types of fuel have been used: natural gas. all of the estimated coefficients are less than unity (0. crude oil. The estimated coefficient with respect to total electricity consumption has the expected positive sign but is statistically insignificant. lagged dependent variable . Mining and Quarrying Sector: The mining and quarrying sector demand for energy (natural gas) is a derived demand. In general. The significance of the lagged dependent variable indicates that natural gas consumption in the electricity and water sector follows a long-run adjustment process. as shown in table 3—total electricity consumption (TEC). The other statistics (Durbin-Watson. The sign and statistical significance of the dummy variables indicate that the Iraqi invasion/occupation negatively affected demand for natural gas in the mining and quarrying sector.16. relative price of crude oil (defined as the ratio of the nominal international price of crude oil to the nominal international price of natural gas).

an energy demand model has been formulated and estimated. All together. . commercial. which are estimated on the basis of annual time series data covering the period from 1975 to 2004. crude oil. industrial. and electricity and water) and nine different types of fuel (electrical. as expected. and is statistically significant at a 99-percent confidence level.108 THE JOURNAL OF ENERGY AND DEVELOPMENT (COCEW(-1)). For this purpose. suggesting that the consumption of heavy oil in the power plants is sensitive to changes in electricity consumption. The estimated model can be used by policy makers and planners for forecasting energy demand in Kuwait and examining alternative policies (particularly the rationalization of energy prices) and their impact on energy consumption in the country. government. the relative price of crude oil is not found to have any significant impact on crude oil consumption. and dummy variables for the year 1995—explain around 83 percent of the variation in crude oil consumption in the power plants in Kuwait. natural gas. and heavy oil) are considered in the analysis. and F-statistics) suggest a well-estimated demand function. With the exception of the coefficient of water consumption. kerosine oil. SER. LPG. and F-statistics) also indicate a wellestimated demand function. The estimated coefficient with respect to total electricity consumption has a positive sign. The sign and statistical significance of the dummy variables indicates that the Iraqi invasion adversely affected demand for heavy oil in the power plants. The statistical significance of the estimated coefficient with respect to the lagged dependent variable suggests that the crude oil consumption in Kuwaiti power plants follow a long-run adjustment process. SER. mining and quarrying. The estimated model consists of sector with fuel-specific demand functions. the other estimated coefficients had the anticipated signs. The sign and statistical significance of the dummy variables indicates that the Iraqi invasion adversely affected consumption of crude oil in the power plants. gasoline. The other statistics (Durbin-Watson.3 percent. but not all are statistically significant. diesel oil. The other statistics (Durbin-Watson. The magnitude of the estimated coefficients indicates that an increase of 1 percent in the total electricity consumption will increase the demand for heavy oil in the power plants by 1. aviation fuel. While an increase in the total consumption of electricity leads to an increase in crude oil consumption in the power plants. Heavy Oil: The explanatory variables included in the regression. transport. shown in table 3—total electricity consumption (TEC) and dummy variables for the years 1989 and 1990—account for approximately 91 percent of the variation in heavy oil consumption in Kuwait’s power plants. Concluding Remarks This study has examined factors affecting demand for energy in Kuwait. seven different sectors (residential.

the electricity price in Kuwait has remained fixed at 2 fils/kWh since 1966. For the general consumer. 269-91. Kuwait Institute for Scientific Research. pp. Eltony. S. S. Burney. 1987.’’ Report no. the relative electricity price variable (RAEP) was constructed by dividing total revenues from electricity sales by total electricity generated to get the average effective price and the deflating effective price by the consumer price index (CPI). commercial. Al-Shamali. leaving their energy consumption unaffected. pp. pp. ‘‘Demand for Electricity in Kuwait. A. Kuwait. 1999. This is particularly important because. M. N. KISR-7338. industrial units. O. Kuwait Institute for Scientific Research. the air-conditioning load is the main driving factor in the growth of electricity consumption in Kuwait. ‘‘Electricity Demand in Kuwait: An Assessment of Demand Management Policies.e. Al-Fulaij. Al-Qudsi. M. 2006. Evaluation and Validation. January 1995. Burney. Shatti. S. and Ministry of Planning. AlEnezi. ‘‘The Economic Impact of Changing the Sructure of Electricity Pricing in Kuwait. Kuwait. KISR-4999. A. N. ‘‘Demand for Electricity in Kuwait: Estimates of Future Consumption and Capacity Requirements. In the case of other sectors. Hajeeh. electricity tariff) to reduce the level of energy consumption in the residential sector and save resources that would otherwise be spent on building new power stations. 37-44. KISR-8504. Al-Asfoor. Hamada. Burney. Increases in energy prices alone are not likely to reduce energy consumption in the country substantially. ‘‘Electricity Demand in Kuwait’s Residential Sector: Profile and Determinants. This could be because energy prices in the country are low and have remained unchanged for a long time. M. Ministry of Electricity and Water. N. Chishti. and S.’’ OPEC Review. 3-17. N.KUWAIT: PRICE REFORMS AND ENERGY DEMAND 109 The overall conclusions that can be drawn from the findings in this study are that the authorities can use their energy price policy (i. KISR-2346. Kuwait Institute for Scientific Research. S. N. The authorities would need to complement the energy tariff policy with effective implementation of energy conservation and environmental codes for building. NOTES N. Awadh. 2004. S. Girgis.’’ Report no. Al-Mutairi and N. and other business sectors potentially can shift any increases in the cost due to higher energy prices to their consumers. 1997. A.’’ Report no. Hamada. The data needed for the estimation of the demand functions were obtained from publications from the government offices of the Kuwaiti Ministry of Oil. and that the industrial.’’ Report no. Eltony and S. E. Kuwait Institute for Scientific Research. in the case of electricity. the energy price instrument is unlikely to be effective in managing the consumption of energy. ‘‘Energy Demand in Kuwait: A Model for Structural Analysis and Policy Simulations. Kuwait. and S. Kuwait. Al-Fulaij. Al-Fulaij. and S.’’ OPEC Review. Kuwait Institute for Scientific Research. Mohammed.. and S. M. To capture the impact of electricity price on consumption. and automobiles. W. 4 3 2 1 . September 1989. air-conditioning equipment. Al-Qudsi.’’ Report no. Kuwait. KISR-5710.’’ Journal of King Saud University. ‘‘The Sectoral Demand for Electricity in Kuwait. March 1995. ‘‘Kuwait Energy Demand Model: Estimation. Burney.

’’ OPEC Review. pp. A. N. ‘‘Residential Energy Demand: A Case Study of Kuwait.110 THE JOURNAL OF ENERGY AND DEVELOPMENT 5 M. pp. 7 6 . N. A. Eltony and M. March 2007. M. September 2007. ‘‘Industrial Energy Policy: A Case Study of Demand in Kuwait.’’ OPEC Review. 159-68. pp. M. Al-Awadi. 17-26. ‘‘The Commercial Sector Demand for Energy in Kuwait. N. 85-103.’’ OPEC Review. Eltony. Al-Awadi. June 2006. Eltony and M.

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This paper develops and estimates an energy demand model for Kuwait. The model consists of sector-cum-fuel specific demand functions, which are estimated based on annual time series data covering t...

This paper develops and estimates an energy demand model for Kuwait. The model consists of sector-cum-fuel specific demand functions, which are estimated based on annual time series data covering the period from 1975 to 2003. The different sectors considered in the analysis are residential, industrial, commercial, government, transportation, mining and quarrying, and electricity and water production. The different fuels taken into consideration are electricity, liquefied petroleum gas, kerosine oil, natural gas, gasoline, diesel oil, aviation fuel, crude oil, and heavy oil. The main findings of the paper are that authorities can use energy price policy to reduce the level of energy consumption in the country. However, increases in energy prices alone are not likely to reduce energy consumption substantially. From the Journal of Energy and Development, volume 34, number 1, copyright 2011

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