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Interfuel and energy-capital complementarity in manufacturing industries

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Abstract

The growing importance of energy in the production process due to factors such as fears of the depletion of cheap oil, drastic fluctuations in unit energy prices, and various exogeneous reasons, has led to many studies introducing aggregate energy as an amorphous entity-factor of production. Presently, (a) the relationship between four fossil fuels (coal, oil, gas, and electricity), and (b) the relationship between aggregate energy and aggregate capital, both in manufacturing industries, are being studied. Of prime interest in the relevant literature is the dichotomy characterizing the energy-capital complementarily/substitutability. In a thorough review of the literature of mostly translogarithmic studies we detect interfuel substitutability in the majority of the industrial sectors. More specifically, oil appears to be a substitute for both coal and electricity; gas is leaning towards substitutability with coal and electricity; oil and gas are substitutes in selected industries only, but are complements in most manufacturing processes; and finally, coal and electricity perform as substitutes in aggregate manufacturing. The [`]obscure' contradiction in the energy-capital relationship is marked. Time-series studies favor complementarity but cross-section research supports the substitutability between the two inputs of production. Despite various reconiliation attempts, the dichotomy in the results remains strong. Some explanations are, the insufficient econometric techniques which yield biased estimates, the omission of other significant factors in the estimation process, time-lags, differences in the measurement of capital, and data heterogeneity.

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