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Demand elasticity of oil in Barbados

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Abstract

The importation of oil is a significant component of Barbados' imports, rising from 7% of imports in 1998 to over 20% in 2009. This increase has impacted greatly on the level of foreign reserves. As a price-taker, relying entirely on imported oil for our energy needs could prove a continuous drain on the economy. With a view to formulating an appropriate energy policy for Barbados, this paper analyses the demand for oil using monthly data from 1998 to 2009. The paper estimates the elasticities of demand for oil by employing PesAran (2001) single equation cointegration approach and comparing the results with countries that rely heavily on imported oil and whose policy objective are to alter their energy structure to rely less on imported oil. The results show that the demand for oil imports is price inelastic in the long run. The consumption of oil is responsive to past consumption, prices, income, electricity consumption and the number of appliances imported in the short-run. A policy framework to reduce the use of oil for electricity consumption via alternative energy sources should be considered and the taxation of oil imports given its elasticity is a good source of revenue.

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