This paper examines the impact of the two energy crises - 1973174 and 1978179 - ... parameters for hydroelectric energy, liquid fuels and solid fuels were ...
Energy demand in Greece The impact of the two energy crises George S. Donatos and George J. Mergos
This paper examines the impact of the two energy crises - 1973174 and 1978179 on energy demand in Greece. Initially some spec$c characteristics of energy consumption patterns befbre andafter 1973 arepresentedand compared. Then demand parameters for hydroelectric energy, liquid fuels and solid fuels were estimated using data for the period 1963-84, and alternative econometric methods (OLS, ZSLS, F/ML) to ensure that estimates do not vary across d@erent estimation methods. Appropriate tests were used to examine whether a structural change in energy demand has occurred following either of the two crises. The results indicate that while consumption patterns may be d@erent due to price and income changes after the crises, the parameters of energy demand in Greece have remained unchanged. Keynwrds: Energy demand; Structural
The two crises in 1973-74 and 1978-79 led to an increase in energy prices, particularly the price of oil, to unprecedented levels. High energy prices led to a reduction of economic activity in many countries with a subsequent reduction in energy demand, although the size of this reduction in energy demand has been questioned. It is believed that structural changes take place in the economy that reduce the dependence of economic activity on oil. In fact, the International Energy Agency predicts that energy consumption in OECD countries will not follow a linear path, but there will be changes in energy demand that will interact with future economic development patterns. In this context, understanding whether the structure of energy demand has changed in response to previous energy prices is important. The impact of the two crises on energy demand and on the economy has been studied for several developed countries (eg Sachs [S]
The
authors
University
are
with
the
Department
of Athens, 8 Pesmazoglou
of
Economics,
Street, Athens 105 59,
Greece. The authors wish to thank Mr K. Papathanasiou. in collecting the data. Final manuscript
received 30 Septcmbcr
Ol40-9883/89/020147-06
lor his assistance
1988.
$03.00 (c‘j 1989 Butterworth
change; Greece
and Nasseh and Elyasiani [6]) and also several developing countries (eg Shin [lo], and Dick et al [2]). The price changes in the international energy market have been transmitted to the Greek energy market because of its heavy dependence (more than 70%) on primary energy from imported oil (Zolotas [ 111, GTC [3] and Samouilidis [9]). The major objective of the energy policy of the country is to ensure adequate energy supplies to the economy using an integrated pricing system of the various energy types, a flexible system of oil use, development of alternative energy sources, rational production of electricity, consideration for use of natural gas, and international cooperation in programmes of economizing energy consumption (CPER [ 1)). The purpose of this paper is to study whether the above policy measures, in the context of Greek energy policy induced by the two energy crises, have had any impact on demand for energy in Greece. The paper presents initially a comparison of energy consumption patterns for the periods before and after the two crises. In addition, a summary presentation of the domestic energy sources is given as background. The statistical analysis follows with estimation of systems of demand and price equations for the three types of primary energy, hydroelectric energy, solid fuels and liquid fuels, using alternative estimation methods. Using
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appropriate tests, the two crises are examined to see whether they have played a significant part in the structure of energy demand in the country. Finally. the conclusions and policy implications are presented.
Energy consumption in Greece before and after the two crises From the energy point of view, it is the period after 1960 that is important for Greece, since at that time the economic development of the country accelerated and large public investment projects, completed in the previous decade, came into operation. The period 1960-73 for Greece was one of rapid growth. GDP increased over the period 1960-73 with an annual growth of 7.6%. The average income elasticity of energy consumption during 1960-73 was 1.7. During 1974-84 GDP increased with an annual growth rate of 2.9% while the average income elasticity of energy consumption declined to 1.3. The decline of the income elasticity after 1974 is attributed mainly to the increase in the price of energy due to the oil price increase and to some smaller extent to policy measures taken to curtail energy consumption. Consumer expenditure for final energy consumption was 7% of GDP in 1973 and increased to 13.5 % of GDP in 1984. It should be noted that the total primary energy requirements of the country decreased from I6 million tons of oil equivalent (mtoe) in 1980 to 15.6 mtoe in 1981, and then increased to 16.7 mtoe in 1983 and 17.5 mtoe in 1984 following the observed GDP fluctuations over this period. The average annual growth rate of final energy consumption was 12.6 % for the period 196&73, while it was only 4.3 % during the period 1974-84. The rapid increase in total energy consumption during the period 1960-73 is probably due to the rapid increase in GDP, but also to the fact that the country started in 1960 from a very low level of energy requirements and low energy prices. The decline in the growth rate of final energy consumption after 1974 may be due to a large extent to the low GDP growth rate but also to the lower income elasticity of energy consumption. During 196&73 the energy intensity in Greece almost doubled, perhaps due to the increased share of the manufacturing sector in GDP and the increase by about 70% of energy intensity in the manufacturing sector. During the same period in developed countries energy intensity followed a declining trend. The contribution of other sectors is smaller despite relatively high increases in energy intensity. For instance, energy intensity increased three times in agriculture and twice in the private sector, whereas transport probably had no impact on energy intensity during this period. After 1974, energy intensity follows an increasing trend with
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the notable exceptions of 1974 and 1980 with an overall increase of about 15.6% altogether between 1974 and 1984, perhaps due to the development needs of the country. The types of primary energy used in Greece are solid fuels of which about 20% is imported, liquid fuels with 90% imported and hydroelectric energy. The total annual rate of growth in supply of primary energy shows the large impact of the two energy crises. In particular, the annual rate of growth of primary energy was + 16.2 % in 1972-73 which dropped to - 6% in 1973-74 turning again to positive values ( + 6%) in 1974-75, dropping again to - 2.8 % in l98&81 and returning to + 4.6% in 1983384. Similar changes are shown in all types of primary energy (see Table 1). The share of hydroelectric energy and solid fuels in total primary energy supply increased from 4.8% and 18.1 % respectively in 1973 to 8. I % and 29.9 % in 1984, while the share of liquid fuels decreased from 77.1 % to 62% respectively. The allocation of final use of energy by type of economic activity was as in Table 2. The domestic energy sources include some oil, brown coal and coal. The present contribution of domestic oil production is very small (about 25000 bbl/day). Domestic oil production, however, is not expected to last beyond I99 I. The stocks of brown coal and peat are about 5 billion tons and 4.5 billion tons respectively. The hydroelectric capacity of the country is 85 billion kWh/year. However, only 58%. 7% and 25 % of the above stocks, respectively, can be directly used.
The above discussion leads to the conclusion that the dependence of the Greek economy on foreign energy sources, besides its heavy foreign exchange burden, would imply serious problems of supply in periods of crises. Energy self-sufficiency increased after 1980 from 18.9 % in 1973 to 40% in 1984 following an increase in domestic production of oil and brown coal. It should be noted, that despite significant efforts, the share of imported energy has declined only slightly, from 75 % in 1972 to 70% in 1984.
Model and data The econometric model consists of a system of two equations, a demand equation and a price equation for each type of primary energy as follows: lnQ, = a,, + ui, InP, + ui2 In x + ui
(1)
InP, = hi, + hi, InQ, + hi, InPA, + vi
(2)
where i = 1,2,3 is hydroelectric energy, liquid fuel and solid fuel respectively, Qi is the quantity of primary energy in IO3 toe, & is the gross domestic product
ENERGY
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Table
I. Changes in energy consumption in Greece,
1963 X4.
Change over the previous year Liquid Hydroelectric
Year
Solid
1961
Table 2. Composition
3.5 17.3 14.6 17.x x.7 - 1.4 -1.x 17.9 17.1 16.1 12.9 13.5 6.7 23.9 17.9 I.8 ~ 7.3 I I.2 - 6.4 IO.1 IO.1 21.8 5.9
15.9 5.6 Il.4 9.3 14.7 20. I 8.9 8.1 4.3 14.0 15.6 19.4 - 9.5 2.5 7.4 5.9 12.6 3.2 I .2 - 6.0 I .o - 2.X I.5
10.9 ‘7.3 - 10.2 6.2 I 15.6 - 1.9 - 26.3 40.9 31.4 - I.7 3.7 - 13.9 3.4 - 14.5 - 6.6 4.2 58.5 20.2 7.4 - 9.3 Il.5 0.6 29.4
1962 I963 I964 I965 I966 I967 I968 I969 1970 1971 1972 1973 1974 1975 1976 1917 1978 I979 19x0 19x1 19x2 1983 1984
Solid 23.2 21.3 22.9 22.9 24.2 73 7 _A._ 19.4 I x.3 19.4 I x.2 IX.7 18.5 IX.1 20.5 24.0 25.9 25.1 21.3 22.4 21.0 23.X 25.1 29.6 29.9
of final use of energy (%).
Manufacturing Transport Household, commercial, TVlA
I974 45.4 23.8 30.x 100.0
1973 42. I 26. I 31.x 100.0
etc
and is expressed in million drs in constant 1970 prices. Pi, for i = 1, is the price index of hydroelectric energy, and for i = 2,3, Divisia indices (with base year 1970) of the prices of liquid fuel and solid fuel. PA 1 is an index of the cost of production of hydroelectric energy whereas PA, and PA, are the wholesale price index with the same base year. In addition, in order to capture dynamic effects, we estimate the dynamic equation (3) instead of Equation (1) which includes the lagged-dependent variable as an explanatory variable lnQi = Cio + cir InP, + Ciz In Y+ lnQi_ 1 + ei
(3)
where i = I, 2, 3 is hydroelectric energy, liquid fuel and solid fuel respectively. Energy consumption data used for the estimation of energy demand equations are time-series data at the country level. Sources of data were the National Accounts and the Bank of Greece (GDP and Wholesale Price Index), and primary data on energy consumption available from the Public Power Corpora-
ENERGY
Composition of energy consumption (%) Hydroelectric Liquid 6.2 70.6 6.1 70.0 7.1 70.0 5.5 71.6 5.3 70.5 9.6 6X.2 8.3 72.3 5.9 75.x 7.4 73.2 8.2 13.6 7.1 14.2 6.5 75.0 4.x 77.1 5.2 74.3 4.2 71.8 3.6 70.5 3.6 71.3 5.2 73.5 5.9 71.7 6.4 72.6 5.9 70.3 6.7 68.2 6.5 63.9 8.1 62.0
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1978 41.6 26.9 31.5 100.0
1979 42.8 26.9 30.3 100.0
198.4 37.7 29.2 33.1 100.0
tion, the National Energy Council and the National Statistical Service. It should be noted that the data on energy consumption and prices were in certain cases incomplete or conflicting (when derived from different sources). To make the data complete and consistent we have used several additional sources as well as consistency checks to increase their reliability. Price indices were derived, when required, as the discrete approximation to the Divisia index (Hulten [4]). The unit used to aggregate the various energy types is the ton of oil equivalent (toe) which is assumed to be equal to 10’ kcal. This is the weighted average of the calorie value of the various products derived from one metric ton of typical crude oil.
Estimation and results The demand and price equations are estimated with alternative statistical methods to ensure consistency of the results. Hence, we used Ordinary Least Squares (OLS), Two Stage Least Squares (2SLS) and Full
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Table 3. The estimated coefficients uf demand and price equations. Hydraulic
power
C InP
InP
tnQ
0.14’ (2.00)
- 3.22 (- I .47) - 0.46’ ( - I X4)
lnp,, R’ Liquid fuels C
tnQ
- 0.06 (-0.19) 0.30
0.40
I .26 (1.15)
(- 12.81)
I”
- 0.10’
( - 5.00)
Solid fuels C
InP
0.99
- 5.92” (-5.19) -0.13’ (- 1.86)
0.89’ (5.90) 0.70
0.99
4.70’ (1.76)
(- 4.65) (-
I .50” (8.82)
- 9.08” 13.35) -0.16* (- 16.00) (-
- 0.35h - 2.69) 0.93
0.90
0.87
1.61’ (17.88) _
0.89’ (3.71) 0.65
6.33 (1.17)
- 0.92 - 1.26) _ - 0.06 -0.15) 0.82
1.26 (1.15) _
(-
- 1.58 1.13)
-0.10 1.43)
I .60” (7.63)
- 5.92 5.19) - 0.97” (- 12.12) (-
- 0.47’ 23.50) _ 0.88’ (5.18)
2.95 (1.19) _ - 0.43’ (-61.42)
1.44” (14.5) _
-O.lgb
(- 2.57)
are /-values.
Information Maximum Likelihood(FIML)estimating the system of Equations (1) and (2), and, subsequently, the system of Equations (3) and (2). Estimation results are shown in Table 3. All the coefficients (in demand equations) have the expected signs. The estimated coefficients have expected signs with the exception of the cost of production in the price equation for hydraulic power and of the wholesale price index in the price equation for solid fuels. These results were consistent for all estimation methods. The explanation of such unexpected signs is probably related to the price policy followed in the Public Power Corporation for hydraulic energy and for solid fuels (both constitute a major part of domestic energy supply). The price and income elasticities of demand for
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- 6.55’
-0.41’ - 2.05)
No/c. The numbers in parentheses “Significant at the 0.01 level. “Significant at the 0.05 level. “Significant at the 0.10 level.
- 0.39b
(- 2.29)
I .49’ (24.83)
InPA R’
(-
1.11)
I .55’ (38.75)
InQ InY
4.23a (3.85)
- 0.47
InPA RZ
1.1 I” (I 1.0)
- 0.04 (-0.12) 0.30
- 7.94”
(- 5.50) _
(InY
-0.71’
(- 10.14)
_
0.94
- 10.20” -0.1
-3.14
(I .07)
I
0.14’ (2.00)
(- 8.26) ( - 2.08)
I .30h (2.50) _
InP
tnQ - 3.34 (-- 1.25)
0.14’ (2.00)
- 0.50’
- 0.46’ ( - 2.09)
0.4
InP
- 0.54h
( - 17.59) InP
tnQ _ 2.28 ( - 0.45) (- 2.25)
tnQ In Y
FIML
2SLS
OLS
liquid fuels and the income elasticity for solid fuels are significant at the 0.01 level in all methods ofestimation. In particular, the estimation with FIML gives estimates of price and income elasticities that are all significant at the 0.01 level for all types of energy. The income elasticity of energy demand is higher than expected for a country in this phase of industrialization. The demand for liquid fuels is inelastic with respect to its price irrespective of estimation method. This is an important observation with significant policy implications. This is probably due to the dependence of certain sectors (manufacturing, transport) on liquid fuels. The demand for hydraulic energy in both OLS and 2SLS estimations shows a poor fit. The reason for the poor fit is that hydraulic energy is used by the Public
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Table 4. The computed short- and long-run demand elasticities. elasticity
Table 5. The computed F-values for the demand equations.
Hydraulic power
Short-run Price - 0.289 (1.34)
Liquid fuels
- 0. I76 (7.52)
1.127 (8.12)
- 0.34
2.20
Liquid fuels
0.27
0.53
1.26
0.34
Solid fuels
- 0.079 (1.04)
0.469 (1.65)
- 0.22
I .32
Solid fuels
2.1
I
I .2x
I.25
1.05
Income I.782 (2.29)
Long-run elasticity Price Income - 0.7 1 4.49
Hydraulic power
Static demand equation t; , F2 2.87 3.31
Dynamic
demand equation
F,
F,
1.24
3.73
NO/P: The numbers in parentheses are !-values.
Power Corporation to cover only peak demand. On the other hand OLS and 2SLS estimation results for solid and for liquid fuels show a rather good fit. It should be noted that correlation has been observed in certain cases and was corrected using an appropriate method. Estimation results using a dynamic specification (not reported) were similar to those of the static model. The short-run price and long-run price and income elasticities are presented in Table 4. Table 4 presents estimates that were obtained using a Cochrane-Orcutt autocorrelation correction procedure, because they were better than those obtained with alternative procedures. The demand equations for liquid and solid fuels have a good fit (R2 is 0.99 and 0.94 respectively) while the demand equation for hydraulic energy has been rather improved compared to the static model (R2 is 0.60 in the dynamic and 0.41 in the static model). All coefficients have expected signs and the coefficients of the lag-dependent variable (I@- ,) are significant at the 0.10 level. In particular for liquid fuels, all coefficients are statistically significant at the 0.01 level. Hence in all three cases analysed, energy demand declines with an increase in unit price and increases with income. Also, changes on the demand lagged one period have a considerable effect on the demand for energy. On the other hand, the long-run effects, as expected, are of a higher magnitude than the short-run effects. Moreover, the values of short-run price and income elasticities, calculated from the dynamic demand equations were very close to the elasticities estimated from the static demand equation. By comparing the price and income elasticities from the static and dynamic models, we can have an idea about the impact of energy crises on the pattern of energy consumption in Greece. For this purpose, we estimated price and income elasticities for the periods 1963-73 and 1963-84 as well as for the period 1963-78. In addition, we estimated the elasticities for the periods 1974-84 and 1979-84. Unfortunately, the estimated coefficients because of the limited number of observations had low t-values and the results are not reported.
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NO/C,: F,. F, arc the computed F-values, respectively. for the first and second energy crisis. F, = 3.24, F, = 3.1 I are the critical values for the F-values for the 0.05 significance level respectively, for the static and dynamic demand equations.
Table 6. The estimated ditTerential intercept coefficients of variables for the demand equations Static demand equation
Dynamic
demand equation
Hydraulic power
d, 0.04 (0.25)
d, 0.38 (2.96)
d, 0.13 (0.58)
d, 0.48 (2.43)
Liquid fuels
0.04 (0.56)
0.02 (0.24)
- 0.04 (0.47)
- 0.03 (0.56)
Solid fuels
0.13 (2.10)
0.07 (1.35)
I
(1.00)
0.06 (0.75)
0.1
-
Nor~ d,, 8, are the estimated differential intercept coefficients of dummy variables D,, D, which correspond to the first and second energy crises. Numbers in parentheses are f-values. ~Is.O.Os = 2.13 and f14.0.05 = 2.14 are the critical values for r-values, respectively. for the static and dynamic equations.
However, the existence of structural change in demand for energy has been tested using appropriate tests. For the purpose of testing for structural change in the demand for energy, the Chow test has been used for the static and dynamic models for the periods (i) 1963-73 and 197484 and (ii) 1963-78 and 1979-84. The test results are shown in Table 5. The results show that no structural change in energy demand is supported by the data. To further test whether one-time shifts of the demand for energy have occurred after the crises we used intercept shifting variables as follows: D, (= 0 for 1963-73; = 1 for 1974-84) which refers to the first energy crises, and D, (= 0 for 1963-78; = 1 for 1979 -84) which refers to the second energy crisis. The appropriate estimation results are shown in Table 6. As the computed F-values and t-values, respectively for the Chow test and the dummy variable test are less than the critical values, the null hypothesis of no structural change could not be rejected in the analysis for the 0.05 significance level, with the exception of hydraulic energy, which seems to be affected positively
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by the second crisis. Taking into account the low share of hydraulic energy in total energy supply
(about 6%) the impact of change on total energy demand behaviour seems rather insignificant. In addition, it should be noted that data after 1980 have some particularities, eg partial reduction in oil stocks in the country, low growth rate, and continuation of measures taken in 1975.
Conclusions in Greece was increasing before annual rate of about 10%. This rate declined to about 4.7% after the 1973 crisis for the period 1973379 and declined even further to 1.5 % during 1979984. On the other hand per capita energy consumption in Greece increased significantly in comparison to other countries of the International Energy Agency [S]. Per capita energy consumption increased during 1979-84 with an average annual rate of 2.5% and an energy intensity of 0.9%. On the other hand energy self-sufficiency had risen from 18.9% in 1973 to 41 % in 1984 while the share of liquid fuels decreased from 77.1 % to 62% respectively. The empirical analysis in this paper has shown that despite apparent changes in energy consumption the structure of energy demand has remained virtually unchanged. For all three types ofenergy used in Greece the empirical results show: (i) energy demand is price inelastic, the price inelasticity of demand for fluid fuels being particularly low; (ii) demand for liquid fuels is income elastic; (iii) dynamic effects are important in energy consumption patterns. The tests for structural change used in both the static and the dynamic models show that there has not been any change in the structure of energy demand after the energy crises of 1973/74 and 1978/79. Several explanations can be offered for this result. First, it is the stage of development of the country and the structure of the economy. Second, it is probably the Energy consumption
low efficiency of the energy sector and the lack of alternative energy sources. It seems that Greece, a country not yet highly industrialized, still with low energy consumption, could not curtail the increasing needs for energy of its economy. Thus, after the crisis, the slow down in energy consumption is related to the slow down of the economy and to a small improvement in efficiency, rather than to changes in the structure of demand. Hence, a focus on a strategy that aims to further improve efficiency for energy saving and to develop new domestic energy sources that may substitute for imported oil is unavoidable.
1973 with an average
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