Determinants of Gasoline and Diesel Demand in Ethiopia

In this paper attempts are made to identify determinants of gasoline and diesel demand in Ethiopia. The study estimates gasoline and diesel demand using time series data starting from 1964/65 to 1999/2000. To determine whether there exists long-run relation between gasoline and diesel demand and its fundamentals, the Johansen procedure of co-integration analysis is used. Accordingly, there exists one unique co-integration relation between gasoline and diesel demand, and its fundamentals. The long-run gasoline demand result shows that price of gasoline, population growth and urbanization are found to be statistically significant while price of diesel (relative price), real income per capita, gasoline using vehicles and real foreign exchange earnings are insignificant. Similarly in the case of diesel demand; price of diesel (own price), price of gasoline (relative price), real income per capita, urbanization and diesel using vehicles are found to be statistically significant while population growth and real foreign exchange are insignificant. In the short-run, price of gasoline and diesel, gasoline and diesel using vehicles are statistically significant. In terms of elasticities, gasoline and diesel prices are inelastic while income is marginally elastic for both demand model. Therefore, diesel is a substitute to gasoline in the long-run and has no effect on both demand in the short-run. Finally, since gasoline and diesel price is inelastic in the short-run, the quantity of gasoline and diesel demand is far less responsive to price changes, while the marginal income elasticity suggesting that gasoline and diesel demand continue growing as income of the society increases. However, the prices are tightly controlled and fixed by the government, and it uses cross subsidization as a deliberate means to influence the pattern of energy demand