Determinants of Kerosene and LPG Demand in Ethiopia
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Date
2007-03
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A.A.U
Abstract
In this paper attempts are made to identify determinants of kerosene and LPG demand in
Ethiopia. The study estimates kerosene and LPG demand using time series data stalting
1964/65 to 2004/05 . To detemline whether there exists long run relation between
kerosene and LPG demand and its detenninants, the johansen procedure of cointegration
analysis used. Accordingly, there exists one unique co-integration relation
between kerosene and LPG demand, and its result shows that the real price of kerosene,
real price of LPG, real per capita income and real foreign exchange eamings are found to
be statistically significant while population growth and level of urbanization are
statistically insignificant. Similarly in the case of LPG demand; real price of LPG (own
price), real price of kerosene (relative price), population growth, level of urbanization
and real foreign exchange earnings are found to be statistically significant while only real
per capita income is statistically insignificant. In the short-run, price of Kerosene, real per
capita income and population growth are statistically significant in kerosene demand and
real price of LPG, real per capita income, population growth are statically significant in
LPG demand. In terms of elasticities, kerosene price and LPG price are elastic and
inelastic, respectively while income is marginally elastic for both fuel demand model. In
the •long run, LPG is a substitute to Kerosene and electricity, other modern energy so urces
are a substitute to LPG ..
finally, in the short run, the government should use direct pricing policy on LPG product
and regulated and pre detennined kerosene pricing policy on kerosene product to
increase its revenue. This kerosene price should be set below LPG price. As the result,
the government can earn more revenue fiom'both products.
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Keywords
Demand, Ethiopia