Relationship between Natural Gas Consumption and Economic activity at the industrial and domestic sectors in Pakistan

Abstract

Natural gas remains the chief source of energy in Pakistan, estimated to supply approximately 50 percent of total energy needs per annum. However, owing to the rapid increase in energy consumption in recent years due to increased economic activity, the demand of natural gas somewhat surpasses the supply, resulting in a disequilibrium situation. This in turn exerts significant pressures on the industrial as well as the domestic sectors of the country due to inadequate and inconsistent energy supply, which ultimately adversely impacts the per capita availability of energy. Moreover, meeting the near future energy demands of the country poses a major concern to the relevant authorities, which inherently calls for robust measures to efficient utilization of energy sources. This study estimates a demand model of Natural Gas Consumption, its price, the substitute’s price and real GDP for the domestic and the industrial sectors in Pakistan. The study uses annual data for the period 1971–2011, for residential as well as industrial sectors. Unit root testing enables the study to identify stationarity and to free the data of any deterministic trends co-integration is used. Vector Error Correction model is used to establish the direction and the strength of granger causality among the variables along with the long-run and short-run price, income-elasticity and cross-elasticity of demand. To assess the strength of the model diagnostic tests are also conducted. Key findings of the study suggest the presence of unidirectional causality from natural gas consumption to price in the short run for the domestic sector only. Long run price elasticities do not tend to have a significant impact on consumption of natural gas in both the sectors Page | 5 whereas the income does appear to be having a significant impact. Increase in income does cause the demand for natural gas to increase while increase in prices does not decrease the demand of natural gas as expenditure on natural gas is a very small proportion of income. The study recommends that a keen eye on the economic activity must be kept and the production must be adjusted keeping in view the economic activity. This is essential to avoid natural gas shortfalls. Moreover, the government has the cushion of increasing the tariff rates in order to generate more revenue as the natural gas appears to be a necessity, although such measures are not prudent.