THE DETERMINANTS OF OIL DEMAND: EVIDENCE FROM ITALY

The main purpose of this paper is to estimate price and income elasticities of crude oil demand in the Italian economy between 1975 and 2014. The Bound Test is employed as an econometric estimation method. According to Bound Test result, a cointegration relationship has been found between oil consumption, oil prices, and real income. Empirical findings show that the long-run income elasticity and price elasticity of oil demand are statistically insignificant in Italy. In addition, price and income elasticities of oil demand estimated as negative-inelastic and positive-inelastic in the short run, respectively. Thus, crude oil can be defined as a necessity good for Italian consumers over the short term. Also, Error Correction Term (ECT) is estimated to be -1.18. According to ECT, a deviation from the long run equilibrium level of oil demand is corrected about one year later. Italy is an energy dependent country and imports most of it. Since crude oil is necessity, the government should diversify energy sources which are consumed in the entire country and/or undertake policies to increase energy efficiency.