Measuring the Elasticities of Energy Demand in Pakistan: An Econometric Analysis

Understanding the responsiveness of oil demand to changes in price, income, and alternative energy sources is essential for informed energy policy and planning. This study examined oil demand dynamics in Pakistan from 1996 to 2023, analyzing price sensitivity, income effects, and substitution possibilities using the ARDL approach. The results revealed three key insights: oil demand showed high price elasticity (-1.22%), confirming luxury good status of oil; gas demonstrated positive cross-price elasticity (0.90%), indicating substitution potential; and income elasticity (0.16) classified oil as a normal good. Diagnostic tests confirmed model robustness with stable parameters, no autocorrelation, and excellent explanatory power (R²=0.9758). The error correction term (-0.915) indicated rapid annual adjustment (91.5%) to equilibrium shocks. These findings carried critical policy implications. First, Pakistan was advised to reduce oil import dependence by boosting domestic production through incentivized exploration and technology upgrades. Second, improved gas infrastructure, especially in rural areas, could capitalize on the observed substitution effect. Third, the confirmed income-demand relationship necessitated demand management strategies as the economy grew. A comprehensive energy transition roadmap was recommended to prioritize: pricing reforms leveraging oil’s elasticity; accelerated renewable investments (particularly solar and wind); and institutional reforms for better sector governance. The government was urged to adopt a multi-pronged strategy viewing energy security as economic security i.e. enhancing domestic supply, optimizing fuel substitution, and diversifying toward renewables. This approach would address immediate energy crises while building long-term sustainability and positioning Pakistan as a regional model for developing economies facing similar energy challenges