Shift in demand elasticities, road energy forecast and the persistence profile of shocks

- This study investigates road transport energy demand in Ghana.
- Government tax policies will create higher efficiency gap for diesel than gasoline.
- Government fuel tax policies should be flexible to account for behavioural changes.
- Government tax policies should discriminate between diesel and gasoline fuels.
- Intervention in petroleum pricing has been politically driven.
- We expect dieselization of the economy in the future.

We forecast demand and investigate the shift in price and income elasticities and the persistent profile of shocks for diesel and gasoline fuels in the road transport sector in Ghana using annual data from 1971 to 2011. First, we find that gasoline and diesel demand are both price inelastic in the short- run, but the income elasticity for the former is inelastic and elastic for the latter. There is evidence of a shift in the long-run price and income elasticities after the eighties. We find that these elasticities differ between diesel and gasoline. We show that government decision to withdraw fuel subsidies will increase the energy efficiency gap in the diesel sector more than the gasoline sector. Using the Structural Cointegration VAR, we also show that government intervention in pricing of petroleum products in the road sector seems to be politically and not economically driven. Further, shocks are more persistent for diesel than gasoline. Last, road diesel and gasoline consumption are expected to increase but slow down between 2020 and 2030 with a possible dieselization of the economy. These results have important implications for government fuel tax policy and investment commitment in the road sector.