Estimating dynamics of US demand for major fossil fuels

- Long run demand relations among main fossil fuels in the US were analyzed.
- Time series econometrics and SUR estimation were used in the analysis.
- There was low level of substitutability among fossil fuels in the US.
- Lack of substitutability may lead to distortionary impacts of single-fuel directed policy.

Long-run demand relationships among fossil fuels in the United States were investigated using annual data covering 1918 through 2013. Due to the endogeneity problem among the variables of interest, as indicated by the findings from the Granger Causality test, weak exogeneity test, and Directed Acyclic Graphs, the use of the seemingly unrelated regression (SUR) method was deemed appropriate. The SUR model demonstrated that there was low level of substitutability among fossil fuels, but the small magnitude of the estimated coefficient indicates that natural gas, oil, and coal are more properly classified as independent goods than as substitutes of each other within the US market. Income elasticities for all three fossil fuels indicate that they are normal goods. Several external shocks have significant impact on demand for each of the fossil fuels. Slightly lower explanatory power of oil demand equation may be explained with the fact that the model did not include US oil imports although the US economy has been dependent, to some degree, on imported oil.