Energy trade efficiency and its determinants: A Malmquist index approach

- There is limited substitution between different energy products.
- Malmquist index approach used to investigate multi-product energy trade efficiency.
- Imperfect substitution between different energy products is taken into account.
- The imperfect substitution significantly weakens the efficiency of aggregate trade.
- Industrialization will create a relatively large shock to trade when substitution is limited.

This paper adopts the Malmquist index approach to investigate multi-product energy trade efficiency and its determinants from an empirical perspective. Using trade statistics of coal, oil and gas of 40 countries over the period of 1995 to 2008, we found that the efficiency of bilateral energy trade ranged between 0.26 and 0.35 when imperfect substitution between different energy products is taken into account. This measure is significantly lower than those obtained from traditional gravity models. It suggests that the ability of cross-product substitution affects trade efficiency improvement which results from regional market integration and related trade policy. The results provide useful insights on predicting the pattern of future energy trade and hence have important implications for relevant countries to prioritize product-specific trade policies.