Banking development and energy consumption: Evidence from a panel of Middle Eastern countries

Since the late 1990s, much scholarly work has been done in the field of energy economics on the nexus between economic growth and energy consumption. Over the last decade, however, the literature has been recompiled through examining the relationship between energy consumption and a set of variables by referring to the implicit role of economic growth. Based upon finance-energy nexus, this paper attempts to investigate the linkage between the banking development and energy consumption for a panel of seven Middle Eastern countries using panel cointegration and causality techniques over the period 1980-2011. Panel cointegration results show a long-run relationship between energy consumption, income, energy prices and banking sector development indicators. FMOLS (Fully Modified OLS) results reveal that all banking sector indicators affect energy demand positively in the long-run and the impact range falls between 0.169 and 0.396. In terms of causality, there is evidence of a one way short-run relationship from banking expansion to energy consumption while long-run dynamics indicate a bi-directional feedback relationship. These results have some implications for energy and environmental policy. One main implication is that energy conservation policies may be implemented with little or no adverse impact on financial development in the short-run whereas they might become detrimental in the long-run.