Petroleum consumption—oil price uncertainty nexus in OECD countries: application of EGARCH models and panel cointegration

Abstract

This paper investigates the effects of oil price uncertainty on petroleum consumption in Organization for Economic Cooperation and Development (OECD) countries. We apply panel unit roots and panel cointegration methods to detect long‐run relationships. Moreover, exponential generalized autoregressive conditional heteroscedasticity models are used to capture the stochastic variation and asymmetries in oil prices by using monthly oil prices data from 1980 to 2008. The result indicates that the coefficients of real oil price and income variables are significant and of expected sign. Furthermore, our empirical results indicate that the effect of oil price uncertainty on petroleum consumption of OECD countries is negative and significant. That is, oil price uncertainty reduces petroleum consumption in OECD countries. Following these results, this paper offers some important and common ways to cope with costs of oil price volatility such as reducing oil price volatility itself, take advantage of hedging, price smoothing, broaden the diversity of energy sources and diminishing the importance of oil consumption.