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An Exploration of Australian Petrol Demand: Unobservable Habits, Irreversibility and Some Updated Estimates

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  • ROBERT V. BREUNIG
  • CAROL GISZ

Abstract

We explore a methodological improvement to the standard dynamic demand model for petrol – a general model which allows for slowly evolving, unobservable habits. If this habit formation model is correct, then standard estimation techniques produce inconsistent estimates. We find price elasticities of –0.13 (short‐run) and –0.20 (long‐run). Importantly, standard techniques are misleading about the precision of elasticity estimates and the confidence interval around the long‐run price elasticity is quite wide. We test for price irreversibility and find, in contrast to the USA, almost no evidence that petrol responds differently to price increases and decreases.

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  • Robert V. Breunig & Carol Gisz, 2009. "An Exploration of Australian Petrol Demand: Unobservable Habits, Irreversibility and Some Updated Estimates," The Economic Record, The Economic Society of Australia, vol. 85(268), pages 73-91, March.
    • Handle: RePEc:bla:ecorec:v:85:y:2009:i:268:p:73-91
    DOI: 10.1111/j.1475-4932.2008.00530.x
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    Cited by:

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    2. David P. Byrne & Nicolas de Roos, 2019. "Learning to Coordinate: A Study in Retail Gasoline," American Economic Review, American Economic Association, vol. 109(2), pages 591-619, February.
    3. Scott, K. Rebecca, 2012. "Rational habits in gasoline demand," Energy Economics, Elsevier, vol. 34(5), pages 1713-1723.
    4. Li, Zheng & Rose, John M. & Hensher, David A., 2010. "Forecasting automobile petrol demand in Australia: An evaluation of empirical models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 44(1), pages 16-38, January.
    5. Lorraine Conway & David Prentice, 2020. "How Much do Households Respond to Electricity Prices? Evidence from Australia and Abroad," Economic Papers, The Economic Society of Australia, vol. 39(3), pages 290-311, September.
    6. Scott, K. Rebecca, 2011. "Demand and Price Volatility: Rational Habits in International Gasoline Demand," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2q87432b, Department of Agricultural & Resource Economics, UC Berkeley.
    7. Valadkhani, Abbas, 2013. "Do petrol prices rise faster than they fall when the market shows significant disequilibria?," Energy Economics, Elsevier, vol. 39(C), pages 66-80.
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    9. Sayed Iftekhar & Sorada Tapsuwan, 2010. "Review of transportation choice research in Australia: Implications for sustainable urban transport design," Natural Resources Forum, Blackwell Publishing, vol. 34(4), pages 255-265, November.
    10. Valadkhani, Abbas, 2013. "Modelling the terminal gate prices of unleaded petrol in Australia," Economic Modelling, Elsevier, vol. 33(C), pages 233-243.
    11. Shaw, Charles, 2020. "Econometric Analysis of Demand for Petrol in India, 1966-2019," MPRA Paper 104797, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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