DEMAND ELASTICITY OF FUEL IN BARBADOS

The importation of fuel is a significant component of Barbados’ import bill, rising from around 7 percent of total imports in 1998 to over 20 percent in 2009. This sharp increase in the demand for energy has impacted greatly on the level of foreign reserves. In addition, as a price-taker, relying entirely on imported oil for the majority of our energy needs could prove a continuous drain on the Barbadian economy. With a view to formulating an appropriate energy policy for Barbados, this paper analyses the demand for fuel in Barbados using monthly data from 1998 to 2009. To develop such a policy, the paper estimates the elasticities of demand for fuel by employing Pesaran et al. (2001) single equation cointegration approach. The results show that the demand for fuel imports is price inelastic in the long run. The consumption of fuel is responsive to past consumption, prices, income and the number of vehicles imported in the shortrun. It is concluded that a policy package including upward fuel price, investment and subsidies by government to encourage alternative energy sources could lead to reduce reliance on fuel and better control of our scarce foreign reserves.