Demand for gasoline and light diesel in Kenya

Abstract

This study focuses on the analysis of the demand for gasoline and light diesel in Kenya. The main objective was to estimate demand functions of the two fuels. The specific objectives were: to identify the main factors influencing their demand; and to find their corresponding elasticities. A log linear econometric model incorporating a geometric distributed lag was estimated using Kenya's time series data from 1964 to 1985. The regression results show that in both cases, the positive income effect dominates the negative price effect. This in form suggests that policies that focus exclusively on prices would not be helpful in restraining growth in demand for these fuels. Additional measures should then be used along with the pricing policy if growth in demand for both the fuels is to be restrained. It was also found that in both cases, the demand adjusts to changes in exogenous factors with a lag. However, the impact of the oil crisis on gasoline consumption turned out to be statistically insignificant. This tends to reinforce the low price elasticity which was obtained. The results further show the existence of substitution between light diesel and gasoline. This suggests that the

pricing policy should be such that it does not allow the price differentials of these two fuels to be very large, otherwise excess demand for the cheaper fuel can ensue