Estimating Elasticity of Transport Fuel Demand in Pakistan

This study investigates the fuel demand elasticities separately for petrol, diesel, and CNG using data from July 2004 to June 2015 for Pakistan. The results show that fuel demands are generally (own and cross price) inelastic in the short run, but are relatively elastic in the long run. Though these short run estimates are in line with the literature, the long run estimates differ considerably. Administrative intervention in fuel pricing, load management in CNG sector and its close to perfect substitutability with petrol is driving this long run price elasticity result. Moreover, income elasticity estimates suggest that petrol is a normal good while diesel and CNG are inferior goods. The estimates remain robust when lag demands of substitutes, the exchange rate, and real fuel prices are separately included in the model. [SBP Working Paper Series No. 96].