World Energy Outlook 2006

The own-price elasticity of electricity demand is also very low. For the
WEO regions (see Annex C), long-term price elasticities range from –0.01 to
–0.14. Short-term elasticities are even lower on average. Economic activity is
the main driver of electricity demand in all regions. Average income elasticities
of demand across all end-use sectors, using per-capita GDP as a proxy for
income, range from 0.4 to 1.3. Elasticities are generally highest in non-OECD
regions: on average, their electricity demand rises faster than income. OECD
electricity demand is income-inelastic. This difference reflects saturation effects
in the OECD and catching-up by the poorer developing countries. It also
reflects changes in the structure of economic activities. Heavy electricityintensive
industry has contributed more of the increase in GDP in non-OECD
countries than in the OECD. The energy efficiency of electrical equipment and
appliances in non-OECD countries is also generally lower, boosting electricity
intensity.
The aggregate demand for non-electrical energy for final stationary uses
– which, together with electrical services and transport, makes up final energy
demand – is also price-inelastic. However, demand for different fuels is more
sensitive to changes in relative fuel prices, because of the possibility of substitution
in many end uses. For this reason, a rise in the price of oil products can lead to a
significant amount of switching to natural gas or coal if the prices of those fuels
do not increase. Similarly, the fuel mix in power generation can shift markedly in
response to changes in relative prices, even in the short term, as fuel-switching or
reserve capacity is generally far more extensive than in final sectors.
Explaining Recent Trends in Energy Demand
Trends in global energy demand since the end of the 1990s appear to be
broadly consistent with established relationships between demand on the one
hand and real GDP and prices on the other. The relatively rapid growth in
primary energy demand is almost entirely explained by exceptionally strong
world GDP growth, which peaked at more than 5.3% in 2004 – the highest
annual rate since the 1970s – and remained strong at an estimated 4.3% in
2005. In effect, economic expansion, which partly explains the strength of
energy prices, has overshadowed the adverse impact of higher prices on
demand and more than outweighed it. We estimate that, had prices not risen
since 2002, global primary energy demand would have grown on average by 4.1%
in the two years to 2004 – a mere 0.1 percentage point more than it actually
did – on the assumption that nothing else was different.
Global oil demand has been most affected by higher prices, mainly because oil
prices have risen more than those of other fuels in most regions. Primary oil
demand grew on average by only 1.2% per year between 1998 and 2004,
compared with 2.5% for energy use generally. Strong economic growth
nonetheless drove up oil demand by more than the loss of demand due to
Chapter 11 - The Impact of Higher Energy Prices 289
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© OECD/IEA, 2007