Analyzing the Impact of Oil Price Volatility on Electricity Demand: The Case of Turkey

Abstract

The effect of volatility on an economy has been widely discussed in previous studies, both theoretically and empirically. However, few studies have considered the effect of volatility on electricity demand. The purpose of this study is to analyze the effect of oil price volatility on electricity demand in Turkey. Annual balanced panel data on provinces of Turkey covering two different time periods, 1990–2001 and 2004–2014, are used. In this context, a dynamic panel data model is estimated using the system generalized method of moments estimation approach. The results show negative short-run effect of oil price volatility on electricity demand for the period 2004–2014. Moreover, although demand for electricity is found to be price inelastic during the period between 1990 and 2001, the results show that it is elastic during the period 2004–2014. This could be due to the electricity market liberalization policies implemented through the enactment of the Electricity Market Law in 2001. In conclusion, to minimize the costs associated with volatility, policy-makers should focus on better management of external supply and demand shocks by fiscal and monetary authorities, and on dissemination of energy efficiency and conservation applications. © 2017, Eurasia Business and Economics Society.