An assessment of energy substitution possibilites in the Sri Lankan economy
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Date
2001-11-16
Authors
Dissnayake, M.N.
Gunatileka, H.M.
Journal Title
Journal ISSN
Volume Title
Publisher
University of Peradeniya, Peradeniya, Sri Lanka
Abstract
Energy is a very important input in the production process of a country. Sri Lanka imports
its entire requirement of crude oil and oil products. Domestic energy resources consist of only
biomass and hydropower. Higher dependency of an economy on a particular input, especially
when large amount of that input are imported, renders the economy vulnerable to external price
shocks. Sri Lankan energy importation statistics show that the demand for imported energy is
increasing by 9% per annum and neariy 3% of the country's GDP is spent on energy imports.
Therefore, external energy price shocks can have a profound impact on the Sri Lankan economy.
In fact, the current economic slow down in Sri Lanka is partly due the higher energy prices There
are many ways to reduce the dependency of an economy on imported energy. This study explored
one such possibilities: substitution of energy with other inputs.
The objectives of this study were to examine substitution possibilities between energy and
non energv inputs in Sri Lanka and to identify the responsiveness of factor demand to price
changes The specific aim was to estimate the elasticity of substitution for the basic factors of
production in the Sri Lankan economy to check the substitutability among them. In addition, own I
price and cross price elasticities of demand were estimated to examine the price responsiveness of
energy inputs.
The selected factors of production for the analysis were labour, capital and petroleum 1
based energy Data on GDP, quantity of labor, quantity of petroleum energy, amount of capital, 1
price of petroleum, interest rates and wage rates were collected from different secondary sources.
Quarterly data for the period of 1990-1999 were used in the analysis Data limitations did not
allow extension of the data set for the periods before 1990. Factor share equations for labor,
capital and petroleum energy, derived from a Translog production function, were estimated. The
estimation was carried out as a system of equations using Seemingly Unrelated Regression (
method. Price elasticities and elasticities of substitution were calculated using estimated share
equation parameters.
The results reveals that the petroleum energy is price inelastic and it behaves as a
complement with other two inputs Hence, the results imply that, substitution possibilities of both
labor and capital, in place of energy, do not exist given the structure of the economy. Of the two
ways 10 reduce energy dependency, i.e., energy conservation and substitution, these results
suggest that energy conservation is the only possible way to deai with the situation. To achieve
higher efficiency from energy conservation practices, various educational, administrative and fiscal
measures can be used as part of the government policy Results also show that the use of price as
a mechanism to reduce energy consumption will not be an effective reform strategy due to price
inelasticity of energy.
Description
Keywords
Agricultural , Assessment , Enargy , Economy
Citation
Proceedings & abstracts of the Annual Research Sessions 2001,Unviersity of Peradeniya, Peradeniya, Sri Lanka,pp.13