On Fuel Subsidies for Transportation Sector in Kuwait

The aim of this study is to estimate the demand for oil products in the transportation sector in Kuwait using time series data for the period 1975-2005. The results indicate that the demand for motor gasoline is inelastic with respect to price and income in the short and long run. The demand has a short run elasticity approaching unity when it comes to the average fuel economy of the fleet of automobiles, which indicates a rapid response to global changes in the automobiles’ technology. Furthermore, the results reveal that diesel fuel consumption is price and income inelastic in the short run but exceeds unit elasticity in the long run. As for the case of aviation fuel, the demand is inelastic with respect to the price in the short run but it exceeds unit elasticity with respect to the number of flights landed at Kuwait airport, which indicates that the level of activity is more important explanatory variable of the demand for aviation fuel than its own price. The Simulation of the estimated model under various scenarios regarding energy prices revealed that there are definite long run advantages to introducing fuel prices adjustment upward. There is a great potential for energy conservation and fuel efficiency gains in the transportation sector. The moderate, the extreme and the complete removal of subsidies scenarios showed that the transportation sector will observe a decline of in the range of 3 % to 6 % from the baseline scenario. The size of fleet of automobiles and improvements in technical fuel efficiency will contribute significantly in that direction. Finally, for the result under no price subsidies, fuel prices for the transportation sector will be the highest prices among all the scenarios and the total energy demand will be lower than the baseline scenario by about 6 % in 2015.  

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