Impact of Petroleum Consumption on Economic Growth in Kenya

Abstract

Purpose: The main objective of the study was to find the relationship between petroleum consumption and economic growth in Kenya. Methodology: A modified Cobb-Douglas production function was used to analyse the relationship between energy consumption and economic growth. In this study, secondary annual time series data covering the period 1980-2009 was used. All variables were expressed in natural logarithms. The data on GDP, population, labor force and private capital and petroleum consumption were collected from the various issues of the annual Kenya Economic surveys and statistical abstracts (1980-2008). Relevant data on petroleum consumption was also obtained from the ministry of Energy. Results: The estimation results of the long-run relationship revealed that the relationship between petroleum consumption and GDP, and private capital and GDP was positive and statistically significant. Estimation of Error-correction model showed that in short run there was a positive and statistically insignificant relationship between GDP and lagged petroleum consumption. Finally, Granger causality tests imply a unidirectional Granger causality running from petroleum consumption to GDP. Unique contribution to theory, practice and policy: Given the long-term positive effects on the economy, the study recommended that an energy growth policy in the petroleum consumption should be adopted in such a way that it stimulates growth in the economy. To encourage petroleum consumption, both supply side and demand side dynamics should be addressed. For instance, the domestic price of petroleum should be reduced to a level that stimulates both household and industry demand. Structural problems such as the lack of proper storage facility that could stabilize prices during petroleum stocks were indeed necessary