The impact of economic complexity on energy demand in OECD countries

Abstract

This paper investigates the role of economic complexity on energy demand using the panel dataset of 25 Organization for Economic Co-operation and Development (OECD) countries from 1978 to 2016. Both real per capita income level and economy-wide real energy price index are critical determinants in energy demand modeling. The battery of the cross-sectional dependency test proposed by Pesaran (2004 and 2007) is used, signaling the presence of cross-sectional dependency in the dataset. Thus, the Westerlund (2007) cointegration test is also used, revealing the long-run relationship between the series. Moreover, the results from using the Augmented Mean Group (AMG) estimations illustrate that real per capita income level positively affects energy demand while real energy price and economic complexity negatively influence on it. From a policy perspective, we suggest increasing technological innovation (i.e., higher economic complexity) will reduce the energy demand. The reduction of massive energy usage may be beneficial for the natural environment's health in the OECD countries.