Estimating Oil Product Demand in Indonesia using a Cointegrating Error Correction Model

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Abstract
Indonesia's long oil production history and large population mean that Indonesian oil reserves, per capita, are the lowest in OPEC and that, eventually, Indonesia will become a net oil importer. Policy‐makers want to forestall this day, since oil revenue comprised around a quarter of both the government budget and foreign exchange revenues for the fiscal years 1997/98. To help policy‐makers determine how economic growth and oil‐pricing policy affect the consumption of oil products, we estimate the demand for six oil products and total petroleum consumption, using an error correction‐cointegration approach, and compare it with estimates on a lagged endogenous model using data for 1970–95.

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