Assessing the Relationship between Oil Prices, Energy Consumption and Macroeconomic Performance in Malaysia: Co-integration and Vector Error Correction Model (VECM) Approach

Abstract

This paper investigates the long run relationship between oil price, energy consumption and macroeconomic\rperformance in Malaysia. The sample period is from (1980-2005) and the time series are subjected to various\rshortcomings such as autocorrelation, multicollinearity problems and host of other problems; data were first tested for their residuals. The results reveal that there is an evidence for a stable long-run relationship between the oil price, employment, economic growth and growth rate of energy consumption and also substantial short run interactions among them. Also, this paper indicates that the changes of world oil prices also affect the total energy consumption in Malaysia but reverse does not hold in Malaysia context. The linkages and causal effects among the oil price, energy consumption and macroeconomic performance have important policy implications on the benefits of energy conservation and regulation of macroeconomic policy. Given the dominant effects of oil price on energy consumption, better response and right mechanism of energy conservation policies should exist to curb the non renewable energy use and to shift extensively to the inter fuel substitution towards indigenous resources, mainly renewable energy. The most important findings here indicated that the growth of energy used has significant impacts on employment growth and present energy conservation policy especially energy saving policy and energy efficiency initiatives has significant impact on economic growth in Malaysia.