An Engel Curve for the Direct and Indirect Consumption of Oil

A method of deriving an Engel curve for the direct and indirect household consumption of oil, and hence estimating the income elasticity for the demand for oil, is presented. Comparison with other studies is difficult as they have, in general, relied on time series data. However, studies by Houthakker and Taylor, and by Phlips derive short run income elasticities close to the estimated value of 0.58 obtained in the analysis presented. Two points are emphasized: 1. The income elasticity is a short-run value and therefore indicates a lower bound for the long-run elasticity. 2. Although the study takes account of both the direct and indirect demand for oil, it does pertain to consumer tastes and production technologies current in the early 1960s.