urbanization and consumption of petroleum products in kenya

Urbanization and consumption of petroleum products in Kenya

Peter K. Kimuyu

Kenya's urban population has been growing at 6% per annum in the last 20 years and is expected to account for 25% of the population in the year 2000. This paper analyses the impact of urbanization on the consumption of seven petroleum products sold in the country, and finds positive urbanization elasticities for all the fuels except illuminating kerosene. LPG, heavy diesel oil and jet fuel are especially urbanization elastic. It is evident, therefore, that the transfer of an increasingly larger proportion of Kenya's population to urban centres has significant im- plications for consumption of petroleum products, and should be taken into consideration in energy planning.

Keywords: Urbanization; Kenya; Petroleum products' demand

Economic growth and development alter the structure of an economy by changing the relative importance of different sectors and spatial population distribution and concentration. Such structural shifts are in turn accompanied by changes in the structure of energy demand arising from changed fuel requirements and use propensities. As secondary and terti- ary activities gradually replace primary production and subsistence activities, use of the more efficient and convenient commercial energy expands. 1 It has been argued and demonstrated that when the impact of fast structural changes experienced by developing countries are netted out, much of the difference in the income elasticities of demand for energy between developing and developed countries is eliminated. 2

Urbanization, a major structural phenomenon re- sponsible for shifting increasingly larger proportions of the population to commercial and administrative centres during development, promotes peculiar energy needs and use tendencies. These include increased reliance on the energy intensive transport

The author is with the Economics Department, University of Nairobi, PO Box 30197, Nairobi, Kenya.

sector propelled by enhanced rural-urban, interur- ban and intraurban travel requirements, provision of public services, and a proliferation of commercial and industrial activities necessary to meet urban needs and wants. Most of the energy needed to fuel urban households, industrial and commercial activities, tends to be biased towards commercial energy services) Urbanization is therefore expected to have a positive impact on commercial energy consumption.

Economic structure and consumption of petroleum products in Kenya

The agricultural sector's contribution to monetary gross domestic product (GDP) in Kenya increased from 15.4% in 1963 to 43% in 1978. 4 Since then, it has been oscillating between 32% and 40%; it was 33% percent in 1990. The contribution from manufacturing increased from 12% in 1963 to 17% in 1972, and subsequently stagnated at 15%. The shares from other major sectors such as transport and trade show a general declining trend, with the transport sector's contribution declining from 12% in 1963 to 9% in 1990. The corresponding figures for trade are 18% and 14% respectively. 5 In other words, the agricultural and manufacturing sectors jointly account for a half of the country's monetary output, with the former accounting for a third. The agricultural sector therefore continues to dominate the Kenyan economy. 6

The proportion of petroleum products sold direct- ly to the agricultural sector declined marginally from 3.9% in 1976 to 3.5% in 1990, while the proportion sold to industrial and commercial activities increased

f rom 23.4% to 24.7%. Those sold through retail pumps increased to 47.2% from 25.5% over the same period. 7 Overall, the index of monetary GDP increased to 322.9 in 1990 from 100 in 1980, while sales of total petroleum products initially declined to 82.1 in 1982 from 100 in 1980, and subsequently increased to 109.5 in 1990. 8 In the last ten years, therefore, monetary GDP increased considerably faster than consumption of petroleum products.

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Urban population in Kenya increased at 7.1% per annum during 1969-78, and at 5% on average during 1979-89. About 20% of the country's population currently live in urban centres, and the proportion is expected to increase to 25% by the year 2000. 9 More than a third of the total urban population is resident in Nairobi, the country's capital city.

R e l a t e d s t u d i e s

Energy literature is replete with studies that demon- strate the existence of a strong relationship between variants of national income and demand for energy. However, there is scant evidence of efforts to empir- ically gauge the impact of changes in the relative importance of different GDP contributing sectors on energy demand.~° The works by Hoffman, Kimuyu, and Jones are examples of the limited effort.~l

Using pooled time series cross-sectional data for selected country groups, Hoffman showed that the impact of structural changes on the demand for energy was significant. The explanatory variables in his analysis included population, income and shares of major sectors in GDP. The elasticities of shares of the manufacturing, transport and electricity sectors were positive and those for agriculture negative. However, the elasticity of the share of transport was insignificant. The estimated elasticities were long term as a result of the cross-sectional dimension of data used, and it is possible that the estimates were grossed up by aggregating data from different countries and fuels.~2

In an attempt to explore the structure of commercial energy demand in Kenya, Kimuyu, following Hoffman, demonstrated that changes in the relative importance of major sectors and urbanization had significant but differential effects on the consumption of different commercial fuels. 13 The sectors considered included agriculture, manufacturing, transport and services, ~4 and the fuels analysed were petroleum products, coal and electric power sold to different categories of consumers. GDP, however, was not included as an explanatory variable, predis- posing the economy-structure fuel models to misspecification. ~5 Annual data for 1963-85 were interpolated exponentially to obtain half-year series which were subsequently applied to the economic structure models. ~6 The study underscored the sig- nificance of energy considerations in development planning, since such planning can alter the relative importance of sectors, and therefore affect energy requirements.

Using 1980 cross-sectional data for some 60 countries, Jones explained energy consumption in terms

of GDP, urbanization, industrial composition, population density and fuel prices. 17 The results showed urbanization elasticities of energy demand ranging from 0.30 to 0.45, with urbanization having a stronger impact on commercial than total energy, including traditional energy.

The present study attempts to shed further light on the impact of urbanization on the consumption of petroleum products, which dominate the commercial energy sector in Kenya. =s In that regard, the study adds to the literature on the relationship between economic structure and energy consumption, and therefore increases our understanding of the structure of energy demand.

M e t h o d o l o g y a n d r e s u l t s

Ordinary least squares were applied on log-linear functions using annual data for 1963-90, in which per capita consumption of different petroleum products were regressed against per capita GDP, percentage of population resident in Nairobi, and percentages of monetary GDP accruing to agriculture and manufacturing respectively. The specific products considered were motor spirit, gasoil, 19 illuminating kerosene, liquefied petroleum gas (LPG), jet fuel, heavy diesel oil and fuel oil, measured in litres per capita. 2°

The estimating equation was

lnFi = lna0 + atlnGDP + a21nURB + a3 A G R + anlnMFG + U

where Fi is per capita consumption of petroleum product i, GDP is per capita GDP, URB is proportion of population in Nairobi, 2~ A G R and MFG are percentages of monetary GDP deriving from agriculture and manufacturing respectively, aj for j = 1, 2 • . . 4 are the relevant elasticities, lna0 is the regres- sion constant, and U is the error term subject to the usual stochastic assumptions. 22

The results are presented in Table 1, and confirm that the structural variables explain the consumption of petroleum products reasonably well, as indicated by the high adjusted coefficients of multiple deter- mination (~2). GDP, urbanization and the contribu- tions of agriculture and manufacturing to monetary GDP jointly account for at least 70% of the varia- tions in petroleum products' consumption in Kenya. Similarly, all the estimated F values are reasonably high; the results can therefore be considered broadly significant, as all the independent variables as a group adequately explain the consumption of petroleum products.

The estimations elicited positive urbanization

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Table 1. Structural elasticities of petroleum products' consumption.

Product GDP Urbanization Motor spirit 0.08 0.983

(2.070) (3.845) Gasoil 0.129 0.986

(2.002) (4.733) Illuminating kerosene 0.409 0.664

(5,517) (2.612) LPG 0.202 1.903

(2.189) (2.601) Jet fuel 0.195 1.479

(8.175) (11.577) Heavy diesel oil 0.124 1.863

(5.971) (5,505) Fuel oil 0.476 0.290

(7.262) (1,969)

Proportion of GDP accruing to Agriculture Manufacturing R 2 F -0.182 0.850 (I.84 36.8

(-2.251) (2.672) -a -~' (I.93 102

0.198 0.413 (I.72 18.4 (2.249) (1.989) 0.048 0.545 11.82 29.1

(3.231) (1.91) 0.651 1.145 0.89 65.1

(2.202) (9.769) -0.379 0.244 11.81 34.5 ( - 1.974) (2.683) 0.145 -0.808 /I.92 97.5

(2.1147) (-2.783)

aNot significantly different from zero. bFigures in brackets are t-ratios.

elasticities of consumption of all petroleum products except illuminating kerosene, which is used mainly by rural and low income urban households for lighting and cooking. A 10% increase in the proportion of the population resident in Nairobi would, other things remaining equal, reduce the consumption of illuminating kerosene by 6.6%. On the margin, therefore, illuminating kerosene is not an urban fuel.

The urbanization elasticities of consumption of the other petroleum products range from 0.29 for fuel oil to 1.903 for LPG. The consumption of LPG, heavy diesel oil and jet fuel is especially urbanization elastic, since a 10% increase in urban population would, in each case, lead to more than 10% increase in consumption, everything else remaining the same. For the consumption of LPG and heavy diesel oil, the impact of a given increase in urbanization is almost double, while that for jet fuel is about one and a half times. A large urbanization elasticity of consumption of jet fuel is probably associated with rapid expansion of Nairobi and Mombasa Interna- tional airports, through which international airlines consume two-thirds of all air transport fuels sold in the country, as well as the global shift away from propeller type aircraft using aviation spirit. LPG is a relatively new product in the Kenyan market, with considerable potential in the domestic and commer-

cial sector. A high urbanization elasticity for its consumption probably reflects the unsaturated nature of its Kenyan market.

The urbanization elasticities of the consumption of motor spirit and gasoil, the two automotive fuels, are slightly less than unity, indicating that an increase in urbanization, other things remaining the same, increases the consumption of these fuels by about the same proportion.

The estimated GDP elasticities range from 0.08 for motor spirit to 0.476 for fuel oil. The consumption of petroleum products is therefore not GDP elastic. This is the result of the netting out effect of the economy structure variables included in the consumption models, leaving out the pure GDP elasticities. The elasticity of the portion of GDP accruing to agriculture is positive for illuminating kerosene, LPG, jet fuel, and negative for motor spirit and heavy diesel oil. For the latter group of products, an increase in the proportion of GDP accruing from agriculture would reduce their consumption, while increasing the consumption of the former group. All the elasticities, both positive and negative, are nevertheless less than 11.5, that for jet fuel being the only exception.

The elasticity of the proportion of GDP accruing from manufacturing is positive for most of the fuels except fuel oil, ranging from 0.244 for heavy diesel

Table 2. Percentage sales of petroleum products to different sectors, selected years.

Retail Retail Marine Power Commercial Agriculture pump transport transport Aviation generation and industrial Government

1976 3.9 25.1 5.3 5.7 21.9 11.6 23.4 3.2 1980 4.1 28.5 4.2 8.0 21. l 9.1 25.8 4.3 1985 3.3 41.1 2.3 9.8 17.4 1.8 311.2 3.1 1989 3.5 46.9 1.4 8.8 15. l 2.2 25.4 2.7 1990 3.5 47.2 1.9 11.7 16.5 1.5 24.7 3.3

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Table 3. Indices of monetary GDP, sectoral output, and total petroleum products consumption 1980 = 100.

Monetary Agricultural Manufacturing Transport Trade Petroleum GDP output output output output products

1976 57.6 67.8 43.0 54.1 54.2 87.2 1977 74.2 97.1 48.9 61.5 67.3 90.1 1978 80.5 91.8 61.0 78.9 77.4 92.0 1979 88.7 94.3 74.3 89.7 87.5 93.3 1980 100.0 100.0 100.0 100.0 100.0 100.0 1981 116.0 115.1 111.2 112.2 112.0 94.8 1982 131.0 131.8 126.2 126.7 122.4 89.1 1983 149.3 149.8 138.3 152.8 156.5 82.1 1984 146.3 180.8 156.2 184.5 179.8 88.7 1985 165.0 197.2 175.6 206.7 209.2 89.6 1986 192.3 233.2 206.1 241.2 225.3 94.8 1987 210.8 242.6 221.1 307.8 256.8 104.6 1988 240.7 276.5 255.1 339.4 291.0 103.6 1989 275.0 303.5 289.8 380.1 338.9 108.1 1990 322.9 324.9 334.6 468.0 387.3 104.5

Source: Republic of Kenya, Economic Survey Nairobi, Government Printer, Nairobi, 1980, 1986 and 1991.

oil to 1.145 for jet fuel. A 10% increase in the proportion of GDP generated from manufacturing would increase the consumption of jet fuel by more than 11%, and the consumption of motor spirit, illuminating kerosene and LPG by 8.5%, 4.1% and 5.5% respectively. It would, however, reduce the consumption of fuel oil by about 8.1%.

Summary Urban population in Kenya has been increasing at 6% per annum on average over the 20 year period up to 1989, and is expected to account for a quarter of the country's total population by the year 2000. About one-third of the urban population live in the capital city of Nairobi. Oil based energy accounts for more than 70% of the country's commercial energy consumption, the rest deriving from electricity and coal in that order. Over the years, nine types of petroleum products have been processed in the Mombasa based oil refinery and sold in the Kenyan market. 23 These include motor spirit, gasoil, illuminating kerosene, power kerosene, jet fuel, aviation spirit, LPG, heavy diesel oil and fuel oil. Power kerosene is, however, no longer sold in the Kenyan market and sales of aviation spirit have shrunk to insignificant quantities.

While the literature establishing the relationship between energy consumption and national income is considerable, little effort has been put into analysing the acknowledged impact of economic structure on energy consumption. This study has sought to shed some light on this by exploring the magnitude and direction of the urbanization elasticities of the consumption of specified petroleum products in Kenya.

Elasticities were also estimated for proportions of GDP contributed by agriculture and manufacturing, which jointly account for a half of the country's monetary GDP.

The estimations reveal that urbanization has a positive impact on the consumption of most petroleum products, that LPG, jet fuel, and heavy diesel oil are urbanization elastic while motor spirit, gasoil and fuel oil are not. The impact of urbanization on the consumption of illuminating kerosene is negative. The consumption of the products is, however, not particularly responsive to the proportion of GDP contributed by either agriculture or manufacturing, the exception being the utilization of jet fuel which is elastic to the proportion of GDP accruing to manufacturing.

These estimations are predicated on a unique petroleum products supply structure characterized by the presence of a crude oil refining facility that at one point split its total throughput equally between the domestic and regional re-export markets. This state of affairs influences the type and quantity of products available in the market and therefore reg- ulates fuel choices and use inclinations. This in turn affects the relevant elasticities. It is also expected that the estimated urbanization and other economy structure elasticities of demand for the petroleum products would be composite and biased upwards, since the estimations are likely to have mopped up the transition to increased use of commercial relative to traditional fuels. The potential for such transition is presently considerable, since only a third of total energy used in the country derives from commercial sources.

In summary, the transfer of an increasingly large

406 ENERGY POLICY April 1993

proportion of the population, as well as shifts in the relative importance of the major sectors of the economy, have definite impacts on the consumption of petroleum products in Kenya. In that regard, expected urban expansion should be given direct consideration in energy planning.

~H. Amann, Energy Supply' and Economic Development in East Africa, Welt Forum Verlag, Munich, 1969. 2L. Hoffman, Determinants of Energy Demand in Developing Countries, The World Bank, Washington, DC, mimeo, 1978. 3Concentration of population in urban centres permits scale economies in gas and electric power distribution as well as in certain modes of transport, all of which bias energy use towards commercial energy. 4The sector's contribution peaked during the 1977-78 coffee boom when increased international coffee prices substantially increased the country's coffee export earnings. SFigures computed using data extracted from various issues of the Economic Suvey and Statistical Abstracts published annually by the government of Kenya. 6The dominance of the agricultural sector is more pronounced when consideration is given to subsistence production and the role of agrobased industries in manufacturing output. VThis categorization, employed by the Central Bureau of Statis- tics, is somewhat misleading since some of the products sold through retail pumps end up in the agricultural and commercial sectors. SSee Tables 2 and 3. '~Republic of Kenya, Economic Management for Renewed Growth, Government Printer, Nairobi, 1986, Table 4.1, p 41 and Republic of Kenya, Economic Survey, Government Printer, Nairobi, 1990, para 3.12, p 33. t~I'here is, of course, in the literature repeated mention of the potential impact of structural composition of an economy on the demand for energy. IID.W. Jones, Urbanization and Energy Use in Economic


Growth, Oak Ridge National Laboratory, Oak Ridge, TN, 1989; op cit, Ref 2; P.K. Kimuyu, Demand for Commercial Energy on Kenya 1963-1985: A Structural Investigation, Unpublished PhD Dissertation, Economics Department, University of Nairobi, 1988. ~2Grossing up inhibits elicitation of correct behaviourai rc- Sl~onses, and generates unrepresentative parameter estimates. i. Op cit, Ref 2 and Ref 11, Kimuyu. 14These sectors jointly account for about three-quarters of the country's monetary GDP. 15This form of misspecification potentially leads to biased and inconsistent parameter estimates. ~Creation of half yearly series from annual data through inter- polation is likely to have aggravated potential econometric patho- logies such as multicollinearity and autocorrelation. IVOp cit, Ref 11, Jones. t~Oil based energy accounts for more than 70% of all commercial energy used in the country, with 25% deriving from electricity and the balance from coal and coke. ~AIso referred to as light diesel fuel. 2°Aviation spirit and power kerosene were excluded from the analysis because only insignificant amounts of the former are sold in the country following gradual phasing out of propeller type of aircraft, while the latter was withdrawn from the Kenyan market in 1978. 2~The proportion of people living in Nairobi was used as proxy for proportion of people in all the urban centres in the country. This is likely to have biased the urbanization elasticities upwards given the more urban nature of Nairobi relative to other centres. ~This log linear formulation derives from a multiplicative one of the form:

f, = aoGDP"IURB"2AGR"-~MFG"4e" where e = limit of (1 + (l/n)) ~ as n approaches infinity and all other variables are as defined earlier. 23Some of the refinery's throughput is also sold in the neighbour- ing countries such as Uganda and Rwanda. This re-export market, however, shrunk from 54% of the throughput in 1973 to only 24% in 1990 due to subdued regional demand following the oil price shocks of the 1970s and the reduced comparative advantage of the Mombasa refinery.

ENERGY POLICY April 1993 407

urbanization and consumption of petroleum products in kenya

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