Introduction

Indonesia is the fourth most populous country in the world, behind China, India, and
United States. Formerly a net oil exporter in the Organization of the Petroleum Exporting
Countries (OPEC), Indonesia struggles to attract sufficient investment to meet growing domestic
energy consumption because of inadequate infrastructure and a complex regulatory environment.
Indonesia is suspended its membership in OPEC in 2009, after joining in 1962. The exit was
prompted by growing internal demand for petrol consumption, declining production of petrol and
other energy sources, and limited investment to increase capacity. Indonesia currently imports
crude oil and refined products to meet domestic demand.
In this paper, we will analyse the likely relationship that the dependent variable, that is
consumption of petrol, with the independent variables.The first independent variable is the price
of petrol. Price and consumption for a particular good is always likely to be negatively related.
Sill (2007) mentioned that the high price of oil led consumers and firms to conserve energy.
Homeowners insulated their houses. Commuters bought more fuel-efficient cars. Firms bought
equipment that was more energy efficient. If the price of petrol is low, consumers will be left
with more purchasing power to buy more of petrol. Likewise, if price of petrol is high consumers
will cut down on the consumption for petrol in order to maintain the same purchasing power for
other goods. To what extent price will affect consumption will depend on the price elasticity of
demand. The demand for petrol is likely to be inelastic since all car owners need it and there is
no close substitute for it.
The second independent variable is per capita disposable income. This basically shows
what people on average have after paying off taxes. This is likely to have a positive relation with
consumption. An increase in income will increase the purchasing power of consumers. People
will be left with more money to spend. As a result, their spending patterns may expand. Hence,
the consumption of petrol is likely to rise. On the other hand, if people incur a fall in income they
will be left with relatively less purchasing power. This will ultimately lead to a decrease in
consumption for petrol. Disposable income per capita is measured by using a proxy which is the
adjusted net national income per capita.
The third independent variable is total petrol production in Indonesia. This basically
shows the total amount of petrol production that produced by Indonesia, excluding the petrol
exports. Similar with income per capita, a higher petrol production led to higher petrol
1

consumption. Overall, this paper aims to determine the factors of petrol consumption in
Indonesia . Hence, the explanatory variables used are price petrol, income per capita, and total
petrol production.

Materials and Methods

The following econometric model is used to verify the impact of income per capita,
petrol production, and price of petrol on petrol consumption. The equation model for this paper
is in linear form and can be symbolically written as follows:

CPt

= 0 + 1.lnPt + 2.lnIt + 3.Yt + t

(1)

In Equation (1), CP is the dependent variable that representstotal Indonesia petrol

consumption (barrels per day) whereas P (price for petrol (IDR/barrel)), I (adjusted net national
income per capita (US$)), and Y (total Indonesia petrol production (barrels per day)) are the
independent variables. Moreover, is the stochastic error term and the subscript (t) indexes time.
In Equation (1), all of the explanatory variables are expected to be positively related with petrol
consumption as the dependent variable.
This study is based on secondary data ranging from 1980 to 2012. Since it is a time-series
data, unit root tests and cointegration test are applied to check the stationarity and long-term
effect. Later on, ordinary least squares method is employed. The data used have been taken from
various sources. Total petrol consumption and production data are taken from U.S. Energy
Information Administration1, price of petrol is taken from Ministry of Energy and Mineral
Resources Republic Indonesia2, and net national income per capita is taken from World Bank 3.
Eviews7 is used for computation purposes.

Results
Unit Root Tests
Stationarity Test

http://www.eia.gov/countries/country-data.cfm?fips=ID#pet
http://www.esdm.go.id/publikasi/harga-energi.html
3
http://data.worldbank.org/indicator/NY.ADJ.NNTY.PC.CD
2

Empirical work based on time series data must first guarantee to be stationary. First, we
may analyze the stationarity by looking at the graph on each variables (see Appendix 1). If the
data trend shows upward or downward trend, it can be simply concluded that the data is nonstationary. To be more accurate, a test of stationarity can be employed by unit root tests which
the results are shown in Table 1.
The starting point is the pure random walk as follows:

(2)

In this case, we execute the Augmented Diskey Fuller (ADF) test on Eviews. The rule of
thumb is if absolute ADF test is greater than MacKinnon critical values, we reject null
hypothesis. The null hypothesis is that there has a unit root or non-stationary. This unit ADF unit
root tests sort the lag automatically by using Schwarz Info Criterion (SIC). From SIC method,
we may conclude that there is no stationarity appears in all variables at the 5% level of
significance.
Table 1: Results of Unit Roots Tests (Level)
Variables

ADF Test*

MacKinnon Critical Values* ( = 5%)

Decision

CP

2.000382

2.957110

Accept H0

LN P

0.143613

2.957110

Accept H0

LN I

0.122056

2.957110

Accept H0

0.174936

2.957110

Accept H0

*On absolute term. (See Appendix 2)

To conclude the results from Table 1, all the variables have a unit root or non-stationary
since we cannot reject the null hypothesis. Therefore, the order of integration test must be
employed in order to find a lag at which the variables will stationary.
Order of Integration Test
The form of this ADF test is slightly different with the previous level:

(3)

Basically, this is an iteration process which put each variable into certain level. First, we
start from 1st differencing. If 1st differencing creates stationary variables, then the spurious
3

regression problem is solved. Then, we can run the further analysis on the cointegration analysis.
The steps are similar with the stationarity test, yet the only difference is on the level of
differencing. The results are compiled in Table 2.
Table 2: Results of Unit Roots Tests (1st difference)
Variables

ADF Test*

MacKinnon Critical Values* ( = 5%)

Decision

CP

5.837351

3.562882

Reject H0

LN P

6.891366

3.562882

Reject H0

LN I

5.919807

3.562882

Reject H0

5.647091

3.562882

Reject H0

*On absolute term. (See Appendix 3)

The rule is if absolute ADF test is greater than MacKinnon critical values, we reject null
hypothesis which means that the variable is stationary. To conclude the results from Table 2, all
the variables now are stationary as we reject the null hypothesis. Thus, after running this test, our
model now is no longer a spurious regression and have a meaning.
Johansen Cointegration Test
One way to solve the spurious regression is by differencing the series until stationarity is
achieved and then use the stationarity series for regression analysis. However, there is a problem
with using first differences. If we difference the variables the model can no longer give a unique
long-run solution. So, we use cointegration test to show whether there really is a genuine longrun relationship between dependent and independet variables. Cointegration becomes an
overriding requirement for any economic model using non-stationary variable (a non I(0)
variable) on time series data. Yet, if the cointegration is not found then we may regress the
model with using first differences by using OLS method. In this case, Johansen cointegration test
is employed to check the cointegration. From the Eviews result (see Appendix 4), both Trace test
and Maximum-eigenvalue test indicate no cointegration at the 0.05 level, so, we can proceed to
regress the model by using OLS.
The Estimated Model
The model is estimated by Eviews(see Appendix5). Given the output from Eviews, we
can proceed to the estimated equation.

Estimated model:

(4)

= -31993.29 + 10486.74.d(lnPt)+ 77251.61.d(lnIt)+ 0.041827.d(Yt)

Se = (5957.787) (21775.97)
p-value = 0.0000
N = 32

(24211.84)(0.072629)

0.63390.0035 0.5693
= 0.189612

F-stat = 3.417760 ; (p-value = 0.03084)

The independent variables can be interpreted by using the coefficients of the

estimation.Income per capita is positively related and statistically significant at the 5% level of
significance. If the disposable income per capita as measured by adjusted net national income per
capita as a proxy increases by 1 percent, petrol consumption is estimated to increase by 1.047
thousand barrels per day, ceteris paribus. On the other hand, price of petrol and petrol production
are found to have positive sign, but they are not statistically significant at any level of
significance. For petrol price, it is on contrary with the priori expectation. This conversely
relationship is caused by the fact that the demand for petrol is likely to be inelastic since all car
owners need it. Moreover, currently there is no close substitute for petrol yet, so people will not
reduce the petrol as its price increases.
However,adjusted R2 equal to 0.189612 shows that the changes in total Indonesia petrol
consumption is only 18.9612% explained by the price of petrol, income per capita, and total
Indonesia petrol production. In addition, this is overall significance since probability of F-stat is
less than 5% level of significance.
Multicollinearity
There are two methods to detect the problem of multicollinearity. First, usecorrelation
matrix and second, calculate VIF (Variance Inflating Factor) for each independent variable in
auxiliary regressions. In this case, the second method is chosen.The VIF is a method of detecting
the severity of multicollinearity by looking at the extent to which a given independent variable
can be explained by all other independent variables in the equation. A high VIF indicates that

multicollinearity has increased the estimated variance of the estimated variance of the estimated
coeffiecient by quite a bit, yielding a decreased t-score.

is the coefficient of determination (the unadjusted R2) of the auxiliary regressions.

The auxiliary regressions are written below:

(4)
(5)
(6)

First, run the auxiliary regression (4), (5), and (6) in Eviews (see Appendix 6) to look at
the

, later on, calculate the VIF score of each auxiliary regression. VIF values exceeding 10

are generally viewed as evidence of the existence of problematic multicollinearity. 4The result of
multicollinearity is given on the Table 3.

Table 3:
AuxiliaryRegression

, Auxiliary Regression
VIF

Decision

D(lnP) (1)

0.095935

1.10612

Theres aproblem of multicollinearity

D(lnI) (2)

0.055918

1.05923

Theres a problem of multicollinearity

D(Y) (3)

0.071655

1.07719

Theres aproblem of multicollinearity

From Table 3, it shows that all of VIF score of each auxiliary regression are less than 10.
It means that all independent variables have aproblem of multicollineary but still not considered
as a severe multicollinearity. The problem of multicollinearity can be solved by several
remedies. Firstly, we can drop the independent variable. Second, we may transform the
independent variables. Third, we can add new data. And last, we ignore it. However, if we drop
or transform the independent variables, it may create another problem to the model. Meanwhile,
4

Asteriou, Dimitrios. Applied Econometrics. 2011. Published by Palgrave Macmillan, p. 100.

if we want to add more data or more observations to the model, it may be difficult due to the
unavailability of the data. In this model, thus, the best way to remedy the problem of
multicollinearity is by ignoring it.
Auto Corellation
Auto correlation is most likely to happen with the time series data. In order to check the
auto correlation of the model, we can apply Breusch-Godfrey LM testwhich can be used to test
1st order serial correlation or 2nd order serial correlation. In order to run for Breusch-Godfrey LM
test, the lags included have to be identified. In the model, there are two lags are included.
(7)
where :

is a white noise error term

The null hypothesis represents that there is no 1st order or 2nd order auto correlation.
Hypothesis testing shows that there is no 1st order or 2ndauto correlation or accept null hypothesis
since F-statistic (0.604919) is less than critical value of F-statistic (3.32) at 5% level of
significance (see Appendix 7).
Heteroskedasticity
Heteroskedasticity is the situation when the variance of the error term is not constant.
However, if heteroskedasticity occurs, OLS estimates are no longer BLUE and do not provide
the estimate with the smallest variance. Moreover, the standard errors are biased when
heteroskedasticity is present. In time series data, the variables tend to be of similar orders of
magnitude because one generally collects the data for the same entity over a period of time.
The problem of heteroskedasticity can be tested byWhite test. White test is taking into
account in a way all the possibilities together, thus it is more comprehensive than other
heteroskedasticity tests.In order to run White test, we must create the equation first:

+
+

+
+

(8)

The null hypothesis is that the error term is homoskedastic. Hypothesis testing shows that
the probability of Chi-square statistic is greater than 5% level of significance (0.6599> 0.05),
means accept H0 or the error term is homoskedastic (see Appendix 8).
Normality
Normality of residuals occurs when the disturbances are assumed to be independently and
identically normally distributed, with mean zero and common variance

. To check the

normality in Eviews, we can use histogram normality test. The result (see Appendix 9) shows
that the probability is more than 5% level of significance (probability 0.160627> 0.05), means
accept H0 which indicates that the error term is normally distributed.

Conclusion
According to this paper, the determinants that significantly affects total petrol
consumption in Indonesia isincome per capita whereaspetrol price and total petrol production are
not proven to be significantly affects total petrol consumption in Indonesia. To answer the
objective, this paper is examined by using a time-series data from 1980-2012. Among the
independent variables, only petrol price that is estimated to have conversely sign compared to the
a priori expectation. Petrol price is found to be positively related as it should be negatively
related to the petrol demand. It can be explained logically since the demand for petrol is likely to
be inelastic since all car owners need it and currently there is no close substitute for petrol yet.
Hence, people will not reduce the petrol as its price increases.
However, the emphirical results suggest that only income per capita is found to be
statistically significant towards the total petrol consumption in Indonesia. Price of petrol and
total petrol production which are not statistically significant may occurs due to the measurement
error, inaccurate data used, and the limitation of the researcher itself.

References
Asteriou, Dimitrios. 2011. Applied Econometrics. England: Palgrave Macmillan.
Gujarati, Damodar N. Basic Econometrics. United States of America: McGraw-Hill, Inc, 1995.
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Energy

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Mineral

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Indonesia,http://www.esdm.go.id/publikasi/harga-energi.html
Sill, Keith. 2007. The Macroeconomics of Oil Shocks. FRB Philadelphia Business Review.
Studenmund, A H. Using Econometrics A Practical Guide. Edinburgh: Pearson Education
Limited, 2014.
U.S.

Energy

Information

Administration,

http://www.eia.gov/countries/country-

data.cfm?fips=ID#pet
World Bank, http://data.worldbank.org/indicator/NY.ADJ.NNTY.PC.CD