The relationship between consumption and imports of fuel oil in Indonesia

Abstract

This study examines the short- and long-run relationship between consumption and imports of fuel oil in Indonesia using a time series data spanning from 1988 to 2018. A Vector Error Correction Model (VECM) approach has been used in examining the short- and long-term conditions designed based on the theoretical framework of the Keynesian consumption model. The results show that the import and price of fuel oil significantly affect fuel oil consumption in Indonesia. Notably, fuel oil imports and prices disrupt the equilibrium of fuel oil consumption in the short term, although, in the long term, the consumption returns to the equilibrium. Moreover, fuel oil consumption and the exchange rate also significantly affect fuel oil imports in Indonesia. Specifically, the exchange rate disrupts fuel oil imports in the short term, then returns to the equilibrium in the long term. Accordingly, the Indonesian government needs to manage fuel oil imports and exchange rate stability to eliminate short-term disruptions in Indonesia’s fuel oil imports.