Energy Consumption and Economic Growth: Evidence from Ghana

Abstract

The causal relationship between economic growth and energy consumption represents a widely studied topic in energy economics and interest in this area of research has increased because of global warming, oil price shocks and recent advancement in econometric methodology. Although it is very well known that there is a strong correlation between energy consumption and economic growth, the issue of “causality” still remains unanswered in Ghana. This study aims at investigating the possibility of the “energy demand - led growth” and “growth-driven energy demand” hypotheses in Ghana.

Using annual data for the period 1975 - 2006 and the Vector Autoregression model (VAR), the study established that for Ghana, causality runs from economic growth to energy (electricity and petroleum) consumption. Possible explanation for this occurrence could be that in Ghana the major driver of economic growth is the agricultural sector whose energy consumption is low. The household sector consumes majority of electricity generated whiles most of the oil products are consumed by the transport sector. The implication is that, the industrial and service sectors that are supposed to be energy intensive through the use of advanced technologies and the major drivers of economic growth are not energy intensive and rarely drive growth. Rather, the agricultural sector drives growth although its energy consumption is quite minimal. Impulse response analysis revealed that it takes a longer time for shocks in economic growth on energy consumption to return to their long run equilibrium than it is for a shock in energy consumption on economic growth.