THE JOURNAL OF ENERGY

AND DEVELOPMENT

Hassen Guenichi,

World Oil Prices, Energy Use,

and Economic Growth Sectors:
Relationships in Tunisia,
Volume 39, Number 1

Copyright 2014

WORLD OIL PRICES, ENERGY USE, AND

ECONOMIC GROWTH SECTORS:
RELATIONSHIPS IN TUNISIA
Hassen Guenichi*

Introduction

he Tunisian economys energy dependency has deepened significantly since

1994. Energy resource development that had contributed to the growth of the
Tunisian economy, particularly during the 1980s, is now being challenged by the
need to meet growing domestic demand. Indeed, 1994 marked a watershed year
for the country of Tunisia, which, for the first time, experienced a net energy
deficit. But, with the doubling of the pipeline capacity between Algeria and Italy
in 1995 and the commencement of operations a year later at the Miskar natural gas
fieldoutside of Tunisias traditional hydrocarbon-producing region of the Gulf
of Gabesa surplus energy balance was once again achieved. However, this
surplus was short lived and by 2001, the energy balance had slipped again into
a deficit. As is the case with many nations since the beginning of the 21st century,

*Hassen Guenichi is a permanent assistant in Quantitative Methods at the Higher Institute

of Computer Science and Management of Kairouan (Tunisia) and a research associate at the
Computational Mathematics Laboratory, Monastir University (Tunisia). He holds a masters degree
in quantitative methods from the University of Sousse (Tunisia), a masters in mathematical
economics and econometrics from the University of Manar (Tunisia), and a Ph.D. in economic
sciences from the University of Sousse. His principal research areas are energy economics, economic
growth, energy consumption, oil prices, and econometric modeling of the relationships between
growth and energy in emerging countries. The authors most recent articles have been published in
such refereed and peer-reviewed journals as Energy Studies Review, International Journal of
Business and Management Research, Asian-African Journal of Econometrics, and The International
Journal of Economic Issues.
The Journal of Energy and Development, Vol. 39, Nos. 1 and 2
Copyright 2014 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.

53

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THE JOURNAL OF ENERGY AND DEVELOPMENT

energy consumption increasingly is outstripping energy production. Tunisias total

energy consumption has reached 9,445,000 tons of oil equivalent (toe). As of
2001, the energy consumption in the agricultural, industrial, and services sectors
were 317,000 toe, 1,900,000 toe, and 1,400,000 toe, respectively. Clearly, Tunisias expanding energy consumption is a concern to policy and decision makers
alike who are interested in assessing the issue of causality between energy use and
economic growth. Formulating policies and strategies to reduce energy demand
without adversely affecting economic growth is essential not only in the Tunisian
case but for other nations as well.
Thus, it is not surprising that economists have spent a great deal of time and
effort in analyzing the issue of energy consumption and economic growth. The
ongoing debate among energy economists about the relationship between energy
use/consumption and economic output/growth has led to the emergence of two
opposite views. One suggests that energy is the prime source of value because
other factors of production, such as labor and capital, cannot be utilized without
energy. In this case, energy use is expected to be a limiting factor to economic
development. The other point of view suggests that energy is neutral to growth.
This is what has become known in the literature as the neutrality hypothesis. The
main reason for the neutral impact of energy on growth is that the cost of energy is
very small as a proportion of gross domestic product (GDP); thus, it is not likely to
have a significant impact on output growth. But, we find two other viewpoints in
the recent debate about the relationship between oil prices and economic growth.
The first is that oil price shocks do not affect output and inflation in low-income
oil-exporting countries. However, oil price shocks do significantly influence the
real exchange rates. The implication is that a high real oil price may give rise to
wealth. The second view suggests that there is evidence supporting an asymmetric
long-run relationship between oil prices and GDP. An increase in oil prices seems
to retard aggregate economic activity by more than a fall in oil prices stimulates it.
Most of the empirical literature on the subject investigated the relationship
between energy use and output growth by testing for the existence and direction of
causality between the two variables in either a bivariate or a multivariate context.
However, this literature produced conflicting results, and there is no consensus
judgment either on the existence or the direction of causality between energy use
and output growth.
There are cases where causality was found to be running from GDP to energy
use. These include the United States (J. Kraft and A. Kraft, A. Akarca and T. Long,
and E. Yu and B. Hwang), South Korea (E. Yu and J. Choi), some industrialized
countries (Y. Erol and E. Yu), Pakistan and Indonesia (A. Masih and R. Masih), and
Taiwan (B. Cheng and T. Lai).1 In some other instances, causality was found to be
running from energy use to GDP. These include the Philippines (E. Yu and J. Choi),
India (A. Masih and R. Masih), and Indonesia (J. Asafu-Adjaye).2 Finally, there are
cases where causality was found to be running in both directions (bidirectional).

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

55

Recently, the results of empirical studies examining the relationship between

economic growth and oil prices have offered up different results depending on the
country of study (low income, developing versus developed, oil exporting or
importing, etc.). F. Joutz et al. found an indirect relationship between the government budget constraint and economic growth through investment in Venezuela.3
The latter is positively related to improvements in the countrys fiscal position. In
the work by S. Lardic and V. Mignon, the empirical analysis focuses on the
economies of the United States, the G7, Europe, and euro area.4 Results indicate that
while standard cointegration is rejected, there is evidence for asymmetric cointegration between oil prices and GDP. In the case of low-income and oil-exporting
countries (Nigeria), the findings of P. Olomomla and A. Adejumo were contrary to
previous empirical results for other states; oil price shocks did not affect output and
inflation in Nigeria.5 However, oil price shocks do significantly influence the real
exchange rates. The implication is that a high real oil price may give rise to a wealth
effect that appreciates the real exchange rate.
A major limitation of the research on the relationship among output growth,
energy, and oil price is the failure to account for the time-series properties of the
variables involved and, thus, many of them may have produced spurious results. In
addition, the standard bivariate causality procedures used in this literature, such as
Grangers and Sims, may fail to detect additional channels of causality and also
may result in contradicting results.6 In particular, D. Stern argues that bivariate
tests may fail to detect a causal relationship because of the substitution effects that
may occur between energy and other inputs.7 This means that changes in energy
consumption will be countered by opposite movements in the use of other factors.
Substitution may result in an insignificant effect of energy use on growth. The
latest advances in econometric theory of structural change and the lack of enough
studies examining the relationships among energy use, oil price, and economic
growth in developing countries are the main motivations for this paper.
The aim of this article is to divide the Tunisian economy into three principal
sectors (agriculture, industry, and services) to investigate empirically the relationships among oil price, energy use, and output growth in the case of a developing
countryTunisia. We propose a framework based on the neo-classical one-sector
aggregate production technology where capital, labor, oil price, and energy are
treated as separate inputs. First, we estimate the date breaks, which allow us to
divide the sample into different regimes or subsamples. Second, in each regime we
use the time-series properties of the data and develop a vector error-correction
(VEC) model to test for multivariate cointegration and Granger causality.
This article is structured as follows. We briefly present the econometric framework and explain the structural break estimations based on the Lumsdaine and Papell
(LP) approach, followed by the cointegration analysis in the presence of predetermined structural breaks using the Saikkonen and Johansen cointegration tests
and, last, we provide vector error-correction model (VECM) estimations based

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THE JOURNAL OF ENERGY AND DEVELOPMENT

upon Quintos and Johansen.8 The subsequent section is devoted to an empirical

overview of the link among oil prices, oil use, and economic growth sectors in the
long run in Tunisia; this is followed by the conclusion.

Methodology
Unit Root with Structural Breaks: It goes without saying that structural change is
of considerable importance in the analysis of macroeconomic time series. Structural
change occurs in many time series for any number of reasons, including economic
crises, changes in institutional arrangements, policy changes, regime shifts, and war.
An associated problem is the testing of the null hypothesis of structural stability
against the alternative of a one-time structural break. If such structural changes are
present in the data-generating process, but not allowed for in the specification of an
econometric model, results may be biased towards the erroneous non-rejection of
the non-stationary hypothesis.9
Conventionally, dating of the potential break is assumed to be known a priori in
accordance with the underlying asymptotic distribution theory. Test statistics are
then constructed by adding dummy variables representing different intercepts and
slopes, thereby extending the standard Dickey-Fuller procedure.10 However, this
standard approach has been criticized, most notably by L. Christiano, who argued
that data-based procedures typically are used to determine the most likely location
of a break: evidence of an endogeneity or a sample selection problem.11 This
invalidates the distribution theory underlying conventional testing.
In response, a number of studies have developed different methodologies for
endogenizing dates, including E. Zivot and D. Andrews, P. Perron, R. Lumsdaine
and D. Papell, and C. Bai et al.12 Their research has shown that by endogenously
determining the time of structural breaks, bias in the usual unit root tests can be
reduced. P. Perrons 1992 work and his 1997 article coauthored with T. J. Vogelsang
propose a class of test statistics that allows for two different forms of a structural
break, namely, the Additive Outlier (AO) model, which is more relevant for
series exhibiting a sudden change in the mean (the crash model), and the Innovational Outlier (IO) model, which captures changes in a more gradual manner
over time.13
With this in mind, Lumsdaine and Papell (LP) introduced a novel procedure to
capture two structural breaks in a series.14 They found that unit root tests accounting for two structural breaks are more powerful than those that allow for
a single break. In support, D. Ben-David et al. argued that
just as failure to allow one break can cause non-rejection of the unit root null by the
Augmented Dickey-Fuller test, failure to allow for two breaks, if they exist, can cause non15
rejection of the unit root null by the tests which only incorporate one break.

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

57

LP uses a modified version of the augmented Dickey-Fuller (ADF) test, which

specifies two endogenous breaks as follows:
DXt m bt uDU1t gDT1t vDU2t fDT2t aXt1
XK

c DXti et
i1 i

where DU1t = 1 if t >TB1 and otherwise zero; DU2t = 1 if t > TB2 and otherwise
zero; DT1t = t TB1 if t > TB1 and otherwise zero; and finally DT2t = t TB2 if
t > TB2 and otherwise zero. Two structural breaks are allowed for in both the time
trend and the intercept, which occur at TB1 and TB2. The breaks in the intercept are
shown in equation (1) by DU1t and DU2t, respectively, whereas the slope changes
(or shifts in the trend) are represented by DT1t and DT2t. The optimal lag length (k)
is based on the general-to-specific approach suggested by S. Ng and P. Perron.16
Cointegration Test in the Presence of Structural Breaks: As had been noted as far
back as 1989 by P. Perron, ignoring the issue of potential structural breaks can render
invalid the statistical results not only of unit root tests but of cointegration tests as well.
N. Kunitomo explains that in the presence of a structural change, traditional cointegration tests, which do not allow for this, may produce spurious cointegration.17 In
the present research, therefore, considering the effects of potential structural breaks is
very important, especially because the world economy has been faced with structural
breaks like revolutions and wars in addition to significant policy changes.
P. Saikkonen and H. Lutkepohl (SL) and S. Johansen et al. have proposed a test
for cointegration analysis that allows for possible shifts in the mean of the datagenerating process.18 Because many standard types of data-generating processes
exhibit breaks caused by exogenous events that have occurred during the observation period, they suggest that it is necessary to take into account the level shift in
the series for proper inference regarding the cointegrating rank of the system.
P. Saikkonen and H. Lutkepohl argued that structural breaks can distort standard inference procedures substantially and, hence, it is necessary to make appropriate adjustment if structural shifts are known to have occurred or are suspected.19
The SL test investigates the consequences of structural breaks in a system context
based on the multiple equation frameworks of Johansen-Jeslius, while earlier approaches like A. Gregory et al. considered structural break in a single equation
framework and others did not consider the potential for structural breaks at all.20
According to P. Saikkonen and H. Lutkepohl, an observed n-dimensional time
series Xt = (x1t, . . . , xnt), Xt is the vector of observed variables (t = 1, . . . , T)
which are generated by the following process:21

Xt m0 m1 t g 1 d1t g2 d2t g 3 d3t dDT0t d1 DU1t ut

where DT0t and DU1t are impulse and shift dummies, respectively, and account for
the existence of structural breaks. DT0t is equal to one, when t = T0, and equal to

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THE JOURNAL OF ENERGY AND DEVELOPMENT

zero otherwise. Step (shift) dummy (DU1t) is equal to one when (t > T1), and is
equal to zero otherwise. The parameters g(i = 1, 2,"), m0, m1, and d are associated
with the deterministic terms. The seasonal dummy variables d1t, d2t, and d3t are not
relevant to this research since our data are yearly. According to SL, the term ut is
an unobservable error process that is assumed to have a VAR (p) representation as
follows:22
ut A1 ut1 . . . Ap utp et t 1; 2

By subtracting ut1 from both sides of equation (3) and rearranging the terms, the
usual error-correction form of equation (3) is given by:
Dut Put1

Xp1
j1

Gj Dutj vt

This equation specifies the cointegration properties of the system. In this

equation, vt is a vector white noise process, while ut = Xt Dt and Dt are the
estimated deterministic trends. The rank of P is the cointegrating rank of ut and,
hence, of Xt.23 The possible options in the SL procedure, as in Johansen, are three:
a constant, a linear trend term, or a linear trend orthogonal to the cointegration
relations. In this methodology, the critical values depend on the kind of the abovementioned deterministic trend that is included in the model. More interestingly, in
SL the critical values remain valid even if dummy variables are included in the
model, while in the Johansen test the critical values are available only if there is no
shift dummy variable in the model. The SL approach can be adopted with any
number of (linearly independent) dummies in the model. It is also possible to
exclude the trend term from the model; that is, m = 0 may be assumed first. In this
methodology, as in Johansens, the model selection criteriaSchwarz Bayesian
criterion (SBC), Akaike information criterion (AIC), and HannanQuinn information criterion (HQ)are available for making the decision on the VAR
order. In the following section, we have applied SL tests for the cointegration rank
of a system in the presence of structural breaks.
The estimation method is based on Johansen procedure estimation of the cointegration relationships in the presence of two predetermined structural changes.24
Granger Causality Relationship: Having established the number of cointegrating

vectors, we performed Granger causality tests in order to verify the informational

relationships between the four variables.25 Granger causality from xk to xj means
that the conditional forecast for xj can be improved significantly by adding lagged xk
to the information set. The feasibility of the Granger causality tests depends on the
stationary features of the system. If the series are stationary, the null hypothesis of
no Granger causality can be tested by using standard Wald tests.26

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

59

In a cointegration model as in model (1), however, two sources of causation

Ytk1, if
come to light through the error-correction term
P (ECT), PYtk1 = ab9
27
G
DY
if
all
Gi
=
0.
The
ECT
a 6 0 or through the lagged dynamic terms k1
ti
i1 i
measures the long-run equilibrium relationship while the coefficients on lagged
difference terms indicate the short-run dynamics. Thus, in a cointegration model
(1), the proposition of xk not Granger causing xj in the long run is equivalent to
ajk = 0. In this context, xj is said to be weakly exogenous for the parameter b and xj
does not react to the equilibrium errors. Additionally, in model (1) the proposition
of xk not Granger causing xj in the short run is equivalent to Gjk(L) = 0, where (L)
is the lag operator.
Empirical Analysis
Data Description: Data used in the analysis are quarterly time series on sector
production, capital, labor, energy use, and oil price for Tunisia during the period
19602005. The variables notations and definitions are as follows: Y = sector
production in U.S. dollars, K = sector capital stock in U.S. dollars, L = sector
employment number, EU = total energy use in the sector in thousands of tons of oil
equivalent, and OP = world oil price in U.S. dollars per barrel. All variables are
transformed into their natural logarithms so that their first differences approximate
their growth rates.
The Model: We estimate a five-dimensional macroeconometric model that
represents a vector of sector output (Y), world oil price (OP), labor (L), capital
stock (K), and energy use (EU), of a vector error-correction (VEC) representation
(see S. Johansen):28
Xk1
DYt PYtk1
G DYti cDt et
5
i1 i

where the reduced rank, r, of the 434 matrix of P equals the number of cointegration vectors in the system and n equals the number of (endogenous) series in
cointegration equation (5). Thus, P can be written as P ab0 , where a and b are
each of the dimension r 3 5 and rank r. The matrix b contains the cointegrating
vectors b, b bt ; . . . ; bt ; while the matrix of the adjustment coefficients a
describes the speed of adjustment of each of the four individual series in Yt to
deviations from the cointegration relationships.
Unit Root Test with Two Structural Breaks: We investigate the stationary status
of the variables using the Lumsdaine and Papell (LP) tests for unit roots in the
presence of two structural breaks.29 Table 1 provides the results of the LP test. The
primary findings of the analysis are as follows: the unit root hypothesis is accepted
for all variables under investigation in each sector. The computed break dates are

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Table 1
RESULTS OF THE LUMSDAINE AND PAPELL (LP) TEST

Sector

Variables

TB1

TB2

LM

Unit Root Hypothesis

Agricultural
Sector

Y
K
L
EU
OP

1973 Q4
1973 Q4
1973 Q2
1973 Q3
1982 Q2

1994 Q2
1991 Q2
1999 Q1
1991Q2
1991 Q2

4.96
5.57
6.55
5.31
4.44

Accepted
Accepted
Accepted
Accepted
Accepted

Industrial
Sector

Y
K
L
EU
OP

1973 Q4
1976 Q3
1973 Q4
1973 Q3
1982 Q2

1991 Q1
1991 Q2
1991Q2
1991 Q1
1991 Q2

5.78
4.52
6.24
6.20
4.44

Accepted
Accepted
Accepted
Accepted
Accepted

Services
Sector

Y
K
L
EU
OP

1980 Q2
1973 Q4
1973 Q4
1973 Q3
1973 Q4

1991 Q2
1991 Q1
1991 Q2
1991 Q3
1991 Q2

4.95
5.15
5.85
5.78
4.44

Accepted
Accepted
Accepted
Accepted
Accepted

Y = sector production in U.S. dollars, K = sector capital stock in U.S. dollars, L = sector
employment number, EU = total energy use in sector in thousand tons of oil equivalent, and OP = world
oil price in U.S. dollars per barrel; R. Lumsdaine and D. H. Papell, Multiple Trend Breaks and the Unit
Root Hypothesis, The Review of Economics and Statistics, vol. 79, no. 4 (1997), pp. 21218.

the most significant from this test, which corresponds closely with the expected
dates associated with the effects of the oil boom in 1973 and the first Gulf War in
1991.
Cointegration Test Results: As explained above, Johansen derived the likelihood ratio (LR) test in order to determine the number of cointegrating relations in
a system of variables by allowing for the presence of potential structural breaks.
We now apply a maximum likelihood approach for testing and determining the
long-run relationship in the model under investigation. As mentioned earlier, in
this procedure Johansen assumed that the break point is known a priori. In table 1,
we determined the time of the break endogenously by the LM procedure. The
empirical results based on this method showed two significant structural breaks in
the model under investigation, which are consistent with the timing of the 1973 oil
shock and the first Gulf War (1991). Therefore, at this stage we include two
dummy variables of regime change in order to take into account the two structural
breaks in the system. Following the Johansen procedure we consider three cases:
an impulse dummy and shift with intercept included, an impulse dummy and shift
with trend and intercept included, and, finally, an impulse dummy and shift with

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

61

a trend statistically independent (orthogonal) to a cointegration relation included.

The cointegration results in these three cases are presented in table 2.
The optimal number of lags is determined by AIC and SC, which is more appropriate for the short span of the data. The hypothesis of the long-run relationship among
non-stationary variables is tested and the result is reported in table 2. These findings
indicate that the hypothesis of no cointegration r = 0 is rejected at the 10-percent,
5-percent, and 1-percent significance level. The existence of one cointegration vector
is not rejected in any of the three cases mentioned above for the manufacturing
sector and rejected in the remaining sectors. The assumption of existence of two
cointegration vectors is accepted for the industrial, agricultural, and services sectors.
Estimation Results: In the aforementioned results, we find that two structural

breaks occur in each variable in each sector and that long-run relationships exist in
our predefined model. In the following work, we divide our samples into three
subsamples limited by the break dates and estimate the long-run and the short-run
relationships between the variables. Finally, we try to interpret the causal relationships between variables and determine how each endogenous variable responds over time to a shock to other variables.
Table 2
RESULTS OF THE COINTEGRATION TEST USING THE SAIKKONEN

AND LUTKEPOHL
(SL) APPROACH
Intercept Included (C)

Intercept and Trend Included (C/T)

95%

99%

G0

LR

230.04
127.69
54.06
17.33
8.22

Agricultural Sector
0.000
94.4
98.2
0.000
68.5
71.9
0.013
46.5
49.4
0.738
28.4
30.8
0.477
14.1
16.1

105.8
78.5
55.2
35.7
20.4

0
1
2
3
4

0
1
2
3
4

139.76
73.78
30.70
14.24
3.75

Industrial Sector
0.000
94.4
98.2
0.035
68.5
71.9
0.853
46.5
49.4
0.930
28.4
30.8
0.948
14.1
16.1

105.8
78.5
55.2
35.7
20.4

0
1
2
3
4

126.13
72.94
33.76
14.28
4.93

Services Sector
0.000
94.4
98.2
0.048
68.5
71.9
0.690
46.5
49.4
0.910
28.4
30.8
0.844
14.1
16.1

105.8
78.5
55.2
35.7
20.4

G0

LR

0
1
2
3
4

Pval

90%

Pval

90%

95%

99%

232.24
126.47
54.90
18.73
8.08

Agricultural Sector
0.000 107.8 112.9
0.000
79.3
83.6
0.100
54.7
58.4
0.844
33.8
36.8
0.705
16.5
16.4

122.7
92.3
65.8
42.9
23.0

0
1
2
3
4

138.19
92.89
35.64
18.72
5.80

Industrial Sector
0.000 107.8 112.9
0.001
79.3
83.6
0.800
54.7
58.4
0.824
33.8
36.8
0.887
16.5
16.4

112.7
92.3
65.8
42.9
23.0

0
1
2
3
4

125.40
84.07
44.92
20.05
4.23

Services Sector
0.006 107.8 112.9
0.049
79.3
83.6
0.418
54.7
58.4
0.781
33.8
36.8
0.876
16.5
16.4

122.7
92.3
65.8
42.9
23.0

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VECM Estimation Results in the First RegimeFirst Quarter (Q1) 1960 through
Fourth Quarter (Q4) 1973: As highlighted in table 3, the empirical results of the

Tunisian agricultural sector show that in the long-run relationship in the first regime, physical capital has the most significant effect on agricultural production
Table 3
VECTOR ERROR-CORRECTION MODEL (VECM) ESTIMATION
a
RESULTS IN THE FIRST REGIME
Y(21)
Agricultural Sector
1
b1

K(21)

L(21)

EU(21)

OP(21)

2.34
[5.16]

2.04
[2.06]

1.68
[4.20]

0.81
[4.79]

3.03
4.26

b2

0.77
[3.44]

5.50
[5.15]

0.14
[0.32]

0.50
[2.71]

a1

0.001
[0.17]

0.01
[1.17]

0.002
[2.76]

0.01
[0.68]

0.51
[4.65]

a2

0.03
[3.96]

0.01
[1.66]

0.002
[4.47]

0.002
[0.18]

0.17
[2.24]

Industrial Sector
1
b1

3.26
[2.08]

0.53
[0.61]

0.03
[0.16]

2.18

b2

30.98
[3.67]

11.72
[2.52]

5.38
[5.44]

3.22

a1

0.07
[2.64]

0.17
[2.70]

0.004
[1.83]

0.04
[2.75]

0.22
[1.13]

a2

0.009
[2.05]

0.005
[0.41]

0.0002
[0.51]

0.003
[1.22]

0.17
[4.47]

Services Sector
b1
1

0.83
[0.75]

0.83
[1.08]

0.68
[4.23]

2.37

b2

3.68
[2.20]

2.50
[2.15]

0.46
[1.89]

3.57

a1

0.007
[0.83]

0.03
[2.91]

0.002
[3.24]

0.002
[0.60]

0.51
[4.37]

a2

0.01
[2.15]

0.004
[0.71]

0.002
[5.34]

0.002
[1.16]

0.15
[2.35]

Y = sector production in U.S. dollars, K = sector capital stock in U.S. dollars, L = sector
employment number, EU = total energy use in sector in thousand tons of oil equivalent, OP = world
oil price in U.S. dollars per barrel, and C = drift.

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

63

(a 1-percent increase in K leads to a 2.34-percent increase in agricultural growth).

A 1-percent increase in total energy use (EU) leads to a 1.68-percent increase in
agricultural production. A 1-percent increase in human capital (L) leads to a 2.04percent increase in production. Lastly, a 1-percent increase in oil prices (OP) leads
to a 0.81-percent decrease in agricultural growth It is apparent from these findings
that energy use and oil price have the most important effects on the Tunisian
agriculture sector in this sub-period. The VECM estimation results of the Tunisian
industrial sector suggest only a long-run relationship between energy use and
industrial production growth. Indeed, a 1-percent increase in energy use (EU) leads
to a 0.52-percent increase in industrial production, but the oil price (OP) coefficient
is not significant.
Moreover, the results indicate that, unlike the industrial sector, the oil price has
a great effect on production in the services sector in the long run and the energy
use coefficient is not significant. The results suggest the dependence of the Tunisian
economy on energy and its price, thus contradicting the neoclassical results and
other studies on developed countries because in Tunisia energy is not a limiting
factor for production growth.
Table 4 reports the outcomes from the Granger causality tests. These tests are
conducted using a joint F-statistic for the exclusion of one variable from one
equation as previously illustrated. The results of these tests indicate that for the
agricultural sector Granger causality is running in both directions between output
growth and energy use and between output growth and oil price. Thus, in contrast
with the neoclassical argument that energy is neutral to growth, our results for
Table 4
GRANGER CAUSALITY TEST RESULTS IN THE FIRST REGIME
Null Hypothesis
Agricultural Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price
Industrial Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price
Services Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price

F-Statistic

P-Value

6.04746
10.28020
3.05791
5.41766

0.00345
9.6E-05
0.01376
0.00602

0.37142
0.09686
0.25438
1.25674

0.76837
0.15150
0.08900
0.20270

0.48777
0.86683
4.67759
1.31970

0.61672
0.42615
0.02802
0.14729

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Tunisia are consistent with the view that energy and oil price have a causal impact
on output growth. Our results are also in line with findings by D. Stern, H. Yang,
and S. Lardic and V. Mignon who obtained similar results for other countries.30
Unlike the agricultural sector, the results for the industrial sector tests indicate
that Granger causality is not running between all variables. These results for this
sector are consistent with the neoclassical view that energy is neutral to growth. Our
results are consistent with the findings by U. Erol and E. Yu, E. Yu and J. Choi,
E. Yu and B. K. Hwang, B. S. Cheng, E. Yu et al., and E. Yu and J. C. Jin, which
offered evidence in favor of the neutrality-of-energy hypothesis.31 In the case of the
services sector, the Granger causality is running only in one directionbetween oil
price and output growth (oil price causes output)but is absent between energy use
and services production. These conclusions are consistent with the neoclassical view
that energy use is neutral to growth and are in line with the results of U. Erol and
E. Yu.32 The outcomes are consistent with the research of S. Lardic and V. Mignon,
which suggested that oil prices cause output growth and uncovered an asymmetric
long-run relationship between oil prices and GDP.33
VECM Estimation Results in the Second RegimeFirst Quarter (Q1) 1974 through
Third Quarter (Q3) 1991: In this time period, the oil price coefficients are still significant

for growth in both the agricultural and industrial sectors. One can explain this by the
fact that during this time span Tunisia exported oil and used the revenues for investments projects, which in turn fostered growth. But, the energy use coefficients are
still not significant in terms of the long-run relationships; the energy consumption was
not a limiting factor for the agricultural and industrial sectors during this time frame.
The estimation results for the sector of services suggest that, for the period
19731991, the energy use and oil price were not significant factors for growth
(see table 5). Indeed, for growth only the capital and labor coefficients are significant for a long-run relationship.
For the second period of our sample, the Granger causality tests are reported in
table 6. The results indicate that, like the first regime, for the agricultural sector the
Granger causality runs in both directions, between energy use and agricultural output
growth and is unidirectional between oil price and output growth (oil price causes
output). These results are aligned with findings by K. H. Ghali and M. I. T. El-Sakka
that energy use is not neutral to growth.34 But with the unidirectional relationship
between oil price and agricultural output, we find that oil price has a negative effect
on output growth. The increase in oil price delayed the output growth.
In the case of the industrial sector, the Granger causality is bidirectional between
energy use and output growth and unidirectional between oil price and industrial output.
These results are consistence with the view of non-neutrality of energy to growth. But,
in Tunisia the industrial sector growth is dependent upon fluctuations in world oil prices.
For this period, the services sector output growth is independent of energy and
its price. Indeed, the Granger causality test and VECM estimation fail to find

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

65

Table 5
VECTOR ERROR-CORRECTION MODEL (VECM) ESTIMATION RESULTS IN THE
a
SECOND REGIME
Y(21)
Agricultural Sector
1
b1

K(21)

L(21)

EU(21)

OP(21)

2.01
[6.41]

0.19
[0.41]

0.27
[1.04]

0.32
[2.62]

1.30
9.99

b2

0.11
[3.11]

1.84
[5.50]

2.35
[2.17]

3.52
[6.75]

a1

1.22
[1.57]

1.38
[2.28]

0.004
[0.22]

2.43
[3.09]

6.64
[3.20]

a2

0.28
[1.65]

0.38
[2.80]

0.0007
[0.17]

0.52
[1.06]

1.42
[3.07]

4.56
[5.65]

0.21
[0.47]

1.05
[2.27]

0.41
[3.10]

3.64
1.94

Industrial Sector
b1
1
b2

0.72
[2.28]

1.65
[3.94]

0.999
[2.20]

0.57
[4.40]

a1

0.36
[2.46]

0.21
[4.03]

0.003
[3.28]

0.14
[2.77]

0.77
[2.49]

a2

0.06
[2.83]

0.05
[1.61]

0.004
[5.13]

0.06
[3.00]

0.31
[1.16]

0.50
[3.01]

1.39
[2.69]

1.54
[2.47]

0.001
[0.02]

6.79
2.69

Services Sector
b1
1
b2

2.09
[0.09]

7.96
[5.32]

6.01
[3.34]

0.396
[2.00]

a1

0.016
[0.09]

0.13
[0.38]

0.009
[1.38]

0.093
[0.67]

2.27
[1.60]

a2

0.042
[0.68]

0.044
[0.37]

0.003
[1.46]

0.064
[1.32]

0.575
[1.16]

Y = sector production in U.S. dollars, K = sector capital stock in U.S. dollars, L = sector
employment number, EU = total energy use in sector in thousand tons of oil equivalent, OP = world
oil price in U.S. dollars per barrel, and C = drift.

a relationship between energy use and output and between oil price and output
growth.
VECM Estimation Results in the Third Regime Third Quarter (Q3) 1991 through
Fourth Quarter (Q4) 2005: The empirical results indicate that in the agricultural

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Table 6
GRANGER CAUSALITY TEST RESULTS IN THE SECOND REGIME

Null Hypothesis
Agricultural Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price
Industrial Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price
Services Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price

F-Statistic

P-Value

9.80750
8.33717
7.89687
1.19845

0.00090
0.00202
0.00260
0.32060

2.70741
6.40796
5.64023
1.09865

0.04668
0.25200
0.00186
0.17080

0.00057
3.35635
2.58446
2.19469

0.99943
0.04640
0.08977
0.12649

sector the total energy use (EU) and oil price (OP) coefficients are not statistically
significant. This result shows that these two factors are not a limiting factor on
economic growth in Tunisia. This is due to the governments intervention by subsidizing this sector. In the third long-run relationship, the industrial sector production depends on the total energy use and oil price fluctuations. Indeed, the EU
and OP coefficients are statistically significant (a 1-percent increase in EU and OP
leads, respectively, to an increase of 1.91 percent and a decrease of 0.84 percent in
production). Table 7 provides the VECM estimation results for the third regime.
For the services sector, the VECM estimation results show the dependence of
this sector on energy use, which is the limiting factor to its production growth.
However, the coefficient of oil price in the first cointegration relationship is not
significant. This result can be explained by the fact that the Tunisian services
sector is quite developed and contains many sub-sectors, such as tourism and
communications, which are not dependent on oil price fluctuations.
Table 8 reports the results of the Granger causality tests indicating that for the
agricultural sector Granger causality runs in one direction and only between output
growth and energy use (energy use causes output). Thus, in contrast with the
neoclassical argument that energy is neutral to growth, our results for Tunisia are
consistent with the view that energy has a causal impact on output growth. The
absence of relationships between world oil price and output growth in the case of
the agricultural sector can be explained by the use of government subsidies.35
The results in table 8 indicate that for the industrial sector Granger causality is
bidirectional running between energy use and output growth and is unidirectional

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

67

Table 7
VECTOR ERROR-CORRECTION MODEL (VECM) ESTIMATION RESULTS
a
IN THE THIRD REGIME
Y(21)
Agricultural Sector
1
b1

K(21)

L(21)

EU(21)

OP(21)

1.44
[4.88]

0.66
[3.88]

1.25
[4.36]

0.30
[1.56]

2.83
3.30

b2

0.12
[1.63]

0.03
[0.44]

1.66
[15.59]

0.04
[1.40]

a1

0.003
[0.11]

0.01
[0.29]

0.006
[3.98]

0.15
[2.85]

0.18
[0.81]

a2

0.19
[2.59]

0.15
[1.54]

0.009
[2.10]

0.53
[3.95]

0.15
[0.26]

Industrial Sector
b1
1

1.62
[5.76]

1.91
[2.35]

0.08
[2.36]

3.71

b2

0.95
[2.11]

0.02
[0.04]

0.19
[3.25]

7.08

a1

0.09
[3.59]

0.13
[3.02]

0.01
[3.38]

0.11
[5.38]

0.34
[4.77]

a2

0.086
[3.50]

0.13
[3.23]

0.003
[1.21]

0.05
[2.95]

0.09
[0.23]

0.19
[3.96]

2.65
[9.17]

2.58
[8.01]

0.08
[0.38]

2.540
1.768

Services Sector
b1
1
b2

1.31
[2.97]

1.34
[21.9]

0.02
[0.31]

0.097
[13.5]

a1

0.004
[0.096]

0.079
[2.11]

0.028
[4.70]

0.08
[3.05]

0.43
[0.50]

a2

0.25
[1.17]

0.65
[3.80]

0.064
[2.34]

0.176
[1.34]

1.50
[0.37]

Y = sector production in U.S. dollars, K = sector capital stock in U.S. dollars, L = sector
employment number, EU = total energy use in sector in thousand tons of oil equivalent, OP = world
oil price in U.S. dollars per barrel, and C = drift.

between oil price and output. These results for this sector and period contradict the
neoclassical view that energy is neutral to growth. For the services sector, however, the Granger causality is running only in one direction between energy use
and output growth (energy use causes output), but it is absent between energy oil

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Table 8
GRANGER CAUSALITY TEST RESULTS IN THE THIRD REGIME

Null Hypothesis
Agricultural Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price
Industrial Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price
Services Sector
Energy does not Granger cause output growth
Output growth does not Granger cause energy
Oil price does not Granger cause output growth
Output growth does not Granger cause oil price

F-Statistic

P-Value

5.22494
0.15171
0.97049
0.40586

0.00856
0.85962
0.38565
0.66849

3.48777
2.86683
4.67759
1.31970

0.01672
0.02615
0.02802
0.44729

5.15226
0.44611
2.51687
2.61655

0.00303
0.64311
0.09282
0.08493

price and services production. The results show that the services sector growth
depends on energy consumption but not on the world oil price.

Conclusion
The latest advances in econometric theory of structural change and a lack of the
studies examining the relationships between energy and economic growth in developing countries are the main motivations behind this research. In order to
examine the relationships between world oil price and the economic growth
sectors in a developing country (in this case Tunisia), we use the technique of
cointegration in the presence of structural breaks. The predetermined dates of
structural changes divide the sample into regimes that allow us to better evaluate
and understand the relationships among world oil price, energy use, and economic
growth.
The results show that the agricultural and the services sectors are not influenced much by a surge in oil prices. But it is very clear that our results contradict
neoclassical theory that energy is neutral to growth. Indeed, we find that energy
use always has had a great impact on the production of all economic sectors. We
can explain this as the agricultural sector still is supported by the government via
subsidies. In the last decade, the services sector has witnessed significant developed
in part due to the rapid growth in the communications industry as mobile phone
ownership has become widespread among the Tunisian population. Additionally,

TUNISIA: OIL PRICES, ENERGY USE, & GROWTH

69

the tourism subsector has become a major driver of the Tunisian economy, which is
made even more attractive by the cost differential for the tourists coming from high
cost-of-living developed nations and enjoying the relatively lower costs in Tunisia,
where oil prices are maintained by the government.
The industrial sector is influenced by energy use and world oil prices fluctuations,
especially in the last two regimes (first quarter 1974 through third quarter 1991 and
third quarter 1991 through fourth quarter 2005). This is due to the importance of this
sector to the overall Tunisian economy. Indeed, in the first period (first quarter 1960
through fourth quarter 1973), Tunisia was in the first stages of development after
gaining its independence. The industrial sector was nascent and the country had
excess oil production capacity, which is why we find that the production of this sector
was greatly influenced by the use of energy and not by the price of oil. In the last two
time periods, the industrial sector became one of the bases of the Tunisian economy.
Then, particularly in the last regime, Tunisias energy supply and demand balance
became onerousa situation with major implications for the industrial sector as it is
a significant energy consumer. Therefore, it makes sense that a surge in oil prices has
a notable impact on the growth of the industrial sector.
In general, the results reject the neoclassical assumption of the neutrality of
energy to economic growth. Nonetheless, world oil prices do have a significant
effect on the Tunisian industrial sector, although locally the oil prices are maintained by the government. The results of this study are in line with some findings,
but contradict others. In particular, our results are consistent with those of S. Lardic
and V. Mignon, who suggest an asymmetric relationship between oil price and
output growth: the increase in the oil price delayed or had a negative influence on
economic growth.36 Finally, we can better see the effects of world oil prices on the
global Tunisian economy if we add the variable of public expenditure in the model
because many products and sectors are subsidized.
NOTES
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2
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E. Zivot and D. Andrews, Further Evidence of the Great Crash, the Oil Price Shock and Unit
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13
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P. Saikkonen and H. Lutkepohl, Testing for the Cointegrating Rank of a VAR Process with
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19

P. Saikkonen and H. Lutkepohl, Testing for the Cointegrating Rank of a VAR Process with
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22

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23

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C. W. J. Granger, Investigating Causal Relations by Econometric Models and Cross-Spectral

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S. Johansen, Statistical Analysis of Cointegration Vectors, Journal of Economic Dynamics

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29

R. Lumsdaine and D. H. Papell, op. cit.

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U. Erol and E. S. H. Yu, On the Causal Relationship between Energy and Income for Industrialized Countries, and Time Series Analysis of the Causal Relationships between U.S.
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33

S. Lardic and V. Mignon, op. cit.

34
K. H. Ghali and M. I. T. El-Sakka, Energy Use and Output Growth in Canada: A Multivariate
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35

These include quantities of fuel for farmers, new energy-saving materials, encouraging
farmers by a sum of money or a tax exemption.
36

S. Lardic and V. Mignon, op. cit.