Primary Energy Demand in Korea: Substitution and Structural Change

Abstract

International energy price changes can lead energy-importing economies to adjust their input factor choices, and Korea provides a useful case given its very high dependence on imported primary energies. This study estimates a primary energy input-demand system for Korea using quarterly data from 2000 to 2021, covering coal; crude oil; natural gas; labor; and others, including non-primary energy inputs. Our analysis uses LA-AIDS specifications. Breakpoint unit-root and cointegration tests support structural change around the global financial crisis, and this shift is incorporated through period-specific parameters within a unified demand system. The compensated elasticities indicate that crude oil becomes more price sensitive after the break, while coal and natural gas become less responsive to their own prices. Cross-price relationships also change, with weaker substitution among the primary energies and greater substitution between crude oil and others. These findings suggest that the ability to adjust inputs and the economic effects of international price changes can vary over time, which should be taken into account in energy policy evaluation.