Changing Patterns of household expenditures on energy: A case study of Indonesia and Pakistan

Type Journal Article - Extractive Industries and Development
Title Changing Patterns of household expenditures on energy: A case study of Indonesia and Pakistan
Volume 6
Publication (Day/Month/Year) 2009
This paper applies a decomposition technique using a log mean Divisia
index to two sets of household surveys taken several years apart in
Indonesia and Pakistan. The methodology enables separation of changes
in expenditure on different types of energy into changes in prices,
quantities, the share of households using the given form of energy, and
total household income (using total household expenditure as a proxy).
The technique was applied to electricity, liquefied petroleum gas (LPG),
kerosene, and gasoline in Indonesia, and to natural gas, kerosene, LPG,
purchased firewood, collected firewood, dung cake, and other forms of
biomass in Pakistan.
The recent history of petroleum product prices, which climbed over
several years to a peak value in mid–2008 and then fell rapidly until early
2009, has drawn attention to the effects of energy prices on household
expenditures and energy use. Although information on household
expenditures in developing countries from 2007 and 2008 is not yet
available, data from earlier household expenditure surveys conducted
during periods of rising energy prices can be useful in this context.
Using two sets of household surveys carried out during the first half of
this decade, this paper investigates three questions:
• What proportion of household income is spent on petroleum products
and on energy generally?
• How does the proportion vary across income levels, and does the
effect of higher oil prices bear more heavily on low- or high-income
• Are there important differences in the patterns of expenditure on
energy between rural and urban households at similar income
A further issue undertaken by this paper that has not been widely
addressed relates to the changing patterns of household expenditure
on energy over time. Changes in expenditure shares for an individual
household can occur because of changes in quantities purchased, prices
paid, or total expenditure. Separating these factors allows the relative
importance of each to be pinpointed. The large changes in energy prices
experienced over the last few years raise questions about the degree of stability of household expenditure shares on energy, questions that this
paper looks to address:
• Does the share of expenditure on energy remain constant over time
when there are large price changes?
• How do household budget shares for different fuels change as
quantities purchased respond to changed prices and incomes?
• Do households switch to or switch away from the use of certain fuels
The surveys of household expenditures confirmed the importance of
energy in the household budget. In Indonesia, the share of expenditure
on energy for all income group quintiles was about 7 percent in 2002
and 8 percent in 2005. In Pakistan, the share was about 9 percent in
2001–02 and 10 percent in 2004–05. These results suggest that large
energy price increases would weigh heavily on all households.
The share of expenditure on electricity was high in both Indonesia and
Pakistan, and higher than any other form of energy in every quintile in
Pakistan. In Indonesia, the share of expenditure on electricity increased
markedly between the two surveys, even though the access rate (defined
here as the percentage of households reporting use) was already very
high in urban areas at the time of the first survey. As expected, the
share of expenditure on automotive fuels rose steeply with increasing
income quintile in both countries. Firewood and other forms of biomass
were widely consumed by low-income households, but their relative
importance declined over time.
Comparing rural and urban households at the same quintile levels
revealed large differences in patterns of energy use, even though the
shares of expenditure on energy and the general level of household
income were not very different. Urban households devoted more of
their budget to modern forms of energy (petroleum products, electricity,
and natural gas where available), while rural households devoted
a larger share to biomass. A limited analysis of household groups
at similar income levels showed that rural households as a group
allocated a higher share of expenditure to automotive fuels than did
urban households. In Indonesia, this is explained largely by a higher
proportion of households owning automotive vehicles in rural areas,
while in Pakistan the quantity consumed per user household is higher.
At similar income levels, expenditure on electricity was higher in urban
areas, while expenditure on firewood and other forms of biomass was
higher in rural areas. Expenditure on kerosene differed between the two
countries, being higher for Indonesia’s urban quintiles and for Pakistan’s
rural quintiles.

Related studies