How is demand for natural gas determined across European industrial sectors?

This paper estimates the response of manufacturing sectors' natural gas demand to price and output changes. The average response to future changes in absolute and relative prices of the manufacturing industry in an OECD country depends on the mix of manufacturing industries, particularly with respect to energy intensity and substitution opportunities in production. We estimate short and long run demand elasticities using a shrinkage estimator, which allows heterogeneous demand responses across industries for each country. Our results show that price and output elasticities are heterogeneous within the same manufacturing sector across countries. Furthermore, an output contraction due to e.g. demand shocks will generally have larger negative effects on gas demand than increases in natural gas prices. (C) 2011 Elsevier Ltd. All rights reserved.