Analysis of the domestic demand for liquefied petroleum gas (LPG) in urban areas: the case of Dar es Salaam

Tanzania is an oil importing developing country which, like other less developed countries, has found itself in the pincers' double squeeze of the energy crisis: on the one hand is the oil crisis, while on the other is the fuel wood crisis. The undesirability of the consequences of the crisis has led authorities to take various measures such as energy conservation, improvement in end-use efficiency, afforestation, oil and gas exploration, etc., all in an effort to try and forestall the damaging effects of the crisis. Still there are some dents in implementation. Much effort has not gone, for example, in ensuring that imported oil (which takes a lion's share of our treasured foreign exchange) is fully put to use. The issue of flaring liquefied petroleum gas (LPG) when its demand indicates that it should be selling 'like hot cake' seems to be a paradox which has instigated this study. It was the task of this study therefore, to analyse the factors that influence and determine the demand for LPG in Tanzania. Dar es Salaam was taken as a case study under the consideration that it is a typical urban area, since LPG is consumed only in urban areas. The significance of this analysis could be conceived in two ways. In terms of policy, basing on the findings, measures could be invoked to avoid unnecessary wastage of LPG, for example, by increasing its consumption and/or adjustment in consumption relative to other alternative sources. Secondly, in the state of the art, the study is the contribution to knowledge in regard to empirical verification of demand theory. In view of the practical difficulties of quantifying all the explanatory variables, the econometric analysis was supplemented by an overview of LPG consumption in a historical perspective. While the econometric analysis attempted an estimation of the parameters of the quantified demand relationship to establish the significance and sign of the estimated coefficients, the general level analysis helped to highlight the problems that are taken to affect the consumption of LPG. The study benefitted from the previous related studies in two ways. In one way, the double-log single equation model fitted by ordinary least squares(OLS) in the analysis of time series data derived from previous empirical studies and economic theory. In another, broad issues related to LPG and its alternatives were reviewed, if only to indicate the position of LPG in that spectrum and show the seriousness with which this double-edged crisis has been taken. The findings or the econometric analysis showed that the aggregate income of consumers, LPG's own price and LPG appliance holdings are significant determinants of the demand for LPG; while from the overview of LPG consumption it was derived that institutional bottlenecks: storage and distribution facilities, and refinery's capacity utilization may also be factors that have effect on LPG consumption. The policy implications and recommendations that follow from the findings are of both short-term and long-term nature. Since LPG is a normal good, its price may be manipulated to influence its increased consumption, for example, by reducing/shifting the tax on LPG. Moreover the findings on LPG's income elasticity of demand indicate that LPG consumption will increase with increased income. In the short term therefore, the government may wish to raise people's incomes by reducing the income-tax rates while the long term will be taken care of by increase in output. In regard to appliances, it is recommended that these may be imported as a short-term solution, while for the long-term efforts need to be taken to encourage local manufacturing of these utensils. Institutional bottlenecks could be solved through proper coordination and by limiting the number of institutions involved in the marketing processes and decisions. Lastly, whereas the problem of refinery's capacity utilization is being solved, the solution to the issue of storage and distribution would require the government to allocate enough foreign exchange to import some of these facilities. Viewed in the macro-economic framework, the measures recommended are interlinked in the cause-and-effect fashion through the multiplier process. This implies that they have to be instituted as a whole package. However, this study was found to have limitations in aspects of data availability, estimation and scope. Yet, it could still be concluded that with proper implementation of the recommended measures, LPG need not be flared and wasted.