Determinants of Fuel Consumption in Nigeria: Evidence from an ARDL Approach

Abstract

Fuel subsidy reforms have remained a central policy issue in many oil-dependent economies due to their implications for energy consumption, fiscal sustainability, and economic efficiency. This study examines the effect of fuel subsidy reforms on fuel consumption using annual time-series data from 1990 to 2024. This study adopts a quantitative time-series research design to examine the effect of crude oil price volatility on fuel consumption in Nigeria. The study employs the Autoregressive Distributed Lag (ARDL) modelling approach to investigate both the short-run and long-run relationships between fuel consumption and selected macroeconomic variables, including crude oil price, real gross domestic product, population, industrial output, and energy efficiency. The empirical results confirm the existence of a long-run relationship among the variables. The long-run estimates reveal that real GDP and industrial output exert positive and significant effects on fuel consumption, indicating that economic expansion and increased industrial activities drive higher demand for fuel. Energy efficiency also shows a positive relationship with fuel consumption, reflecting the expansion of energy-using activities within the economy. Population exhibits a negative effect on fuel consumption, while crude oil price demonstrates a negative but statistically insignificant influence. The short-run dynamics further confirm that deviations from long-run equilibrium are corrected over time through a significant error correction mechanism. Diagnostic and stability tests indicate that the model is statistically robust and stable. The findings suggest that while subsidy reforms and fuel price adjustments may influence consumption patterns, broader structural factors such as economic growth, industrial activity, and energy use efficiency play a more significant role in determining fuel demand.