Abstract:
In the modern trends of industrialization and development, energy has become one of the
most important aspects of every economy in the world. Among the energy sources that are
available today, diesel has a considerable consumption for various activities such as
production of goods and transportation in many countries including Sri Lanka. Using
monthly data of ten explanatory variables (January 1998 to July 2018) vector error correction
model of order 2: VECM (2) was developed to model monthly consumption of diesel in Sri
Lanka. The diesel consumption has been increasing due to various activities. The most
significant influential variables are Exchange rates of USD to LKR, Merchandize Imports,
Number of Tourists Arrivals, National Consumer Price Index, and Electricity Power
Generated. The errors of the model were found to be white noise. The percentage errors of
the fitted data using the VECM (2) model for both trained and validated set vary from -8.4 to
+8.5%. Further it was found that Exchange rates of USD to LKR, Merchandize Imports, and
Number of Tourists Arrivals show significant long run positive association with diesel
consumption while National Consumer Price Index and Electricity Power Generated indicate
significant long run negative relationship with diesel consumption in Sri Lanka. This model
is suitable only short term prediction and it is recommended to develop the model so that it
can be used for long run prediction. Nevertheless, the model provides the analyst with the
ability to make decisions using various predicted intervals with different membership values
by controlling the explanatory variables.
