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Abstract
The ability of industry to adjust to sharply increased energy prices is a key question for business and government. The existing literature is incomplete and inconclusive. Traditional studies of industry factor demand generally omit energy as an input. More recent multifactor studies are inconclusive about input substitutability characteristics, specifically whether energy and capital are complements or substitutes. Also, these recent studies are highly aggregated in terms of both energy and industries. This paper analyzes energy demand within the context of other inputs for the cement industry. Unlike an aggregate of diverse industries, the cement industry is characterized by a homogeneous product and a common production process. This paper reviews the economic structure of the industry and the use of energy in the production process. Alternative econometric models are then applied to 1947-1972 data. A dynamic Cobb-Douglas specification as a means of deriving short and long run relationships is unsuccessful. A separable translog specification with inputs grouped into subfunctions performs well. It provides evidence that energy is substitutable with capital within a fossil fuel-electricity-capital subfunction but becomes complementary when all inputs, including production and nonproduction labor, are considered together. The model is shown to be an unreliable predictor of the 1973-1976 period. Structural and transitory reasons for this are discussed. Nevertheless, the industry is shown to be responsive to energy prices as is evidenced by economic theory, awareness of the engineering possibilities, and the importance of energy costs to the industry.
