Energy—capital substitutability/ complementarity

Changes in the price of energy affect not only the demand for energy but also the rates of capital formation and labour utilization. These changes depend on the functional relationship between energy and the primary factor inputs. In particular, the relationship between energy and capital has been characterized by major conflicting evidence. Time-series data classify the two inputs as complements. By contrast, pooled cross-section studies conclude that capital and energy aresubstitutes in the production process. In this case, higher priced energy will stimulate the demand for investment. While several reconciliation attempts on this disparity deserve marked attention, the most prominent explanation is that time-series studies reflect short-term relationships and cross-section analyses capture long-term effects.