Abstract
This paper investigates the dynamic causal relationships between energy consumption, energy price and economic activity in Saudi Arabia based on a demand side approach. We use a Johansen multivariate cointegration approach and incorporate CO2 emissions as a control variable. The results indicate that there exists at least a long-run relationship between energy consumption, energy price, carbon dioxide emissions, and economic growth. Furthermore, a long-run unidirectional causality stands from energy consumption to economic growth and CO2 emissions, bidirectional causality between carbon dioxide emissions and economic growth, and a long-run unidirectional causality runs from energy price to economic growth and CO2 emissions. In the short-run, there is unidirectional causality running from CO2 emissions to energy consumption and economic output and from energy price to CO2 emissions. Even though, the energy-led growth hypothesis is valid, the share of energy consumption in explaining economic growth is minimal. Energy price is the most important factor in explaining economic growth. Hence, policies aimed at reducing energy consumption and controlling for CO2 emissions may not reduce significantly Saudi׳s economic growth. Investing in the use of renewable energy sources like solar and wind power is an urgent necessity to control for fossil fuel consumption and CO2 emissions.