Fuel for Thought

An Introduction to Oil Burden

Apr 10 2015 Read 770 Times

The continuing fluctuation of oil prices has caused global concern, both for oil operators and consumers. Oil burden is the volume of oil consumed multiplied by the average price and divided by nominal gross domestic product. This equation gives the relative amount of the world economy who are buying oil. As oil prices change throughout the decades, so does the oil burden.

High oil prices and the effects on the global economy

High oil prices in the 1970’s caused a great many worldwide changes. They bought about two severe recessions, led to the manufacture of smaller vehicles by Japanese companies such as Toyota and Honda, and kick-started production of North Sea oil.

The high prices of oil, which had seen the cost of a barrel rise from $3 to over $12 in 1974, also led to a change in relations between the West and the Middle East. The UK and the US had previously focused on Russia and China as part of the Cold War opponents and had seen the Middle East as allies. Now the West had to look to alternative forms of energy and countries with more stable oil supplies. During this period oil burden was high.

Low oil prices and the effects on the global economy

Compared to the 1970’s, oil was very cheap in the late 1990s. World economy grow steadily and, as such, oil burden at the end of the second quarter was falling well below last year’s. During this period oil burden was low.

The current oil burden

At present, current oil burden stands at 45% higher than it did over a year ago. However, worldwide nominal GDP has only risen by 13%. This means the current oil burden is set to be the highest it has ever been for more than a decade. For more information about the current situation, you can read about the Pros & Cons of Plummeting Oil Prices and if Oil Prices Will Recover.

Experts calculate an oil burden of around 5% as critical for a viable global economy. This is based on oil demand historically and forecasts for future demand. During the run up to rising oil prices during 2008, oil burden was just below this level, with oil priced at around $100 per barrel. As prices have declined, the oil burden has fallen accordingly.

The forecast for future oil burdens

If the experts’ predictions of the quarterly price average of $42/bbl West Texas Intermediate (WTI) prove to be accurate, the oil burden it expected to fall below 2% of GDP. However, with another forecast of a rise in prices to $60/bbl by the last quarter in 2015, the final oil burden of the year is set to rebound to 3%. This is still under the ideal percentage of 5%. 

Image Source: Crude oil chart – via Terence Wright
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