Saturday, February 12, 2011

IEA Warns of Rising Oil Burden

by OGJ editors, OGJ, Feb 10, 2011
The global oil burden in 2010 was the second-highest following a major recession and could rise this year to levels close to those that have coincided in the past with marked economic slowdowns, warns the International Energy Agency in its latest monthly oil market report.

The ‘oil burden’ concept is defined as nominal oil expenditures (demand multiplied by the crude price) divided by nominal gross domestic product (GDP). A rising oil burden will not necessarily cause an economic recession, but it can greatly compound the effect of other economic and financial shocks, IEA said.

Economic activity in developed countries of the Organization for Economic Cooperation and Development (OECD) had already been stagnating before oil prices began their final ascent to $147/bbl by July 2008 from about $90/bbl in late 2007. Thus, as much as the Great Recession can be attributed to financial factors, high oil prices were a final nail in the coffin for advanced economies at that time, the report said.

The oil burden rose by roughly a quarter in 2010 to 4.1%, the second-highest following a major recession. The highest was reached in 1980, at 8%. For the OECD, this was equivalent to about 0.8% of its collective GDP. Moreover, under current assumptions for global GDP, oil price, and oil demand, the global oil burden could rise to 4.7% in 2011, getting close to levels that have coincided in the past with a marked economic slowdown, IEA said.

The Paris-based agency warns of the unhealthy combination of higher oil prices with a fragile economic recovery, emerging inflationary pressures, and instability in the Middle East.

IEA’s sensitivity analysis for 2011, holding GDP and oil demand constant, indicates that at current prices of around $90/bbl for WTI, the global oil burden is rapidly approaching the 2008 ‘recession threshold,’ and is already well above the $70-80/bbl price range described as ideal by some producing countries, which would entail an oil burden of 3.5-4%, the report said.

A problem can occur when the rate of growth in prices moves out of sync with economic activity.

“Following the price shocks of the 1970s and early 1980s, prices were arguably too low for the following two decades, in the sense that they undermined efficiency efforts, encouraged waste (both symbolized by the ascent of SUVs in North America) and removed economic incentives to promote more expensive renewables and other energy sources,” IEA said.

By contrast, oil prices rose to unsustainable levels in the mid-2000s, supporting alternative energy sources but also helping to trigger the Great Recession of 2009.

“Ideally, it might be better if the growth in both prices and GDP remained relatively proportionate, letting consumers gradually adapt and producers benefit from rising revenues. That may be wishful thinking, however, as subsidies and other market distortions persist, notably in emerging countries,” IEA said. [Full story]

(The IEA, the energy policy and monitoring arm of the 28-member IEA and the 34-member OECD, warned last month that sustained oil prices of US$100 a barrel pose a real risk to the world economy. "Were $100/bbl oil to become entrenched in 2011, that would risk pushing the [oil burden] figure through 5%," IEA said in its previous monthly Oil Market Report (OMR), released on January 18, 2011. -- D.R.)

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