Chart of the Week: Keep An Eye on the Relative Price of Oil
The combination of rising absolute prices for crude oil in recent weeks, coupled with the lackluster growth in the global economy, translates into a high oil expense indicator.
Just how high are crude oil prices nowadays? Well, by one measure, the cost now stands at $96.25 a barrel – or at least, that’s what it will cost to but the near-term crude oil West Texas intermediate futures contract. And yes, those prices have been climbing, despite the weakness in the global economy.
But there is another way of examining the current price of the world’s major source of energy, and that is by looking at it with respect to global GDP, as we do in this week’s Chart of the Week, below.
While crude prices may be rising in absolute terms, this chart paints a picture that is just as worrying. After dipping briefly earlier this year the oil expense indicator – the price of oil multiplied by global consumption and then divided by global GDP – is also on the rise again, despite hovering at close to record highs. This figure tells us roughly what percentage of its income the world spends on crude oil. The combination of rising crude prices and flat to modest growth in global GDP is a depressing combination for all those who rely on crude – from consumers paying higher prices for gasoline, to corporations whose businesses rely on crude or its byproducts as key inputs and that now must face higher expenses at a time when revenue and profit growth has become more scarce.
Economists attribute the recent rise in crude prices to a combination of anxiety about the turmoil in the Middle East – specifically, growing tensions between Iran and Israel – and other supply concerns, such as production issues in the North Sea. Hopes of another round of quantitative easing or other central bank stimulus measures also is igniting a wave of speculative buying of energy futures; in previous rounds, crude oil prices moved sharply higher and strategists have forecast that this time it could benefit again, along with other commodities.
Some of those concerns about conflict in the Middle East, or hopes for central bank stimulus, could prove unfounded. But while that would certainly deliver a blow to the price of crude oil and give consumers a break, it would affect only the absolute price. The relative price – the oil expense indicator – is likely to remain on the high side unless and until the global economy shows signs of springing back to life.
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