• 4 minutes Ten Years of Plunging Solar Prices
  • 7 minutes Hydrogen Capable Natural Gas Turbines
  • 10 minutes World looks on in horror as Trump flails over pandemic despite claims US leads way
  • 13 minutes Large gas belt discovered in China
  • 1 hour Would bashing China solve all the problems of the United States
  • 36 mins Model 3 cheaper to buy than BMW 3 series.
  • 2 hours Yale University Epidemiologist Publishes Paper on Major Benefits of Hydroxchloroquine for High-risk Outpatients. Quacksalvers like Fauci should put lives ahead of Politics
  • 45 mins Pompeo's Hong Kong
  • 11 hours COVID 19 May Be Less Deadly Than Flu Study Finds
  • 1 day China to Impose Dictatorship on Hong Kong
  • 1 hour Thugs in Trumpistan
  • 6 hours China’s Oil Thirst Draws an Armada of Tankers
  • 36 mins Income report showing potential future spending and economic growth
  • 7 hours China To Boost Oil & Gas Exploration, As EU Prepares To Commit Suicide
  • 2 days Iran's first oil tanker has arrived near Venezuela
  • 1 hour US-China tech competition accelerates: on Friday 05/15 new sanctions on Huawei, on Monday 05/18 Samsung chief visits China
  • 2 days Chicago Threatens To Condemn - Possibly Demolish - Churches Defying Lockdown
  • 2 hours The CDC confirms remarkably low coronavirus death rate. Where is the media?
  • 1 day 60 mph electric mopeds
Shale Restart Threatens WTI Rally

Shale Restart Threatens WTI Rally

The rally in WTI crude…

Oil Prices Stabilize On Rumors Of An OPEC+ Extension

Oil Prices Stabilize On Rumors Of An OPEC+ Extension

Oil prices stabilized on Thursday…

Oil Prices Are Unlikely To Break $40 This Year

Oil Prices Are Unlikely To Break $40 This Year

Despite production cuts from OPEC+…

Ronald Stoeferle

Ronald Stoeferle

Ronald is a metals analyst at Erste Group. Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4…

More Info

Premium Content

Economic Consequences of the High Oil Price

The average January petrol price in the US set a new all-time-high. The high petrol price acts like an additional tax for US consumers. An increase of 10 cents per gallon translates into an additional burden of USD 14bn per year for US households. Therefore we expect the high petrol prices in the US to affect the economy (even though the extent remains unclear).

Average January petrol price in the US (USD per gallon)
Average January Petrol Price in US
Sources: Zerohedge, Gasbuddy, Erste Group Research

In Europe, too, the higher oil price could soon trigger economic consequences. The price of Brent has already set new all-time-highs in euro. In this context, fears of deflation seem unfounded.

The price of Brent in EUR 
Price of Brent in Europe
Sources: Datastream, Erste Group Research

The OECD countries imported almost USD 1 trillion worth of oil in 2011. This represents an increase of USD 200bn on 2010. According to Jeff Rubin, the oil price increase in 2008 triggered the financial crisis, and the mortgage crisis was only a symptom of the high oil prices. Rubin claims that high oil prices have caused four of the five most recent global recessions . This is on the one hand due to consumption, which suffers, and on the other hand to the transfer of assets to exporting countries. The transfer of petrodollars in 2008 amounted to USD 700bn, 400bn of which were going to OPEC countries.

Oil price (logarithmic scale) and recessions (shaded)
Oil Price and Recessions
Sources: Datastream, Erste Group Research

However, of course, there is clearly also causality the other way around, and recessions have likely contributed to the subsequent oil price decreases.

According to IEA, worldwide expenditure on oil accounted for almost 5% of global GDP in 2011. An “oil burden” (i.e. oil demand multiplied by the oil price divided by the nominal GDP) of 5% has been a critical value for the economy, historically speaking. At an average price of USD 150/barrel the share would amount to 7.5% in terms of GDP.

Oil price burden (% of GDP) vs. inflation-adjusted oil price 1970-2011
Oil Price Burden v Inflation Adjusted Oil Price
Sources: IEA, Datastream, OECD, Bloomberg, Erste Group Research

The Baltic indices have not recovered so far. The Baltic Dry index has fallen by more than 70% since November 2011. This means it is now at its lowest level since 2008 and 2000.

The Baltic Dry index is the benchmark index for global freight rates of bulk goods (among others iron ore, copper, gravel, grain, coal) and has thus traditionally been an important indicator for global trade. It therefore also served as reliable leading indicator for the oil price. The following chart shows that the Baltic Dry index has developed a massive divergence to the oil price, which has been widening.

To be fair, though, the capacities of the big shipping companies have increased significantly, which puts the reliability of the Baltic Dry index as a leading indicator for global trade into question. However, the Harper index, which reflects the global development of prices on the charter market for container ships, shows a similar negative tendency. Hence, it is unclear if the increases of the oil price are purely demand driven, or if other factors – e.g. monetary - have contributed.

Baltic Dry index vs. Brent
Baltic Dry Index v Brent
Sources: Bloomberg, Erste Group Research

By. Ronald Stoeferle of Erste Group

Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4 million clients in 3,200 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 31 December 2010 Erste Group has reached EUR 205.9 billion in total assets, a net profit of EUR 1,015.4 million and cost-income-ratio of 48.9%.


Download The Free Oilprice App Today

Back to homepage





Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News