M-RCBG Associate Working Paper No. 164
Oil Intensity: The curious relationship between oil and GDP
Since the mid-1980s, volumetric improvements in oil intensity have followed a linear time trend. We verify the existence and explore the causes and consequences of this trend. It is the result of a shift in the composition of oil demand from intermediate to final consumption. The typically single-fuel appliances associated with final consumption restrict inter-fuel substitutability and price elasticity while, in a globalising world, efficiency gains in end-user appliances spread fast and uniformly, mirroring global turnover patterns. We argue that on a deeper level, the resulting time trend reflects a gradual regime change from a supply to a demand constrained global oil market. In percentage terms, oil intensity first improves at rates below global GDP growth, allowing global oil demand to rise. Over time, given its linear functional form, the rate of intensity improvements will accelerate to outpace the rate of global GDP growth, and global oil demand will start to decline. It is conceivable for relative price changes to break the trend, by reconfiguring the degree of substitutability embodied in the capital stock. However, so far neither shale oil (accelerating oil demand) nor the energy transition (decelerating it) have had this effect. For now, the linear trend soldiers on.