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February 15, 2017

EIA’s short-term global oil demand outlook considers the role of economic activity

graph of changes in liquids consumption and oil consumption-weighted gross domestic product, as explained in the article text
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, February 2017
Note: OECD is the Organization for Economic Cooperation and Development.

Oil plays a crucial role in the global economy—from the production of goods to the transportation of people and freight. For this reason, economic activity and oil consumption tend to move together, particularly in developing economies. This relationship makes gross domestic product (GDP) an important driver of oil consumption.

In developing its Short-Term Energy Outlook (STEO), EIA considers measures of economic growth that reflect whether growth is disproportionately occurring in countries that consume a lot of oil (with respect to their total economic output) or in countries that consume relatively little oil.

In addition to a GDP forecast for the United States, EIA uses an economic growth forecast weighted by levels of oil consumption for the Organization for Economic Cooperation and Development (OECD) region, for the non-OECD region, and for the world. An EIA working paper provides additional explanation of the methodology for the STEO’s oil consumption-weighted GDP.

A potential shortcoming of using an aggregate oil consumption-weighted GDP growth rate as an indicator of world oil consumption growth is that it does not account for differences across countries in the sensitivity of oil consumption to changes in economic activity. The elasticity of oil use to GDP, a measure of the responsiveness of oil demand to changes in economic activity, tends to be larger for emerging economies (i.e., non-OECD countries) than for advanced economies (i.e., OECD countries).

Principal contributor: Laura Singer