Oil expense Indicator - Symptoms of another slow down?

Recently I came across an interesting concept of “oil expense indicator” and how it has impacted the economies round the globe.

The importance of oil cannot be underestimated.

Oil is a key global cost because it is crucial to every part of the economy, powering manufacturing and the production of food and other commodities, fuelling transport as well as being a building block for industries such as plastics and electronics.

Oil expense indicator is defined as the share of oil expenses as a proportion of worldwide gross domestic product (GDP).

Since the year 1965 this ratio has hovered around 3% and has exceeded 4.5% only during three periods: 1974, between 1979 and 1985 and in 2008.

•          1973-1974: The first global "oil shock", oil prices rocketed after an Arab oil embargo in response to an Arab-Israeli war disrupted oil flows and triggered panic buying.
•          1979: Revolution in Iran affected most of the country's oil output and was followed by a long Iran-Iraq war, bringing a second "oil shock".
•          2008: The burst of house bubble propelled speculative buying of new debt instruments and as a result oil prices exceeded 100$ a barrel and went to as high as 147$ a barrel.

James Zhang, an analyst at Standard Bank, says the danger level comes with the oil expense indicator at around 5%. "$100 per barrel represents about 5% for the 'oil expense indicator', which we think would be a threshold on an annual average level to potentially kill off global growth," he said.

With US default crises, the price of Brent oil has come down to around 100$ a barrel. However if the U.S. government decides third phase of quantitative easing it will result in relative increase in the commodity prices including oil again.

No doubt the consumption of oil has increased to a much greater extent because of developing economies like India and China, but the high price of crude has hardly to do anything with real demand and supply of oil. Speculative trading in commodity has caused disproportionate increased in the price of oil and unless a limit is imposed on speculative trading of oil and other commodities, there exists a good chance that “oil expense indicator” may indicate bleak future.