What It Is:

A barrel of oil equivalent (or BOE) is a unit measure of unused energy resources. Expressed frequently in the financial statements of utility companies, BOEs are defined by the U.S. Internal Revenue Service as 1,700 kilowatt hours or as 5.8×106 British Thermal Units (BTUs).

How It Works/Example:

Utility companies, especially electrical providers, need some way of expressing their inventories of potential energy resources. Since there may be many resources capable of differing energy outputs, there needs to be one standard, universally-recognized unit of measure that can be used to express the value of energy resources.
 
To illustrate, consider electric company XYZ with the following energy resource inventories as of December 31, 2008:

• Coal –  5,000 kilowatt hours
• Crude Oil –  5,000 kilowatt hours
• Propane –  7,000 kilowatt hours

Regardless of the energy resource, when added up, the total amount of kilowatt hours comes to 17,000. To express this in BOEs, please note the calculations below:

17,000 kilowatt hours / 1,700 kilowatt hours per BOE = 10 BOEs total available energy resources

Why It Matters:

Utility companies need to report their energy resource inventories in their annual reports and financial statements. Since energy itself is an abstract commodity produced from potential energy resources, we need to express the energy in terms of available resources. For this reason, the total amount is expressed in a standard unit based on how much energy can be produced regardless of the resource. Since barrels of oil are a universally-recognized source of consumer and industrial energy, they can be used to express energy inventories based on their 1,700 kilowatt hours-per-barrel capacity as the common denominator.