2008 Oil Price Outlook

Oil prices (WTI crude) hit an all-time record of $99.62 this week, but will it continue? The Energy Information Agency (EIA) says no. The agency's most recent forecast for the price of a barrel of West Texas Intermediate (WTI) crude is a decline from current highs to an average of $84 per barrel through 2008. The EIA bases the price decline on slower economic growth, which will result in slower demand. Inventories will remain constrained, despite OPEC's long-stated intention to keep oil prices between $60-70 per barrel. (Source: EIA, Short-Term Energy Outlook, December 2007)

However, the EIA's forecast is $10 a barrel higher than their October forecast for 2008. That's because global demand has increased by 1.4 million barrels per day (bpd), while OPEC has decided to keep increase production by on .4 million bpd. In addition, the U.S. winter is forecast to be 4% colder than last year, causing an increase in U.S. heating fuel consumption.

What It Means to You

Higher oil prices generally translate into higher gasoline prices, and the EIA is forecasting gas prices to remain above $3.11 through 2008. Crude oil accounts for 55% of the price of gasoline, while distribution and taxes influence the remaining 45%.

Of equal concern is the impact of higher oil prices on inflation. According to the EIA, 96% of transportation relies on oil, 43% of industrial production, 21% of residential and commercial uses, and 3% of electric power. In addition, if oil prices rise, then so does the price of natural gas, which is used to fuel 14% of electric power generation, 73% of residential and commercial uses, and 39% of industrial production. (See Crude Oil Prices Definition and Forecast)

Related Reading

• How Are Oil Prices Set?
• What Is OPEC?
• What Are the Strategic Petroleum Reserves?