Nevertheless, experts have become very good at predicting annual and longer-term prices. In fact, prices should moderate in the near future, before moving much higher by 2020. Compare the predictions for oil prices in 2013 and 2020.
Oil Price Forecast 2013The U.S. Energy Information Administration (EIA) predicts that the price for Brent crude oil will average $108 per barrel in 2013 and $101 per barrel in 2014. Both are lower than the average price of $112 per barrel in 2012. However, spikes have already occurred. In February, oil prices rose to $119 per barrel. Traders got concerned that Iran was threatening to close the Straits of Hormuz, as it did in 2012.
Average oil prices are dropping because of increased U.S. shale oil and alternative fuels. As a result, U.S. crude oil production rose to 7 million barrels per day (mb/d) in November and December 2012, the highest since December 1992. Domestic output will increase to 7.3 mb/d in 2013 and 7.9 mb/d in 2014, keeping a lid on prices. (Source: EIA, Short-Term Energy Outlook, March 2013)
The Organization of Petroleum Exporting Countries, (OPEC) predicts that total global demand for oil will be 89.7 mb/d in 2013, an increase of .8 mb/d from 2012. Half of this growth will come from China, with a 0.4 mb/d increase, while demand from other emerging-market countries will rise .7 mb/d. The U.S. and EU will demand .3 mb/d less than in 2012. The EU economy continues to be slow, while the U.S. is slowly shifting to more fuel-efficient vehicles and alternative fuels.
OPEC has plenty of capacity to meet demand in 2013. Non-OPEC sources will produce 59.96 mb/d, so that OPEC will only need to produce 29.71 mb/d, slightly less than in 2012. From a supply/demand perspective, oil prices should remain within the 2012 range of $89-$128/barrel. It's in OPEC's best interest to keep prices in this range -- it's high enough to maintain profits while low enough to discourage investment in expensive alternative energy sources.(Source: OPEC Monthly Oil Market Report March 2013)
Oil Price Forecast 2020The EIA forecasts that the average price of a barrel of Brent crude oil will actually decrease from $111/barrel in 2011 to $96/barrel in 2015 (in 2011 dollars, which means there is no inflation). That's a result of a significant increase in shale oil production.
After 2015, world demand will start driving oil prices to the equivalent of $163/barrel in 2040 (again, in 2011 dollars). Thanks to inflation, this will be around $269 per barrel. By then, all the cheap sources of oil will have been exhausted, making it more expensive to extract oil. (Source: EIA Annual Energy Outlook, December 5, 2012)
The Organization for Economic Cooperation and Development (OECD) agrees that the price of Brent oil could go as high as $270 per barrel by 2020. It attributes this to skyrocketing demand from China and other emerging markets. In fact, OPEC's forecast was issued the same week that China overtook the U.S. as the world's largest net importer of oil.
If you are shocked by the idea of oil at more than $200/barrel, remember that EU consumers have been paying the equivalent of about $250 per barrel for years, due to very high taxes. This hasn't stopped the EU from being the world's second largest oil consumer (now third). As long as people have time to adjust, they will find ways to live with higher prices.
Furthermore, 2020 is only seven years away. Look how much prices have changed in the last seven years. In March 2006, a barrel of Brent Crude sold for around $60 a barrel. It's nearly double that now, showing that it could very easily double again in the next seven years.
The OECD admits that super-high prices would slow economic growth and demand for oil itself. That's because high oil prices can result in "demand destruction." As prices skyrocket, people change their buying habits. Demand destruction occurred after the 1979 oil shock. Oil prices steadily deteriorated for about six years and then finally collapsed when demand declined and supply caught up. (Source: World Oil News, OECD Says Oil Prices Could Reach $150-$270 BBL by 2020, March 6, 2013)
However, volatility from oil speculators could spike the price higher if they panic about future supply shortages. This is exactly what happened in 2008, when fear that China's demand for oil would overtake supply. Investors drove oil prices to a record $150/barrel. Thes fears were grossly unfounded, as the world soon plunged into recession, and demand for oil dropped. Article updated March 12, 2012