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What's the Forecast for Oil Prices?

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Oil Price Forecast

Oil prices are volatile, but predictable.

Photo: Getty Images
fracking

Oil prices are dropping thanks to fracking in the U.S.

University of Michigan Energy Institute
hormuz.jpg

Forty percent of the world's oil still passes through the Straits of Hormuz next to Iran and Saudi Arabia.

Question: What's the Forecast for Oil Prices?

Answer: U.S. oil prices are very volatile, making it seem they are difficult to predict. They usually spike in the spring, as oil futures traders anticipate high demand for summer vacation driving. Once demand has peaked, prices drop in the fall and winter. Sudden shortages from hurricanes, war or threat of war in oil-exporting areas, and refinery shut-downs can also cause prices to spike.

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 2014

The U.S. Energy Information Administration (EIA) predicts that the price for Brent crude oil will average $105 per barrel in 2014 and $101 per barrel in 2014. Both are lower than the average price of $112 per barrel in 2013. However, spikes have already occurred. In March, oil prices rose to $110 per barrel. Traders got concerned that Iran was threatening to close the Straits of Hormuz, as it did in 2013.

Average oil prices are dropping because of increased U.S. shale oil and alternative fuels. As a result, U.S. crude oil prices (West Texas Intermediate) will average $96 a barrel in 2014, and $90 a berrel in 2015.  (Source: EIA, Short-Term Energy Outlook, March 2014)

The EIA predicts that total global demand for oil will be 90.4 mb/d in 2014, growing at a rate of 1.4 mb/d a year. Most of this growth comes from China, while demand from the rest of the world remains stable. Demand from Europe and Japan will actually drop. 

Thanks to increased supply from the U.S., OPEC (the Organization of Petroleum Exporting Countries) now has plenty of capacity to meet demand. In fact, demand for OPEC oil will drop from 30 mb/d in 2014 to 29 mb/d in 2015.  

Oil Price Forecast 2020

The 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. These fears were grossly unfounded, as the world soon plunged into recession, and demand for oil dropped. Article updated April 16, 2014

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