This post will be regularly updated as new projections come out. Initially published 26/8/2013, last updated 3/1/2014
Oil prices are notoriously difficult to predict. One paper states that “oil prices have been highly volatile [since 1970], and seem likely to stay that way… the oil market as it is structured today seems inherently prone to further disruption”. It also argues that “over the longer term, the oil industry appears to be a highly cyclical one, with periods of tight supply, high prices, and high investment followed by periods of glut, low prices, and low investment”.
If it’s the next few years you’re talking about, you can look at prices on the oil futures market. These prices have been studied academically, and found to be unbiased [i.e., they’re correct on average] and the most efficient predictor of future oil prices. Even so, these markets are relatively weak predictors of what the oil price will be in the future.
The futures market is picking oil prices to decline over the next few years, no doubt driven by short-term supply boosts like fracking. But this doesn’t mean that prices will fall to that extent. Back in November 2005, for example, the NYMEX futures markets were predicting oil prices to slowly decline over the period to December 2011, from $57.68 to $53.13 in nominal $USD. Most analysts agreed that a fall was likely. Indeed, there was a drop in prices, and spot prices reached this level briefly in 2008-2009. But then, in spite of the biggest financial and economic crisis since the 1930s, they rebounded. By December 2011, spot prices for West Texas Intermediate oil were actually around $100 a barrel. So, the futures market can get it wrong.
If you want to get an idea of what will happen to prices in the longer term, you need to look elsewhere. In the longer term, people are quite hesitant to make “forecasts”, or predictions of what they think will happen. Instead, it’s much more common to talk about “projections”, which are scenarios created to explore different possibilities. Agencies will usually have a ‘central’ projection along with low and high ones. You can probably think of the ‘central’ projection as being kind of like a forecast, but with a really massive disclaimer.
Two organisations which publish these kinds of projections are the International Energy Agency (IEA), and the U.S. Energy Information Administration.
The graph below is one I put together a couple of years ago. It uses information from the IEA’s World Energy Outlook 2011 and the U.S. Energy Information Administration’s Annual Energy Outlook 2011:
It’s worth noting that, in the IEA’s “450 Scenario”, the world’s governments pull finger on global warming, and create workable schemes to cut emissions, fast, so that the atmosphere stabilises with a CO2 concentration of 450 parts per million. In this scenario, oil demand falls (so prices fall), but retail prices for petrol and diesel stay high because there’s a higher carbon price built into them.
I’ve now updated the graph to show the latest projections available – which are the IEA’s World Energy Outlook 2013 and the U.S. Energy Information Administration’s Annual Energy Outlook 2013.
What’s changed between the two graphs? The U.S. Energy Information Administration actually seems more pessimistic than it did two years ago. “High” oil prices could be higher, and the “low” oil price scenario also shows higher oil prices than a couple of years ago. The “reference scenario” also tops out at more than $140 a barrel, compared with $120 two years ago. The IEA projections haven’t changed that much.
The main thing to note with the IEA is that in 2013, for the first time, they’ve added a “Low Oil-Price Case” scenario, where oil prices fall to $80 a barrel in the next few years, and stay there from then on. This scenario is based on more optimistic supply projections, including from shale oil in the US. However, these prices “would be a mixed blessing for OPEC countries – a finding that calls into question its likelihood in practice”. That is, the big oil producers have enough clout that they could manipulate prices to avoid them getting to this level.
Furthermore, “the Low Oil-Price Case would also bring international prices below the estimated fiscal breakeven prices in many large resource-owning countries, i.e. the price needed to generate sufficient revenue to balance government budgets (based on current spending commitments)… for many significant producers, this could be an important source of resistance to the production levels and price trajectory outlined in the Low Oil-Price Case”.
So, the IEA are pretty cagey on this new scenario, and even then, they only show oil prices falling back to around 2007 levels.
The U.S. Energy Information Administration also makes reference to several other agencies which make projections:
- INFORUM, who were previously projecting oil prices to reach $127.12 in 2035, are now projecting that they’ll get to $149.55 instead.
- Energy Ventures Analysis, Inc., who were previously projecting oil prices to reach $112.67 in 2030, are now projecting that they’ll be around $80 instead.
- IHS Global Insight, who were previously projecting oil prices to reach $84 in 2030, are now projecting that they’ll be around $90 instead.
So, one’s gone up a lot, one’s gone down a lot, and one hasn’t changed much. You could interpret this as saying there’s more uncertainty than ever, but I wouldn’t read too much into it myself, and a lot of the changes might be due to different assumptions, etc.
What are the conclusions from all this? Oil prices may well fall in the next few years, although petrol’s not likely to get much cheaper (I’ll crunch the numbers on that in another post). In the long term, the smart money’s on prices going up, and there’s certainly more chance that they will go up substantially than that they’ll go down substantially. But petrol’s not likely to hit $4 a litre, or not for a long time, and nor is it likely to go much below $2.
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What model of future prices get used in NZ, eg by the NZTA?
Hi Dan, the last work I saw from the MBIE used the International Energy Agency’s projections as a base – not sure what NZTA or MoT use but I will look into it.
I think looking at the futures market for indications of what the future prices might be is fine with a renewable product like wheat or sugar or coffee. But for a depleting finite resource like mineral oil is another thing. Whether these oil futures markets have really taken on board that conventional crude oil production has already peaked and that the fracking oil boom fields are pretty much that – boom – with fields suffering steep early declines from what I have read. Also I think the world is getting increasingly concerned about increasingly high risk deep sea, arctic and fracking in my back yard crude oil recovery. And lastly, we know we need to leave most of the existing fossil fuels in the ground to avoid dangerous climate change – Are the futures markets factoring these things in? I don’t think so: they thought the US fracking boom would depress US oil prices, yet that is not what has happened (for WTI futures at least) – see here for West Texas Intermediate trends over the last year:http://www.bbc.co.uk/news/business/market_data/commodities/143910/twelve_month.stm.
Interestingly the Natural gas boom has caused CO2 emissions to decline so its all not bad news environmentally.
I’m talking about in the US. Sorry about that.
Natural gas is an improvement compared with oil or coal, but we really need to do better than that to make much of a dent in greenhouse gas emissions…
Makes no difference to global emissions as the US is exporting that coal it used to burn at home to be burnt elsewhere. Guess where? Check out this frightening chart: http://www.energytrendsinsider.com/2013/08/20/king-coal-gets-fatter-while-the-us-goes-on-a-diet/
What happens to the price of coal if China does manage to keep up or increase their rapid renewables expansion?
that’s why emission data per country should include also exports. Norway wouldn’t look so green then.
There is one thing for certain; oil prices will not fall below $100 per barrel anytime soon (except for short shocks and then rise again back to around the current level as it did in 2008-2009).
Production costs for unconventional oil such as tar sands, fracking and deep water are reported to be in the $60-90 per barrel range and without these sources in the market, we would be in a shortage and prices would be much higher now.
And then there’s this: http://bit.ly/15by3EE. Source is NY Mercantile Exchange, current chart here: http://bit.ly/19TSWg0
You people should forget about WTI, it is not a reliable benchmark for predicting crude prices. The oil industry looks much more closely at Brent.
In any event, the predictions vary but the swaps curve for Brent crude today is (Starting in Jan 2014 through to Oct 2016 per month)
108.27 108.27
107.51 107.51
106.81 106.81
106.12 106.12
105.45 105.45
104.84 104.84
104.28 104.28
103.66 103.66
103.09 103.09
102.51 102.51
101.91 101.91
101.43 101.43
100.86 100.86
100.32 100.32
99.81 99.81
99.27 99.27
98.78 98.78
98.33 98.33
97.89 97.89
97.41 97.41
96.96 96.96
96.51 96.51
96.09 96.09
95.75 95.75
95.35 95.35
95.00 95.00
94.66 94.66
94.27 94.27
93.29 93.29
91.78 91.78
90.24 90.24
88.81 88.81
87.27 87.27
85.73 85.27
….. Clearly as a finite commodity the price of oil in the longer term needs to go higher but narrowing it down to a number is just a wild guess, by anyone. What I would say is that the current values are over expressed because of manipulation of the futures, the relatively low cost of investing in futures, and the total lack of understanding by the regulatory bodies.
Most traders expect fracking to suppress oil values as the US becomes less reliant on crude and that is expressed in the swaps curve. I personally think China will take up the slack and I wouldn’t sell below $100. Certainly $85 crude looks cheap to me and Id be tempted to buy a call option on that.
What I would say though. for the purposes of predicting future transport trends, that the car will be here to stay for a long long time yet because fuel at todays pump prices is very affordable.
I think looking at West Texas Intermediate is interesting to see what effect fracking is actually having in the country that is having a fracking boom – that was my point – it hasn’t bought the price down, in fact it has gone up. Fracking is reducing price rises in the short term, not bringing back $20/bbl crude.
Nothing is bringing $20 crude back, the oil producing nations know very well the market is comfortable with $100/bbl
The market is not ‘comfortable’ with $100 oil, but it is coping with $100 oil. Demand destruction and the West being outbid shows the discomfort:
Demand destruction: The cause of the discontinuity shown below is surely price, or supply contraction as expressed by price.
The West outbid: Look who’s burning ‘our’ oil?
In many ways you could say this is economics 101 working as promised, new high price leading to substitution [expensive to extract unconventional oil] and reducing demand [where possible].
The difficulty for net importers [like NZ] and wasters [the West in general] is that we may be coping with $100 oil but will our economies cope with another repricing upwards? Are we doing anything like enough to build resilience? Shouldn’t we be more actively addressing the difficult issue of getting off oil dependence where ever possible?
Lets look at your nominal vrs actual consumption. The nominal graph shows a straight line, it ignores all sorts of actual events like two middle east wars, the GFC, and the increased efficiency of oil burning activity (better mpg on cars, planes etc) It also ignores the effect of government mandated bio mass percentage added to liquids. All of which can be seen expressed in the observed graph.
As for your second graph, I would be shocked if anyone didnt realise the east is consuming a lot more oil. This is a reflection of moving manufacturing to Asia and all those Chinese factories eat oil and increased population and wealth in non OECD countries.
The fact remains that the world is comfortable with $100 crude. This is the strike that OPEC and the G20 are happy to live with and you can see clear evidence of oil supply management to protect that level. Of course there are going to be spikes (your about to get a big spike tomorrow on Syria) but rule of thumb when oil falls below 100 OPEC cuts production and over 110 Obama gets on the phone.
You may wish to think high oil prices led to the GFC but even out of work people consume oil. Energy consumption just isnt that elastic.
However, I agree with your summation that net importers should be more active in reducing oil dependency and for that reason I have suggested NZ invest in Hydrogen technology.
Phil your insistence that no one but gamblers can understand the world is funny but its repetition is getting boring.
And perhaps you should look up the world ‘nominal’; the point of that line is to describe a base case of consumption that expressly excludes all those events you list, it’s a benchmark, and the crazy thing about it is how good a fit it has been for so long. And the point of it? To highlight discontinuities beyond noise.
There is observable elasticity in energy use in general: energy efficiency of US economy has roughly doubled since the 1970s [Yergin].
And of course there is also elasticity in energy source. Neither are necessarily easy or cheap, and are almost never quick. There is close to zero elasticity in the short term, but it does expand over time. Good idea to plan ahead.
NZ does not have an energy problem but it does have a liquid fuels vulnerability, an exposure to price and supply changes beyond its control. Needs some serious action beyond hoping some turns up beneath us. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11115275
Enough with plugging your Hydrogen venture too, funny how you speculators always want to socialise the costs of your ventures.
Pat, I understand what nominal means and my point is that it is a useless data line. Its assuming a linear value in a non linear environment… Whats the point of that? The fact that you judge a deviation from the linear value just shows your lack of imagination or grasp of the realities of what effects supply and demand.
Your statement that NZ does not have an energy problem only a liquid fuels vulnerability is naive. We can not rid ourself of liquid fuel dependency by investing in solar, wind, or wave generation. It would simply cost far too much to do that. We can not address a liquid fuels dependency by forcing people off the roads, it is never going to gain popularity of the electorate. NZ, being a small country and a tiny economy, is at the mercy of the world to come up with a long term solution (which they will) and meanwhile we can have a reprieve on transport fuel costs from an unexpected surplus created by fracking.