Oil Price Forecast 2018 - 2050

How High Oil Prices Will Rise in 2018

Oil drilling
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Crude oil prices will average $57/b in 2018. That's an increase from last month's Short-Term Energy Outlook by the U.S. Energy Information Administration. Commodities traders also predict the price of oil in their futures contracts. They predict the price could be anywhere from $48/b to $68/b by March 2018. 

In December, 2017, oil prices hit a a 30-month high. Traders responded to the November 30, 2017, OPEC meeting where members agreed to keep production cuts through 2018.

In November, oil prices rose to $63/b from  $51/b in October. It's almost triple the 13-year low of $26.55/b on January 20, 2016. Six monthsbefore that, oil had been $60/b (June 2015). A year earlier, it had been $100.26/b (June 2014). Today's oil price changes daily.

The price of a barrel of West Texas Intermediate oil is $4/b lower than Brent North Sea oil prices. It's returned to its historical level. The difference had dropped to $2/b when Congress removed the 40-year ban on exports in December 2015. 

Prices have been volatile thanks to swings in oil supply versus demand. That's because the oil industry has changed in fundamental ways.

Three Reasons for Volatile Oil Prices

Oil prices used to have a predictable seasonal swing. They spiked in the spring, as oil traders anticipated high demand for summer vacation driving. Once demand has peaked, prices dropped in the fall and winter. So why have oil prices been so volatile?

 Here are three reasons.

First, OPEC reduced output to put a floor under prices. On November 30, 2016, its members agreed to cut production by 1.2 million barrels by January 2017. Prices began rising right after the OPEC announcement. 

OPEC's cuts lowered production to 32.5 million b/d. The EIA estimates OPEC would produce 32.8 million b/d in 2018.

But both figures are still higher than its 2015 average of 32.32 million b/d.  

Throughout its history, OPEC controlled production to maintain a $70 price target. In 2014, it abandoned this policy. Saudi Arabia, OPEC's biggest contributor, lowered its price to its largest customers in October 2014. It did not want to lose market share to its arch rival, Iran. These two countries' rivalry stems from the conflict between the Sunni and Shiite branches of Islam. Iran promised to double its oil exports to 2.4 million b/d once sanctions were lifted. The nuclear peace treaty allowed Saudi Arabia's biggest rival to sell oil in 2016. 

Saudi Arabia also did not want to lose market share to U.S. shale oil producers. In 2015, U.S. production of shale oil and alternative fuels increased.  It was 9.7 million b/d in November. It's expected to rise to 9.9 million b/d in 2018, the highest annual average production in U.S. history. It would beat the previous record of 9.6 million b/d set in 1970. 

Why did the United States produce so much oil at historically low prices? Many shale oil producers became more efficient in extracting oil. They found ways to keep wells open because it's expensive to cap them.

 

At the same time, massive oil wells in the Gulf came on line. They couldn't stop production regardless of low oil prices. As a result, large traditional oil enterprises stopped exploring new reserves. These companies include Exxon-Mobil, BP, Chevron and Royal Dutch Shell. It was cheaper for them to buy out the less efficient shale oil companies. 

Saudi Arabia correctly bet that lower prices would force many U.S. shale producers out of business, reducing its competition. At first, shale producers found ways to keep the oil pumping. Thanks to increased U.S. supply, demand for OPEC oil fell from 30 million b/d in 2014 to 29 million b/d in 2015. But the strong dollar meant OPEC countries could remain profitable at lower oil prices. Rather than lose market share, OPEC kept its production target at 30 million b/d.

As a result, 2016 U.S. oil production fell to 8.9 million b/d. That's because less-efficient shale producers either cut back or were bought. That reduced supply by around 10 percent, creating a boom and bust in U.S. shale oil

The second reason for recent volatility is foreign exchange traders. They drove up the value of the dollar by 25 percent in 2014 and 2015. All oil transactions are paid in dollars. The strong dollar helped cause some of the 70 percent declines in the price of petroleum for exporting countries. Most oil-exporting countries peg their currencies to the dollar. Therefore, a 25 percent rise in the dollar offsets a 25 percent drop in oil prices. Global uncertainty is one factor that makes the U.S. dollar so strong.

Since December  2016, the dollar's value has been falling according to the DXY interactive chart. On December 11, 2016, the USDX was 102.95. In early 2017, hedge funds began shorting the dollar as Europe's economy improved. As the euro rose, the dollar fell. By September 15, 2017, it had fallen to 91.84. 

Third, global demand grew more slowly than anticipated. It only rose from 92.4 million b/d​ in 2014 to 93.3 million b/d​ in 2015, according to the International Energy Administration. Most of the increase was from China, which now consumes 12 percent of global oil production. But its economic reforms slowed growth

Oil Price Forecast 2025 and 2050

By 2025, the average price of a barrel of Brent crude oil will rise to $86/b (in 2016 dollars, which removes the effect of inflation). By 2030, world demand will driving oil prices to $95/b. By 2040, prices will be $109/b (again in 2016 dollars). By then, the cheap sources of oil will have been exhausted, making it more expensive to extract oil. By 2050, oil prices will be $117/b, according to the EIA's Annual Energy Outlook.

By 2026, the United States will become a net energy exporter. It has been an energy importer since 1953. Oil production will rise until 2030, when shale oil production will slow. U.S. oil production will decline slightly through 2050. 

The EIA's forecasts all depend on 1) what happens with U.S. shale oil production, 2) how OPEC responds, and 3) how fast the global economy grows. The predictions given here are for the EIA's most likely scenario. 

How Oil Prices Could Rise Above $200 a Barrel

Oil prices reached the record high of $145/b in 2008 and were $100/b in 2014. That's when the Organization for Economic Cooperation and Development forecast that the price of Brent oil could go as high as $270/b by 2020. It based its prediction on skyrocketing demand from China and other emerging markets. It seems unlikely now that shale oil has become available.

The idea of oil at $200/b seems catastrophic to the American way of life. But people in the European Union were paying the equivalent of about $250/b for years due to high taxes. That didn't stop the EU from being the world's third-largest oil consumer. As long as people have time to adjust, they will find ways to live with higher oil prices.

Furthermore, 2020 is only three years away. Look how volatile prices have been in the last 10 years. In March 2006, a barrel of Brent Crude sold for around $60/b. It skyrocketed to $145/b in 2008. It leveled out to around $100/b in 2014. It plummeted to a 13-year low in January, then doubled to current levels. If enough shale oil producers go out of business, and Iran doesn't produce what it says it could, prices could return to their historical levels of $70 - $100 a barrel. OPEC is counting on it.

The OECD admits that high oil prices slow economic growth and lower demand for oil itself. High oil prices can result in "demand destruction." If high prices last long enough, people change their buying habits. Demand destruction occurred after the 1979 oil shock. Oil prices steadily deteriorated for about six years. They finally collapsed when demand declined and supply caught up. 

Oil speculators could spike the price higher if they panic about future supply shortages. That's what happened to gas prices in 2008. Traders were afraid that China's demand for oil would overtake supply. Investors drove oil prices to a record $145/b. These fears were grossly unfounded, as the world soon plunged into recession and demand for oil dropped. 

Keep in mind that any perceived shortages can cause traders to panic and prices to spike. Perceived shortages could be caused by hurricanes, the threat of war in oil-exporting areas or refinery shutdowns. But prices tend to moderate in the long term. That's because supply is just one of the three factors affecting oil prices.