Oil Price Forecast 2018 - 2050
How Oil Prices Could Rise Above $200 a Barrel
In April 2018, global oil prices averaged $72/b. It's $6 a barrel higher than in March. Traders were responding to the November 30, 2017, OPEC meeting. The oil cartel's members agreed to keep production cuts through 2018.
On May 10, 2018, global oil prices reached $80/b. Investors believe Iran's oil supply will dwindle once sanctions are reimposed. On May 8, the United States pulled out of the Iran nuclear agreement and reinstated sanctions. It may also sanction companies who continue to deal with Iran.
Oil prices were almost triple the 13-year low of $26.55/b on January 20, 2016. Six months before that, prices had been $60/b. A year earlier in June 2014, they had been $100.26/b. With several fluctuating factors influencing today's oil price, it changes daily.
There are two grades of crude oil that serve as benchmarks for other oil prices. West Texas Intermediate comes from, and is the benchmark for, the United States. Brent North Sea oil comes from Northwest Europe, and is the benchmark for global oil prices. The price of a barrel of WTI oil is $4/b lower than Brent prices. In December 2015, the difference was just $2/b.
That was right after Congress removed the 40-year ban on U.S. oil exports.
The EIA forecast that WTI oil will average $71/b in 2018 and $66/b in 2019. Commodities traders also predict the price of oil in their futures contracts. They predict the WTI price could be anywhere from $54/b to $84/b by August 2018.
Four Reasons for Volatile Oil Prices
Prices have been volatile thanks to swings in oil supply. 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 peaked, prices dropped in the fall and winter. So why are oil prices no longer as predictable? The oil industry has changed in four fundamental ways.
First, U.S. production of shale oil and alternative fuels, such as ethanol, began increasing in 2015. U.S. fuel production was 10.4 million barrels/day in 2018. The EIA estimates it will average 10.7 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. Production averaged 9.3 million b/d in 2017. The EIA forecast that oil production will average 11.4 million b/d in 2019.
Why is the United States producing so much oil at historically low prices? Many shale oil producers have become more efficient at extracting oil. They've found ways to keep wells open, saving them the cost of capping them. At the same time, massive oil wells in the Gulf began producing in large quantities. 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.
The International Energy Administration predicts that the United States will become the world's largest oil producer by 2023. The U.S. oil industry will grow enough to meet domestic demand. To do so, it must find the right balance. It must increase supply slowly enough to keep prices high enough to pay for increasing exploration.
Second, OPEC reduced output to put a floor under prices. On November 30, 2016, its members agreed to cut production by 1.2 million b/d by January 2017. Prices began rising right after the OPEC announcement. On November 30, 2017, OPEC agreed to continue the production cuts through 2018.
OPEC's cuts lowered production to 32.5 million b/d. The EIA estimates OPEC will 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/b 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 2015 nuclear peace treaty lifted 2010 economic sanctions and allowed Saudi Arabia's biggest rival to export oil again in 2016.
Saudi Arabia also did not want to lose market share to U.S. shale oil producers. It bet that lower prices would force many U.S. shale producers out of business and reduce its competition. It was right. 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.
The lower prices caused 2016 U.S. oil production to fall to 8.9 million b/d. Less efficient shale producers either cut back or were bought out. That reduced supply by around 10 percent, creating a boom and bust in U.S. shale oil.
Third, foreign exchange traders drove up the value of the dollar by 25 percent in 2014 and 2015. All oil transactions are paid in U.S. dollars. The strong dollar helped cause some of the 70 percent decline 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.
The dollar's value has been falling since December 2016, 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 April 11, 2018, it had fallen to 89.53.
Fourth, global demand grew more slowly than anticipated. It only rose to 93.3 million b/d in 2015, from 92.4 million b/d in 2014, according to the IEA. Most of the increase was from China, which now consumes 12 percent of global oil production. Since its economic reforms slowed its growth, global demand growth may continue slow down.
Oil Price Forecast 2025 and 2050
By 2025, the average price of a barrel of Brent crude oil will rise to $85.70/b (in 2017 dollars, which removes the effect of inflation). By 2030, world demand will drive oil prices to $92.82/b. By 2040, prices will be $106.08/b (again in 2017 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 $113.56/b, according to Table 12 of the EIA's Annual Energy Outlook's Reference Tables. The EIA has lowered its price estimates from 2017, reflecting the stability of the shale oil market.
By 2022, the United States will become a net energy exporter, exporting more than it imports. It has been a net energy importer since 1953. Oil production will rise until 2020, when shale oil production will level off at around 12 million b/d. Shale will make up 65 percent of U.S. oil production.
The EIA's forecasts may change in response to new laws and regulations. For example, the forecast does not yet take the Clean Power Plan into consideration. Several state regulations, such as the Regional Greenhouse Gas Initiative, do affect the forecast. International regulations that limit emissions for ocean-going ships have also been included in the forecast.
The EIA assumes that demand for petroleum flattens out as utilities rely more on natural gas and renewable energy. It also assumes the economy grows around 2 percent annually on average, while energy consumption increases 0.4 percent a year. The EIA also has predictions for other possible scenarios.
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. Prices this high seem 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.
2020 is only two years away, but look at how volatile prices have been in the last 10 years, ranging between $26.55/b and $145/b. If enough shale oil producers go out of business, and Iran doesn't produce what it says it could, prices could return to their historic levels of $70-$100 a barrel. OPEC is counting on it.
The OECD admits that high oil prices slow economic growth and lower demand. 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 unfounded, as the world soon plunged into recession and demand for oil dropped.
Keep in mind that any perceived shortage 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.