Oil Price Forecast 2020-2050
How high will oil prices rise in 2020 and 2050?
Worldwide crude oil prices will average $43.30 a barrel for 2020 and $55.36/b in 2021. That's according to the Short-term Energy Outlook by the U.S. Energy Information Administration. The price estimate plummeted from last month's prediction of $61/b. The COVID-19 coronavirus pandemic is expected to reduce global oil demand. On March 6, 2020, OPEC increased output to offset falling oil prices. On March 9, 2020, Brent had fallen to $20.09/b. Brent averaged $64/b in 2019.
There are two grades of crude oil that are benchmarks for other oil prices: West Texas Intermediate and Brent North Sea.
West Texas Intermediate comes from the United States and is the benchmark for U.S. oil prices. Brent North Sea oil comes from Northwest Europe and is the benchmark for global oil prices.
The EIA forecasts that WTI will be $38.19/b in 2020 and $50.36/b in 2021. That makes the Brent-WTI spread $5.11/b in 2020 and $5.00 in 2021. The price of a barrel of WTI oil will be that much lower than Brent prices due to U.S. oversupply. In Dec. 2015, the spread was just $2/b. That was right after Congress removed the 40-year ban on U.S. oil exports.
- Oil prices will be $43.30 a barrel for 2020 and $55.36/b in 2021.
- Four factors affect prices: U.S. shale production, OPEC, the U.S. dollar, and demand.
- Oil prices will rise above $100/b by 2050.
Four Reasons for Today’s 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 peaked, prices dropped in the fall and winter.
Oil prices have become volatile thanks to unexpected swings in the factors affecting oil prices. The oil industry has changed in four fundamental ways: rising U.S. oil production, the diminished clout of OPEC, the strengthening dollar, and weakening oil demand.
1. Rising U.S. Oil Production
First, the United States has increased the production of shale oil and alternative fuels, such as ethanol. This began in 2015 and has affected supply ever since.
U.S. oil production increased to a record 12.4 million barrels a day in September 2019. It was also the first time since 1948 that the United States exported more oil than it imported. In 2018, the United States became the world’s largest oil producer.
The U.S. oil industry increased supply slowly, supporting prices high enough to pay for exploration costs. Many shale oil producers became more efficient at extracting oil. They've found ways to keep wells open, saving them the cost of capping them.
2. Diminished OPEC Clout
OPEC has not cut output enough to put a floor under prices. U.S. shale producers have become more influential, but they don’t operate as a cartel as OPEC does.
OPEC’s leader, Saudi Arabia, wants higher oil prices because that’s the source of its government revenue. But it must balance that with losing market share to U.S. and Russian companies.
The conflict between the Sunni and Shiite branches of Islam has also compromised OPEC's power.
Sunni-led Saudi Arabia also doesn’t want to lose market share to its arch-rival, Shiite-led Iran. The 2015 nuclear peace treaty lifted 2010 economic sanctions and allowed Saudi Arabia's biggest rival to export oil again in 2016. But that source dried up when President Donald Trump reimposed sanctions in 2018.
3. Rising Dollar Value
Foreign exchange traders drove up the value of the dollar since 2014. For example, the dollar’s value compared to the euro rose by 25% between 2013 and 2016. All oil transactions are paid in U.S. dollars. Most oil-exporting countries peg their currencies to the dollar. As a result, a 25% rise in the dollar offsets a 25% drop in oil prices. Global economic uncertainty keeps the U.S. dollar strong.
4. Slowing Global Demand
Global demand has grown more slowly than anticipated. It only grew by 0.5% in 2018, from 99.31 mb/d in the first quarter of 2018 to 99.82 mb/d in the first quarter of 2019. Most of the increase was from China, which consumes 13% of global oil production. China's economic reforms were slowing its growth.
In 2019, demand grew 1.46%, from 100.00 mb/d to 101.46 mb/d. The EIA forecast demand will average 100.3 mb/d in the first quarter of 2020. It will increase to 101 mb/d by the end of the year, and to 101.5 by the end of 2021.
Commitments to stop climate change introduced more uncertainty into future oil demand. Barclays predicted that oil demand could peak by 2025. It would fall 30% by 2050 if countries kept their Paris Climate Accord commitments. That requires them to cut greenhouse gases enough to stop climate change. The commitments would keep global warming from increasing beyond 2 degrees Celsius. Barclays said demand would only be 69.6 mb/d in that scenario, compared to 100 mb/d in 2019.
Oil Price Forecast 2025 and 2050
The EIA forecasts that, by 2025, the average price of a barrel of Brent crude oil will rise to $81.73/b. This figure is in 2018 dollars, which removes the effect of inflation.
By 2030, world demand will drive oil prices to $92.98/b. By 2040, prices will be $105.16/b, again quoted in 2018 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 $107.94/b, according to Table 1 of the EIA's Annual Energy Outlook. The EIA has lowered its price estimates from 2017, reflecting the stability of the shale oil market.
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% annually on average, while energy consumption increases by 0.4% a year. The EIA also has predictions for other possible scenarios.
Oil at $200 a Barrel?
In 2008, oil prices reached a record high of $145/b. They dropped to $35/b before rising to $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. It based its prediction on skyrocketing demand from China and other emerging markets.
The OECD said that high oil prices 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.
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 one of the world's largest oil consumers. As long as people have time to adjust, they will find ways to live with higher oil prices.
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