Oil Price Forecast 2019 - 2050
How High Will Oil Prices Rise in 2019 and 2050?
Worldwide crude oil prices will average $64 a barrel in the second half of 2019 and $65/b in 2020. That's according to the Short-term Energy Outlook by the U.S. Energy Information Administration. It's the same as the EIA's forecast last month.
There are two grades of crude oil that are benchmarks for other oil prices. 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.
On July 2019, the Brent-WTI spread was $6.60/b. The price of a barrel of WTI oil was that much lower than Brent prices due to U.S. oversupply. In December 2015, the spread was just $2/b. That was right after Congress removed the 40-year ban on U.S. oil exports.
Current U.S. Oil Prices
Brent averaged $64/b in July, the same as June. It's $7/b lower than in May and $10/b lower than in July 2018. This continued the bear market begun on June 4, 2019. Commodities traders are worried about a fall in demand caused by President Donald Trump's trade war. It's the third bear market in oil since 2017.
Oil Prices Have Become Unpredictable
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 been volatile thanks to unexpected swings in the factors affecting oil prices. For example, global oil prices had fallen to a 13-year low of $26.55/b on January 20, 2016. Six months before that, prices had averaged $60/b. A year earlier in June 2014, they had averaged $100.26/b. Today's oil price fluctuates due to these constantly changing conditions.
On September 24, 2018, Brent hit a four-year high of $81.20/b. Traders were optimistic that U.S. sanctions against Iran and outages in Venezuela would lead to supply shortages.
Prices responded to OPEC's December 2018 decision to cut 1.2 million barrels per day from its October levels. Members would cut 800,000 barrels per day and allies would cut 400,000 barrels per day. The EIA thinks OPEC will actually cut 1.7 million barrels per day, thanks to shortages in Venezuela and Iran. Cuts would continue for six months.
OPEC's goal is to return prices to $70 a barrel by early fall 2019. According to the EIA, the cartel's strategy is not working. On July 1, 2019, members agreed to maintain production cuts through the first quarter of 2020.
Four Reasons for Volatile Oil Prices
Why are oil prices no longer as predictable? The oil industry has changed in four fundamental ways: U.S. oil production, uncertainty over OPEC's clout, the fluctuating value of the dollar, and shifts in oil demand.
First, the United States began ramping up production of shale oil and alternative fuels, such as ethanol. This began in 2015 and has affected outcome ever since.
U.S. oil production has increased to a record 12.1 million barrels a day as of March 2019. That meets around 60% of domestic demand of 19.96 million barrels per day.
As a result, the United States has become the world’s largest oil producer. The EIA expects that the United States will be a net exporter by the end of 2019.
The previous U.S. record of 9.6 million b/d was set in 1970. Production was just 9.4 million b/d in 2017 but rose to 10.9 million b/d in 2018. The EIA projects it will increase to 13 million b/d in 2020.
The U.S. oil industry has increased the supply slowly, supporting prices high enough to pay for exploration costs. 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 of Mexico 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 ExxonMobil, BP, Chevron, and Royal Dutch Shell. It was cheaper for them to buy out shale oil companies.
In 2019, production from West Texas will increase by 2 million barrels a day. U.S. companies have drilled 114,000 wells, many of which are profitable at $30 a barrel.
Second, OPEC has not been willing to cut output enough to put a floor under prices. Throughout its history, OPEC controlled production to maintain a $70/b price target. But a strong dollar allowed OPEC countries to remain profitable even at lower oil prices. Members were more concerned about losing market share to U.S. companies, so they let prices drop.
But U.S. shale producers found ways to keep the oil pumping even at low prices. 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. Rather than lose market share, OPEC kept its production target at 30 million b/d instead of cutting it.
That 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%, creating a boom and bust in U.S. shale oil.
On November 30, 2016, OPEC agreed to cut production by 1.2 million b/d beginning in January 2017. Prices began rising right after the OPEC announcement. OPEC's cuts lowered production to 32.5 million b/d. That was still higher than its 2015 average of 32.32 million b/d.
The conflict between the Sunni and Shiite branches has also compromised OPEC's power.
Sunni-led Saudi Arabia, OPEC's biggest contributor, introduced more volatility by waffling on its own promises. In October 2014, it accepted lower prices with its largest customers. It didn'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 Trump reimposed sanctions in 2018.
Third, the dollar has been volatile. Foreign exchange traders drove up the value of the dollar by 25% in 2014 and 2015. All oil transactions are paid in U.S. dollars. The strong dollar helped cause some of the 70% decline in the price of petroleum for exporting countries. 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 uncertainty keeps the U.S. dollar strong.
Between 2016 and April 2018, the dollar's value fell, 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 89.57. A weaker dollar reduces OPEC's oil revenue. That may be reversing. The dollar ended the year at 96.17.
Fourth, global demand grew more slowly than anticipated. It's only increased by 1.6% in 2017 and 1.3% in 2018, according to the International Energy Administration. Most of the increase was from China, which now consumes 13% of global oil production. China's economic reforms were slowing its growth.
In 2019, commitments to stop climate change introduces more uncertainty into future oil demand. Barclay's 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. Barclay's 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
This volatility makes predicting oil prices difficult. But the EIA has bravely done so. It 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.
By the end of 2019, the United States will become a net energy exporter, exporting 1.1 million barrels more than it imports.
It had been a net energy importer since 1953. Oil production will rise until 2027 when it levels off at around 30 million b/d.
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 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 by 2020. 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.