Internationally, Brent crude oil prices averaged $71 per barrel (/b) in August 2021, down $4/b from July's average. They're projected to average $71/b for the rest of 2021 and average $66/b in 2022, according to the U.S. Energy Information Administration's (EIA) Short-Term Energy Outlook released on September 8, 2021.
The COVID-19 pandemic has had a significant impact on oil prices. Brent crude oil prices started strong in 2020, averaging $64/b in January. But they plummeted in the second quarter, closing nearly $9/b in April 2020, when the price of West Texas Intermediate (WTI) at Cushing in the United States fell to an unprecedented negative price of around -$37/b.
Brent prices averaged above $40/b by June 2020, increasing to $50/b by the end of 2020. Prices have fluctuated since then—but continuously risen—to $71/b in August 2021 due to rising oil demands as COVID-19 vaccination rates have increased and economic activity has picked up.
The price increase also reflects supply limitations by the Organization of the Petroleum Exporting Countries (OPEC) and OPEC partner countries. In 2020, OPEC cut oil production due to decreased demand during the pandemic. It's been gradually increasing oil output through 2021. At its most recent meeting in September 2021, OPEC stated it would continue to gradually adjust oil production upward by .4 million barrels per day (mb/d) until they phase out the 5.8 mb/d downward production adjustment.
- The EIA forecast that Brent crude oil prices will average $71/b in the second half of 2021 and $66/b in 2022.
- Prices are increasing due to higher demand as more people are vaccinated against COVID-19.
- OPEC is gradually increasing oil production after limiting it due to a decreased demand for oil during the pandemic.
WTI vs. Brent
There are two grades of crude oil used as benchmarks for other oil prices. These are the WTI at Cushing and North Sea Brent.
WTI at Cushing comes from the U.S. and is the benchmark for U.S. oil prices. North Sea Brent oil comes from Northwest Europe and is the benchmark for international oil prices.
The EIA forecasts that WTI prices will average $65.69/b in 2021 and $62.37/b in 2022.
Four Reasons for Today’s Volatile Oil Prices
Oil prices used to have a predictable seasonal swing. They spike in the spring, as oil traders anticipate high demand for summer vacation driving. Once demand peaks, prices drop in the fall and winter.
Oil prices have become volatile thanks to unexpected swings in the factors affecting oil prices. The coronavirus pandemic sent demand for oil plummeting. That has offset the three other factors affecting oil prices: rising U.S. oil production, the diminished clout of OPEC, and the strengthening dollar.
1. Varying Global Demand
The EIA estimates global oil and liquid fuels demand was 98.4 million b/d in August 2021. That's an increase of 5.7 million b/d from August 2020, but still 4.0 million b/d lower than August 2019. However, the EIA expects demand to increase by 5.0 million b/d for all of 2021 to 97.4 million b/d, and by another 3.6 million b/d in 2022 to average 101.0 million b/d.
It remains to be seen how coronavirus variants will affect global demand for oil for the rest of 2021.
2. Rising US Oil Production
U.S. producers of shale oil and alternative fuels, such as ethanol, increased supply. They increased supply slowly, supporting prices high enough to pay for exploration costs. Many shale oil producers became more efficient at extracting oil. They found ways to keep wells open, saving them the cost of capping them. This ramp-up began in 2015 and has affected supply ever since.
In August 2018, the U.S. became the world’s largest oil producer. In September 2019, U.S. crude oil production increased to a record (at that time) 12.1 million b/d. It was the first time since 1973 that the U.S. exported more oil than it imported. U.S. crude oil production averaged 11.3 million b/d in June 2021 and anticipates that it will remain at that level for the rest of 2021.
It's estimated that U.S. crude oil production will average 11.7 million b/d in 2022.
3. Diminished OPEC Clout
U.S. shale producers have become more influential, but they don’t operate like a cartel as OPEC does. To maintain market share, OPEC has not cut output enough to put a floor under prices.
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.
Sunni-led Saudi Arabia also doesn’t want to lose market share to its archrival, 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, which continue to limit Iran's oil production.
4. Rising Dollar Value
Foreign exchange traders have been driving up the value of the dollar since 2014.
Many traders use the dollar as a safe haven investment during times of economic uncertainty.
For example, the dollar’s value rose by 30% between 2013 and 2016 in response to the Greek debt crisis and Brexit. Between March 3 and March 23, 2020, it rose 8.4% in response to the coronavirus pandemic.
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.
Oil Price Forecast 2025 and 2050
The EIA predicted that, by 2025, Brent crude oil's nominal price will rise to $66/b.
By 2030, world demand is seen driving Brent prices to $89/b. By 2040, prices are projected to be $132/b. By then, the cheap oil sources will have been exhausted, making it more expensive to extract oil. By 2050, oil prices will be $185/b, according to the EIA's Annual Energy Outlook.
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 decreases by 0.4% a year. The EIA also has predictions for other possible scenarios.
Could Oil Really Reach $200 per Barrel?
Although it seems ludicrous now, there are situations that could put oil prices at $200/b. The EIA forecast Brent oil prices of $185/b in 2050 if the cost to produce oil drops and it crowds out competing energy sources, but economic conditions could drive the price even higher.
In July 2008, oil prices reached a record high of around $133/b. They dropped to around $40/b in December before rising to $123/b in April 2011. The Organization for Economic Cooperation and Development (OECD) previously forecasted 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.
Oil prices at $200/b could change consumer consumption. Using oil as an energy source has caused climate change.
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 years. They finally collapsed after continued demand decline, when supply caught up.
The idea of oil at $200/b seems catastrophic to the American way of life, but people in Europe were paying high prices for years due to high taxes. As long as people have time to adjust, they will find ways to live with higher oil prices.
Frequently Asked Questions (FAQs)
What is crude oil?
Crude oil is a liquid found beneath the Earth's surface. It's made up of a mix of hydrocarbons formed by subjecting organic plant and animal material to millions of years of intense heat and pressure. It forms the basis for many petroleum products, including plastic, gas, and lubricating oils.
What is the process that turns crude oil into gasoline?
The refinery process turns crude oil into products like gasoline.
How do you invest in crude oil?
There are many ways to invest in the oil industry, but the most direct way to invest in crude oil as a commodity is with futures contracts. You can also invest in an ETF that replicates exposure to crude oil futures.
How many gallons are in a barrel of oil?
There are 42 gallons in each barrel of oil.