Long Term Oil Price Forecast

Oil Price Forecast 2020 and 2040

By 2020, the average price of a barrel of Brent crude oil will rise to $79/bbl (in 2013 dollars, which removes the effect of inflation). That's a result of a significant increase in shale oil production, which will slow after 2021, contributing to a decline in total U.S. oil production through 2040.

After 2020, world demand will start driving oil prices to the equivalent of $141.28/barrel in 2040 (again, in 2013 dollars). By then, the cheap sources of oil will have been exhausted, making it more expensive to extract oil. (Source: Annual Energy Outlook, EIA (U.S. Energy Information Administration), July 7, 2015)

The 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. These are all so uncertain that the EIA is unwilling (or perhaps unable) to set a hard and fast forecast. Furthermore, this forecast will probably change dramatically when the new report comes out in 2016. 

The drop in oil prices in 2014 and 2015 caught EIA off-guard. 

Oil prices reached the record high of $145 a barrel in 2008, and were $100 a barrel in 2014. That's when the Organization for Economic Cooperation and Development (OECD) forecast that the price of Brent oil could go as high as $270 per barrel by 2020. It attributed that to skyrocketing demand from China and other emerging markets.

The idea of oil at $200/barrel seems catastrophic to the American way of life. But people in the European Union were paying the equivalent of about $250 per barrel 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 four years away. Look how volatile prices have been in the last ten years. In March 2006, a barrel of Brent Crude sold for around $60 a barrel. It skyrocketed to $145 a barrel in 2008, leveled out to around $100 a barrel in 2014, plummeted to a 13-year low in January, then rebounded 40% to current levels. If many shale oil producers go out of business, and Iran doesn't produce what it says it could, prices could easily return to historical price levels.

The OECD admits that super-high prices would slow economic growth and demand for oil itself. That's because high oil prices can result in "demand destruction." As prices skyrocket, people change their buying habits. Demand destruction occurred after the 1979 oil shock. Oil prices steadily deteriorated for about six years and then finally collapsed when demand declined and supply caught up. (Source: Jenny Gross, OECD Says Oil Prices Could Reach $150-$270 BBL by 2020, WSJ, March 6, 2013)

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

From here.

Analysis

As a result of thumb, gasoline prices per gallon are roughly 1/25th of oil prices per barrel.  So, $200 a a barrel oil implies roughly $8 per gallon gasoline.

To recap and to add some of the other big factors in long range oil price forecasting, the more important factors in long term oil prices include:

1.  What will happen with U.S. shale oil production and fracking?

The EIA estimate that this will cease to be a major factor as soon as 5 years from now seems pessimistic.

2.   How will OPEC respond?

Day to day, OPEC matters a lot, but in the long run we would expect its decision making to be driven by the fundamentals.

3.   How fast will the global economy grow?

A small number of large developing countries like China, Brazil, Mexico and India may guide this factor.  This factor may be underestimated in EIA estimates.

4.  Will non-petroleum fueled vehicles reduce demand for petroleum?  To a great extent this is a function of battery technology.

Electric cars with current technologies become more attractive than gasoline/diesel vehicles somewhere in the vicinity of $8-$16 per gallon gasoline.  But, cheaper batteries and mass production price reductions can move that "phase change" point lower.

Note also that developments in hydropower, tidal power, solar power and nuclear power technologies are all almost irrelevant to petroleum prices.  Electric cars cost much less to fuel than petroleum powered cars already and new technologies will only modestly impact that differential.

Honestly, the shift to organic agriculture will probably have more impact on oil prices than the shift to renewable energy sources.

5.  Will there be widespread shifts to more fuel efficient vehicles (e.g. hybrids), or higher occupancy per vehicle-mile traveled (e.g. car pooling and buses), or shorter trips (e.g. to park and ride stations)?

This should start to happen at oil prices lower than the prices necessary to make electric cars more attractive than gasoline and diesel cars (ca. $4 per gallon and up on a sustained basis).

6.  Will petroleum substitutes such as liquid fuels converted from natural gas, coal, ethanol, or biodiesel (e.g. from grease) provide meaningful additional supply?

Some of these possibilities have trigger prices where they start to make sense at oil prices between $50 and $100 per barrel on a sustained basis.  Previous experience and analysis has suggested that the potential for biofuels is much weaker than has been often assumed in the past.

Note that all of the changes in (4)-(6) will significantly slow oil price increases at the threshold level, but probably won't actually reduce oil prices much or remove oil entirely from the economy.

Volatility

It also pays to heed the lessons that oil prices will not evolve in a steady fashion.  They will rise and fall with business cycles, with international conflicts and OPEC policy changes, with new technologies, and with relatively random short term speculative booms and busts.

Also, note that while "Peak Oil" is very relevant to long term oil prices, it is not a stand alone factor. Peak oil may kink the average rate of increase in oil prices up a bit, but doesn't mean that there will no longer be any oil in the economy.