Speculating on oil prices

[GliderGuider]

No this isn't about speculators, it's about speculating -- predicting, projecting, prognosticating and even guessing.

Back in May I did some mathematical trend analysis, projecting the oil price out to 2012. It's published here. I extrapolated two different trends visible in oil prices between 2002 and today, extending the trends out to 2012. The low case indicated $250/bbl in 2012, the high case indicated $900/bbl

One of the factors in any price projection, of course, is the effects of demand destruction as the price creeps ever upward. Several analysts have put forward the idea that the price of oil would exhibit a "stair-step" pattern. The price would rise until oil was no longer affordable to those at the bottom of the economic ladder, then it would level out or even pull back as those buyers dropped out and the rest of the market accommodated to the new prices. The actual price rise over time would depend on the duration of the pauses in the stair-step price escalation pattern as well as the steepness of the rises between them.

When you look at the data, such a pattern is indeed visible:



Since 2002, there are pauses visible in 2003, late 2004, mid 2006, and late 2007. We appear to be in similar price pause right now. The pauses appear to be lasting between four months and a year, with the price subsequently going up by about 50% before the next pause occurs. As a result, oil prices have been rising at a fairly steady 33% per year since 2002.

If that pattern holds, oil prices could rise 500% in the next seven years, for a price of $600+/bbl in 2015. A lot depends on the length of the pause at each of the price steps, and how steep the subsequent rise is. If a global depression takes hold in the next year or so, I'd expect to see a long pause in the price escalation, until the drop in supply exceeds the demand drop and the next rise starts in spite of the poor global economy.

I think a global depression is now probable, due to the accelerating problems in the global financial (credit/debt) system. The depression will likely start in 2009, just after we come out of the current oil price pause. Oil prices will have risen back to $150 or a bit more by the time the depression begins. The global economic slowdown will cause general demand destruction with an accompanying price pullback from $150/bbl to about $100, where prices will languish for two to three years (while everyone celebrates that Peak Oil was another Y2K boogeyman). Then prices will start to rise again due to the pressure of supply depletion and the inelasticity of demand among those who still have the money. The price will then rip to $500 by 2015 and possibly to $1000 or more by 2020.

[winggirle]

1. Oil Prices

ok...I feel a little bit un-easy about this
"SPECULATION"...I would like to know the near future
but the present is at hand and if we can predict the future
oil prices within the next year, I do believe this and that
would help out  lots of future homeowners and business owners.
 Because current situation about oil prices is easy to predict
but what about 2009?

taff

[GliderGuider]

2. $150 by mid 2009, followed by a crash back to $100 by the end of the year.

But I don't think anybody is going to celebrate the price drop in the second half of next year, because of why it happens.

[MannyGoldstein]

3. Why Start At 1998? Why Not Much Earlier?

Would a longer-term graph show an exponential increase that pauses slightly and occasionally before going up by 50%?

[GliderGuider]

4. Earlier the price was virtually flat

The data set I used has prices going back to 1983. Between 1983 and 2002 the price remained in a band around $20 with no visible long-term trend.

The influences on oil prices shifted in 2002 or 2003 as the supply began to tighten. The earlier price regime has nothing to say about what's happening now.

[MannyGoldstein]

5. Adjusted For Inflation, Oil Was Around $100 A Barrel in 1980

And then it dropped a lot.

[GliderGuider]

6. Yes.

That still has nothing to say about the factors driving oil prices today.

[MannyGoldstein]

7. But How Do You Know What's Driving Oil Prices Today?

FWIW, my WAG is that it's a bubble, created by too much money with nothing smarter to do.

[GliderGuider]

8. My WAG is that it's Peak Oil.

AKA constrained supply meeting unconstrained demand.

There are no obvious above-ground supply constraints as there were in the '70s and early '80s. Therefore my conclusion is that the ongoing production declines that are being seen in a number of major oil provinces (e.g. USA, Indonesia, North Sea and Mexico) are evidence that the world is near peak production. If that's true, then the price is simply going to keep rising from here on out (with pauses as I described) because demand will continue growing -- at least until the depression takes hold.

There may be excess money driving the price a bit, but IMO it's an insignificant factor in the medium and long term.

[phantom power]

9. Another factor is how steep the back-slope decline in supply is.

A decline factor of 4% annually is a figure I see used in a lot of projections. The behavior of Cantarell and North Sea over the last two years (and the implications of water forcing and fractional flow curves) is enough to make me worry that 4% is optimistic, but it is fair to say that new oil fields are going to be brought on line, so it may be possible to keep the slope gradual. Since we're still on the plateau, reality hasn't yet weighed in to settle the dispute. A consistent trend of 4% annual decline would be a relentless assault on the world economy.

I guess the other factor is demand elasticity. The school of "conservation, new technology, and human ingenuity will save us from the worst" is basically equivalent to saying "demand for fossil fuels is relatively elastic." I'm less optimistic, but the only way to find out is to live through the future and see.