Oil Price Forecast 2020 and 2040…
By 2020, the average price of a barrel of Brent crude oil will rise to $79/b (in 2015 dollars, which removes the effect of inflation). Shale oil production will slow after 2021. This will contribute to a decline in total U.S. oil production through 2040. By 2040, world demand will start driving oil prices to $136.21/b (again in 2015 dollars). By then, the cheap sources of oil will have been exhausted, making it more expensive to extract oil. (Source: “Annual Energy Outlook,” September 15, 2016.) 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 forecast.
Could Oil Prices Rise Above $200 a Barrel?
Oil prices reached the record high of $145/b in 2008 and were $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. It seems unlikely now that shale oil has become available. 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 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 three years away. Look how volatile prices have been in the last 10 years. In March 2006, a barrel of Brent Crude sold for around $60/b. It skyrocketed to $145/b in 2008. It leveled out to around $100/b in 2014. It plummeted to a 13-year low in January, then doubled to current levels. If shale oil producers go out of business, and Iran doesn’t produce what it says it could, prices could return to their historical levels of $70 – $100 a barrel. OPEC is counting on it.
The OECD admits that high oil prices slow economic growth and lower demand for oil itself. High oil prices can 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. (Source: Jenny Gross, “OECD Says Oil Prices Could Reach $150-$270 BBL by 2020,” The Wall Street Journal, March 6, 2013.)
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/b. These fears were grossly unfounded, as the world soon plunged into recession and demand for oil dropped. For more, see Gas Prices in 2008. Keep in mind that any perceived shortages can cause traders to panic and prices to spike. Perceived shortages could be caused by hurricanes, the threat of war in oil-exporting areas or refinery shutdowns. But prices tend to moderate in the long-term. Here are the Three Factors That Determine Oil Prices.
