But both figures are still higher than the 2015 average before the “cuts.”
Throughout its history, OPEC controlled production to maintain a $70 price target. In 2014, it abandoned this policy. Saudi Arabia, OPEC’s biggest contributor, lowered its price to its largest customers in October 2014. It did not want to lose market share to U.S. shale producers or its arch rival, Iran. These two countries’ rivalry stems from the conflict between the Sunni and Shiite branches of Islam. Iran promised to double its oil exports to 2.4 million b/d once sanctions were lifted. The nuclear peace treaty allowed Saudi Arabia’s biggest rival to sell oil in 2016.
Saudi Arabia correctly bet that lower prices would force many U.S. shale producers out of business, reducing its competition. At first, shale producers found ways to keep the oil pumping. 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. But the strong dollar meant OPEC countries could remain profitable at lower oil prices. Rather than lose market share, OPEC kept its production target at 30 million b/d.
At the same time, global demand grew slowly, from 92.4 million b/d in 2014 to 93.3 million b/d in 2015, according to the International Energy Administration. Most of the increase was from China, which now consumes 12 percent of global oil production. But its economic reforms are slowing growth.
In February 2016, Saudi Arabia, Russia, and Iran discussed a production freeze. That briefly put a floor under plummeting oil prices. But it didn’t pan out because Iran and Russia refused to cut their production. (Source: “Oil Up 7 Percent as Iran Welcomes Output Freeze,” Reuters, February 17, 2016.)
Oil Price Forecast 2025 and 2050
By 2025, the average price of a barrel of Brent crude oil will rise to $86/b (in 2016 dollars, which removes the effect of inflation). By 2030, world demand will driving oil prices to $95/b. By 2040, prices will be $109/b (again in 2016 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 $117/b, according to the EIA’s Annual Energy Outlook.
By 2026, the United States will become a net energy exporter. It has been an energy importer since 1953. Oil production will rise until 2030, when shale oil production will slow. U.S. oil production will decline slightly through 2050.
The EIA’s 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. The predictions given here are for the EIA’s most likely scenario.
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 enough 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.
Oil speculators could spike the price higher if they panic about future supply shortages. That’s what happened to gas prices 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.
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. That’s because supply is just one of the three factors affecting oil prices.