Oil prices forecast is a worthwhile but difficult job. Geopolitics, speculation, crisis, possible scarcity can deeply impact oil price. However, crude oil has a real pricing.
How can we price crude oil ?
It should be the balance between supply and demand
According to International Energy Agency :
Demand = 1 000 billions of barrels
World oil demand over the next 30 years :
Assuming a 10 billions world population (world population today = 7 billions), International Energy Agency’s forecast is around 1 000 billions of barrels for the next 30 years.
Supply = 3 000 billions of barrels
Oil reserves to date (in billions of barrels) :
Proven oil reserves (reasonable certainty of being recoverable) are estimated with a high degree of confidence :
- 1 000 billions of barrels : cost of producing a barrel around 25 $ (easy extraction, mostly in the Middle East and North Africa)
- 1 000 billions of barrels : cost of producing a barrel between 10 $ and 70 $
- 1 000 billions of barrels : cost of producing a barrel between 40 $ à 100 $ (these reserves are located in more difficult areas to access and therefore harder to extract)
Oil reserves are underestimated because they don’t take into account unproven reserves, shale gas and coal.
Real oil pricing
No scarcity of oil :
because the world has between 83 and 213 years of oil reserves left
According to International Energy Agency :
- if demand rises 2% per year, the world has 83 years of oil reserves left.
- if demand growth remains flat, the world has 213 years of oil reserves left.
Conclusion : oil price should be around 50 $ per barrel
(50 $ = average cost of producing a barrel)
But …
Speculation and volatility can strongly impact oil pricing. Forecasts seems to be very difficult.
Oil price (Brent)
An oracle of oil pricing
Arjun Murti, known as the « oracle of oil », is the perfect illustration of how oil pricing forecast is a worthwhile but difficult job. In the 2000s, when he worked at Goldman Sachs, he was the only one to predict a price over 100 $, while all the experts predicted a price decrease. When his forecast came true, he became a star, a famous expert of oil pricing. In 2008, as the barrel price exceeded 100 $, he predicted a price at 200 $ over the next 2 years. But « the oracle » failed. He didn’t anticipate the financial crisis, shale gas boost, OPEP crisis. Six month after his forecast, barrel price was 40 $… End of the myth…
Bibliography : L’homme inutile – PN Giraud