2010 Oil Price Forecast

Forecasting is hazardous. Just ask Michael Lynch, whose New York Times Op-Ed, "'Peak Oil' Is a Waste of Energy.” was discussed previously. Lynch is an economist with a background in political science and the former director for Asian energy and security at the Center for International Studies at MIT. He is currently an energy consultant.

In April 2004, oil was around $37 a barrel. Lynch predicted a fall to $25 by summer. By mid-August, it was $47. Undaunted, Lynch wrote in September 2004 that by September 2005, the price would be under $30. In September 2005, it hit $67.

In March 2006, with oil at $62 a barrel, he forecast a drop back to the $30 - $40 range before year end where it would remain for at least the next two decades. Instead, oil climbed as high as $76  before finishing 2006 at $61.

In April 2007, Lynch predicted a gradually drop from the current $65 a barrel to the mid-to-low $40's in 2008. It climbed steadily to $147.

He did get short-term vindication when the price hit the mid-$30’s as the world economy ground to a halt in the last quarter of 2008. Now with prices back around $70, he confidently predicts $30 again soon.

My price forecasting history is not as documented, but I always tell audiences that the only thing that will cause a significant downward impact on oil prices is severe and sustained worldwide recession, depression or general economic collapse. My long standing and continuing message is that oil prices are heading inexorably higher with occasional wild price swings as the world attempts to adjust to a growing supply/demand imbalance and the end of the Oil Age.

I do admire Lynch for putting his predictions out there for everyone to see – wrong as they are. Since now is budgeting season for supply chains, I want to do the same. So here is my forecast for the price of oil in 2010.

There are many issues that impact the price of oil, but the two biggest are, as always, supply and demand. Since 2005 world oil supply has been on a plateau of 83 to 87 million barrels per day. The 87 million barrels per day recorded in July 2008 was the highest production ever and the price also hit the all time peak of $147 in the same month.

In July 2008, every oilfield in the world that could produce was producing. Some estimated that the Saudi’s had about one million barrels per day in spare capacity, but that was it. This means that with all out production and the Saudi spare capacity, the world was capable of producing 88 million barrels per day in mid – 2008.

New production in 2009 plus oil flow projected to come on line in 2010 will be slightly less than the estimated 5% depletion in currently producing fields. This then leaves world production capacity through 2010 at 88 million barrels per day.

The financial crisis caused ‘demand destruction', but not as much you might think considering the severity of the meltdown.  Barclays Capital Weekly Oil Review showed 2008 demand at 85.5 million barrels per day down only 500,000 barrels a day from 86 million barrels per day in 2007. The Department of Energy (DOE) estimates world oil demand bottomed at 83 million barrels per day in the first quarter of 2009.

This month DOE reported that United States oil demand is starting to pick up. Also this month, the International Energy Agency predicted an increase in oil consumption by mainly emerging economies of 1.4 million barrels a day increasing projected demand in 2010 to 85 million barrels a day.

Assuming demand in 2010 will reach 85 million barrels per day and potential supply is 88 million barrels per day, the oil market should be well supplied through mid – 2010. Using these assumptions my prediction through mid – 2010 is that oil pricing will remain under OPEC (read Saudi) control in the $65 - $75 a barrel range.

Toward mid - 2010 the picture gets hazy. One can make a case either way on the shape of a global economic recovery. U, L, or W are all possible.  If recent nascent growth turns out to be government sponsored bubbles, then it is unlikely oil demand will increase in 2010 and could fall again.

In this scenario, prices weaken and possibly bring Lynch’s $30 prediction closer to reality. Too bad he is only right if the world economy grinds to a halt. Certainly the world still has a backlog of economic problems, but I don’t see the recovery faltering and oil prices falling for two main reasons.

First, governments around the world will not just stand by; they will stimulate again if needed. Second, the 83% of the world’s population that are just starting up the prosperity ladder have the resources, intelligence and drive to continuing climbing.

These 83% only use 44% of the world’s energy, while the 17% in the developed economies use 56%. They want a life like we have and their energy appetite will only grow. E.g. China is now the world largest auto market.

In my forecast, the second half of 2010 will see continued economic upside led by the emerging countries – Brazil, China, India, Russia and the Middle East – with further stimulus from the developing countries if the recovery falters.

I forecast that oil prices will reflect the demand pickup and steadily increase from the $65-$75 level early in the year and end the year in the $80-$90 range. The average price for the year will be around $80 a barrel.

This assumes no “Black Swan” event e.g.: war in the Middle East; revolution or civil war in a major oil producing country;  excess capacity is over estimated; a successful terrorist attack on a key oil processing facility or transport choke point; collapse of a significant oil field; etc.  Any event like this makes forecasting irrelevant until the situation passes.

In summary, the economic meltdown has bought some time, but we confront a paradox and a cycle that will be repeated until the transition from the Oil Age is well along.

Rising oil prices will signal a return to growth and increased demand. However, depletion of existing fields, like rust, never sleeps and finding and bringing enough new supply to meet increased demand and avoid prices climbing into economy-damaging territory is highly unlikely especially after 2011.

Eighty dollars a barrel is not economy crushing. It gives companies time to begin the serious supply chain changes needed before the next oil crisis arrives.

I have developed a Peak Oil Checklist as a guide for preparing supply chains for the “Inevitable Surprise” of Peak Oil.  If you would like a copy, let me know.