Oil Prices: Higher or Lower in 2010?

Oil prices rose Friday as Fed Chairman Ben Bernanke offered positive thoughts about the economy. Does a strengthening world economy mean higher oil prices in 2010? Not so fast, Bucky.

The argument for higher oil prices in 2010: in the short run, supply is inelastic, meaning that higher demand, leading to higher prices, cannot bring much new production on line any time soon. That is absolutely true, but it's only half the story.

The argument for lower oil prices in 2010: in the long run, supply is very elastic, meaning that higher prices eventually stimulate a great deal of new supply.

Here's the price chart, to which I've added the five year moving average:

I used the five year average because five years is a rough estimate of the average time it takes to bring new supply on line. Oil company executives do not move with a hair trigger when oil prices rise, because it's too easy for one month's high price to become the next month's low price.

Rather, investment in oil exploration and development occurs after a sustained period of higher prices.

And just last month we hit the highest five-year average oil price level ever!

That leads me to expect further supply increases in the coming years, which gives good basis for an optimistic (for consumers) oil price forecast for 2010.

Business planning implication: Don't take it for granted that we'll have higher oil prices in 2010, but oil is so hard to predict that neither would I recommend a business plan based on lower prices. Be ready to go in either direction.

Comments

[The Greates...:]

Well, if oil keeps rising, no recovery is on the horizon.

Aug 23 10:36 AM

[Ferdinand E...:]

'The greatest' has the right idea. OPEC should be satisfied with oil at what it is now. They are making plenty of money, and if the oil price keeps rising they will lose because they will...excuse the expression...destroy the demand for oil because they will destroy the recoveery..

And by the way Dr Conerly, when or if you peep in my new energy economics book, what you will find out is that the key to the oil price is not demand, but OPEC discipline, and since they have started to practice 'resource nationalism', that is going to be stronger than ever.

Aug 23 01:06 PM

[starkoski:]

Supply will not increase and will decrease due to peak oil and the land export model. When oil went to $147 there was little supply response and now with the world economies improving supply will not be able to keep up with demand. Even the IEA come out and spoke about the looming peak oil problem even though they think it will be later. It looks like supply peaked over the last 4 years and it is rolling over - forever. Tell me you opinion on this response.
Thanks

Aug 23 01:44 PM

[old #78:]

Agreed that there will be no recovery if gas price escalate, however; the gs price situation is a hoax, there is plenty of oil. Iraq has not come on line yet. They will be looking to under cut OPEC because they will want the money. LNG is our future hope if we are to ever ween ourselves off of oil. Not 100%, but put a dent in the money sent to the middle east.

Aug 23 02:01 PM

[BullnBear:]

The U.S. dollar strength is going to, (and in my opinion currently is), playing a big role in the price of oil.

If the dollar finds support I believe oil rolls back and I have been commenting this same information recently.

I understand and fully agree with the supply issues, peak oil, etc. but right now I believe that the issues with the dollar and the deflation/inflation debate is forcing a protection hedge into oil.

Aug 23 04:44 PM

[Fringedweller:]

Hey Dr. Bill, I would like to see a your 60 year oil price chart overlayed with a 60 year "combined alternative energy oil replacements" chart. The second chart could be the same chart items projected 60 years into the future. In other words what will replace oil? Willl 'glass, cotton, wool, electricity, metal" stocks go up as the price of oil goes down? Thanks for your thoughts!

Aug 24 11:17 AM

[Tony Daltorio:]

Typical thinking of an academic - where all the oil will come from? By magic out of nowhere? You should read the IEA's latest report.

Mexico's Cantarell is heading down the drain and Brazil's offshore fields will take many years to bring on-line.

Aug 24 04:33 PM

[Road Runner:]

The new oil is going to come from the oil sands of Canada, that's where.

Aug 24 05:06 PM