Recently, Hamish McRae, one of the world’s best economic journalists, declared in The Independent that “Hardly anyone a year ago successfully predicted the rise in the oil price to $120 a barrel — in fact I have not found a single forecast of that.” Regular readers of this column may recall that I predicted oil at over $100 US a barrel in April 2006 and well north of that price in another column in July 2007.
I am the most modest of men, but I reckon this gives me the right to offer some further forecasts. So I predict that the price of oil will soon fall — a bit. So far, the economies of the “Brics” (Brazil, Russia, India and China) are still growing strongly, but the old industrialized economies are definitely heading into a recession, and they still consume most of the oil.
This recession has not actually been caused by the high oil price; the sub-prime mortgage scam is to blame. However, the recession is likely to drive the demand for oil down far enough to bring the price back down to $100 before long, or even to between $85 and $90. Then in 2009-2010, as the “old rich” economies recover, it will go back up, probably to the $130 to $150 range.
The price will rise because demand will recover much faster than supply can grow, if indeed it grows at all. An allegedly giant new oilfield has been found off the coast of Brazil, but even if it lives up to the advertising it is five to 10 years away from large-scale production.
The world’s largest oil producer, Saudi Arabia, admits that there is now not enough spare capacity among the OPEC (Organization of Petroleum Exporting Countries) producers to make any difference. Russia, the biggest non-OPEC producer, will probably see production fall this year. And practically everybody else is already pumping flat-out.
So once the recession ends, the price of oil will probably stay well about $100 for most of the time during 2010 to 2015. It won't hit $200, though, because there will be a steep rise in the supply of non-conventional oil from tar sands, oil shales and other sources of “heavy oil.”
Even if the moment of “peak oil” is upon us, this would not mean the end of oil; it just means the end of sweet, light crude. The Alberta tar sands are profitable if the price of oil stays over $40 a barrel; at $60, the far larger Venezuelan tar sands are a viable economic proposition; at $80, even the oil shales of the western U.S. are promising.
Several billion people live in countries that are now growing very fast economically, so demand will probably keep the price for conventional oil near the $100 level well into the 2020s, but the political pressure to shut down extra-high-emission unconventional oil production may become irresistible. (This is why the Alberta tar sands producers now want to replace natural gas with nuclear power as the energy source for freeing the oil from the sand.)
In the still longer run — the 2030s and beyond — the demand for oil will probably fall even further, and with it the price. How do we know? Because if it hasn’t fallen due to a deliberate switch away from fossil fuels, then global warming will gain such momentum that entire countries fall into chaos instead. There is more than one way to cut demand.
Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.
