The volatility of recent years might suggest that all bets are off when it comes to oil prices in the medium and distant future. But the next three to four years could provide the world with a much-needed respite from the rollercoaster ride that transported crude prices to an all-time high of $147 per barrel in July 2008 before plunging them in a free fall to nearly $30 a barrel in December of that same year.
Since then, prices have rollicked along with far less dramatic hiccups. Light, sweet crude is currently trading near $100 a barrel, and analysts have noted a price increase by nearly a third between mid-October and mid-November.
Another bumpy ride?
Are we headed for another bumpy ride in which some forecasters have already predicted that prices could climb as high as $200 a barrel in 2012 if a host of major world events converge?
The economic, political and technological forces that have always driven oil prices will continue to do so in the future, but with a difference, longtime oil industry analyst Roger A. Herrera told Petroleum News Nov. 28.
“In 2008 the first recent economic recession, I could argue, was triggered by the high price of oil. It was affecting everything we were doing,” Herrera said. “However, today oil is a follower, not a leader. That was forcefully demonstrated during the battle in Libya a few months ago when 1 billion barrels per day of oil production effectively dried up and there was virtually no effect on world oil prices.”
Herrera, who shared his latest analysis of the various forces that will affect petroleum prices in the New Year and beyond, has spent more than 40 years observing oil prices.
He started his career as a petroleum industry geologist in Alaska, and then worked around the world, in places such as Peru, East and West Africa, Greece, Canada’s Arctic Islands, Colombia, Papua-New Guinea, Libya and Barbados before returning to Alaska in 1975, where he became increasingly involved in the federal politics of oil production in the northernmost state.
Herrera spent a lot of time in Washington, D.C., on issues such as offshore exploration and opening the 1002 area of the Arctic National Wildlife Refuge to energy exploration.
From time to time during the past decade and a half, Herrera has been interviewed by Petroleum News. Each time, he has accurately predicted the direction of oil prices.
Economy, politics will drive prices
He told Petroleum News that he suspects forecasting oil prices today may be “foolhardy,” but he would attempt to do so anyway.
Herrera said the future of oil prices rests on what happens with the world’s economy, which is currently beleaguered by the European debt crisis and the huge U.S. debt, and with political unrest in the Middle East.
“That won’t change in the short term, and one would have to be a very big optimist to think it will change in the long term,” he said.
To expect the new governments in Greece, Italy and a number of other, smaller European countries to solve their problems “is naïve” and to solve them in the short term “is even more naïve.”
“So I think oil prices will stay at the current level of between $80-$100 per barrel for the foreseeable future,” he said.
One caveat
Herrera did add one caveat to his price prediction: Unexpected events in the global political situation.
Iran’s nuclear weapons capability, the perennial strife between Sunni and Shiite factions in Iraq or something else could create a new crisis in the Middle East that shuts down the Strait of Hormuz or somehow limits the oil output of Saudi Arabia or other Middle Eastern countries.
“If that happens, oil prices will increase but more importantly, it will increase the depth of world economic problems and prolong our agony into the future,” Herrera said.
He also said oil demand from China is unlikely to change this scenario because that country has embarked on huge internal energy schemes to quench its thirst for oil. These include developing its own hydrocarbon resources and new nuclear power facilities when the rest of the world is shunning that energy source.
“China is going to do reasonable things for its own energy needs by other means than decadent use of energy like the West,” Herrera said.
Because China has avoided imitating wasteful energy policies of the West, he said the Asian country will have an easier time of meeting its future energy needs.
In 2010, the U.S. and China were responsible for 32 percent of global oil demand, while the 17 countries using the euro accounted for about 12 percent, according to BP Plc’s Statistical Review of World Energy released June 8.
Conservation could improve outlook
As for other factors, Herrera said he does not envision oil prices being artificially manipulated in the future, as they have been in the past by OPEC countries. “I just don’t see that happening,” he said.
“I’d rather say that we will work things out with the economic situation in the next three to four years, and there will be no major crisis in the Middle East. We will return to economic growth and begin to drive up oil prices again,” he said. “After four years, higher oil prices will inevitably dampen growth in the world economy, and what happens then will depend on what we’ve learned in the medium term.”
Sensible energy policies, including meaningful conservation measures, could improve the outlook for oil prices.
“If we persist in the excesses that we’ve indulged in, we will continue to go from the giddy heights to the dismal depths,” he said. “If we get out of this depressing economic situation by doing sensible things and then go on to do the same old, wasteful things that we did before, nothing will change.”
Herrera said he has given up on waiting for a “magic bullet” that will solve the energy dilemma. “I remember when I was in college years ago and people were talking about putting water into a fuel cell and running a car. Well, it’s not going to happen. So just forget it and get on with life and making sensible decisions,” he urged.
Energy supply problems ahead
As for the effects of peak oil, Herrera said responsible forecasters believe that global oil production peaked in 2005 and since has rolled along a plateau of relatively minor ups and downs.
“When all these political and economic problems work themselves out, I don’t think the energy supply will be present to meet that growth,” he said. “There will be nothing to rescue us. Once we get into the growth scenario, oil prices will go up, and they will go higher than $150 per barrel because of inflation.”
When asked if oil prices will fall below $80 per barrel for a significant period of time in the future, Herrera said that is not likely.
“I personally don’t think so, unless we go into a recession that makes the 1920s look mild,” he said. “I just don’t see that happening.
“There are no sunny skies ahead. We are in a different energy era. We will see lots of surprises, and they won’t be pleasant,” added Herrera.
