Forecast for Oil Prices

The past couple of years have seen a marked rise in oil prices. Unlike the 1970s price spike, these oil price rises are not temporary, but have a strong feeling of permanency about them. In fact, oil prices are liable to continue to rise.

Forecasts for $200 a barrel.

Some in OPEC are predicting a $200 barrel. What is causing them to predict price rises to this level.

1. Economic Growth in China and India. With more than a third of the world's population, economic growth in China and India, is taken a significant % increase in the demand for oil and petrol. China's growth of 9% a year, may not be sustainable at that rate, but, there looks no end in sight to China's record rates of growth. India, is another sleeping tiger, who has the potential to catch up with other industrialised countries. If this occurs, there will be a huge rise in demand for oil. At the moment, US consumes 25% of the world's oil output, but has only 1% of the world's population. If the rest of the world catch up with American standards of living, demand for oil will go through the roof.
2. No Let Down in Global Growth. Depsite a slowdown in US growth, the global economy remains resilient. It is a sign of the times, that the global economy is no longer dependent on US growth. This is the reason for rising demand.
3. Income elasticity of demand for oil. Economic growth in China and India are causing a bigger % increase in demand for petrol. e.g. if income rises 10%, demand for petrol increases by 15% - 20%. This is because the poor cannot afford a car, but, as incomes rise there is a growing middle class who can afford to make the jump to car ownership.
4. Supply is Becoming harder to increase. Saudi Arabia has kept promising to increase supply, above its current levels. However, it appears that even Saudi Arabia is struggling to meet the growing demand.
5. Oil companies such as Shell and Esso are reporting that it is becoming harder and harder to discover new sources of oil supply. It is a mute point how much supplies are left in the ground. However, as time progresses, the remaining supplies will become increasingly harder and expensive to extract. For example, producing oil in the Antarctic, is much more expensive and difficult than Saudi Arabia.