Future Price of Oil

Want to know what the price of a barrel of oil will be in eight years? Exactly $119.50 a barrel.

There’s no shortage of pundits predicting where oil prices are heading. And every day seems to bring new reasons to change the forecast – a resurgent dollar, Americans curtailing their driving habits, oil supply reports… The list goes on.

But the guys who really know the future of oil prices are those sitting right in the driver’s seat – oil producers.

Every day, they make bets about the direction of petrol prices on the futures market. And right now, they’re telling you – in no uncertain terms – oil’s got a floor price of $100 a barrel for years to come.

“Oil-flation” is here to stay".

The Future Price of Oil – And Why You don’t Need a Crystal Ball

Crude oil is the world’s most actively traded commodity. Every day, oil producers trade futures contracts on the New York Mercantile Exchange (NYMEX) to hedge against price swings.

At the end of the day, they – along with speculators who bring liquidity to the market – determine the price of oil, which is simply a reflection of the market’s attempt to balance supply and demand.

So, that prediction of $119.50 a barrel? That’s a recent closing price on NYMEX for the December 2016 contract.

Fact is, NYMEX has over 1,000,000 active futures contracts or “open interest” on crude oil for the next eight years and not one trades below $112 a barrel.

That means the guys in the business – the ones who make their living producing and selling oil – are predicting oil will be priced over $112 a barrel for most of the next decade.

Why are they predicting the continuation of triple digit oil prices?

Plain and simple, the markets are telling us future demand for oil will outstrip supplies.

Demand for Oil Keeps Growing

Although demand is highest in the developed world, exploding economies like China and India are quickly becoming large oil consumers.

The United States is still the world’s largest consumer of petroleum and our thirst for oil is growing rapidly. Between 1995 and 2005, U.S. consumption grew from 17.7 million barrels per day (bpd) to 20.7 million bpd – a 17% increase.

In the same time frame, China’s consumption vaulted from 3.4 million bpd to 7 million bpd – a 106% increase. And that number’s rising, as China surpassed 8 million bpd for the first time in June.

Meanwhile, India’s oil imports are expected to more than triple from 2005 levels by 2020, rising to 5 million bpd.

All totaled, Asia accounts for 60% of the world’s new oil demand.

Putting a worldwide number on it, the International Energy Association recently increased its 2009 oil demand forecast to 87.8 million barrels a day.

On top of that, The U.S. Energy Information Administration projects world consumption of oil to increase to 98.3 million bpd in 2015 and 118 million bpd in 2030. That’s a 35% increase by 2030.

Oil Production Dropping?

By now, you’ve probably heard of the Peak Oil theory – that worldwide oil production has peaked and is now dropping. Consider:

1) The U.S. Energy Information Administration Energy contends that world production leveled out in 2004, and reached a peak in the third quarter of 2006.

2) Oil tycoon T. Boone Pickens recently told Congress, “I believe you have peaked out at 85 million bpd globally.”

3) And at a recent industry conference, the chief executive officer of Total SA (TOT: 64.21 -0.96 -1.47%), the French oil major, said the industry would be lucky to produce 95 million bpd by 2020.

But whether you believe Peak Oil is true or not, at least nine of the largest 21 oil fields on the planet are in decline.

In 2006, a Saudi Aramco spokesman admitted that its mature fields are declining 8% per year. It’s now clear that Ghawar, the largest oil field in the world, has peaked.

The second largest, the Burgan field in Kuwait, started down in 2005. And Mexico announced that its giant Cantarell Field entered depletion in 2006.

Reserves Don’t Equal Production

Then there’s the matter of oil reserves, a moving target if there ever was one.

Oil reserves are classified three ways:

1) Proven; it reserves have at least 90% to 95% certainty of entering production.

2) probable; it reserves have 50% probability.

3) possible; it reserves have a 5% to 10% chance.

A 2007 report by the Energy Watch Group pegged total world proven plus probable reserves at between 850 and 1,250 billion barrels. That’s 30 to 40 years of supply if demand holds steady – which it won’t.

But as Sadad I. Al Husseini, a former VP of Aramco, said in October 2007, “Reserves are confused and inflated. Many of the so-called reserves are in fact speculative. They’re not delineated, they’re not accessible, they’re not available for production.”

By Al-Husseini’s estimate, 300 billion of the world’s proven reserves should be re-categorized as speculative.

On top of that, about 70 oil-producing nations don’t reduce their reserves to account for yearly production. As noted investor Jim Rogers says, “Despite consistently pumping 8 million bpd for over two decades, Saudi Arabia has repeatedly stated their reserves are at 267 billion barrels.”

Organization of Petroleum Exporting Countries (OPEC) member nations even have economic incentives to exaggerate their reserves, as the OPEC quota system allows greater output for countries with bigger reserves.

The reality is this: it’s highly likely we have a lot less than 1,200 billion barrels to burn in the next 30 to 40 years.

And increasing demand could have us running on fumes in an even shorter span.

New Production — a Pipe Dream?

Even though we continue to hear about new oil discoveries, new oil reserves will be harder to find and extract.

Take Kazakhstan, for instance. Its oil fields are slated to be the third largest in the world. The heralded Kashagan field should produce 1.5 million bpd at its peak. But technical problems continue to plague the project.

In 2005, production was scheduled to start in 2009. A year ago that was moved to 2011 and now it’s been pushed back to 2013. And the projected cost has risen to a whopping $50 billion.

Canada’s oil sands are another example. Production could reach 5 million bpd by 2030 in a “crash program,” but the oil contains contaminants such as sulfur and carbon that are difficult to extract and leave highly toxic tailings.

Frankly, the most easy-to-extract oil has been found. Price increases have led to exploration where high technology is required and where it is much more expensive to extract the oil.

We are replacing OPEC oil that costs $3 per barrel to produce with deep-water and other nonconventional sources at $60 per barrel and up.

And that’s why the markets are predicting triple digit oil prices are here to stay.


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