Should we be concerned with Crude oil prices in 2011?

Since we are nearing 2011, there are many speculative sayings in regards to crude oil price forecast in 2011. Some consider that it could shoot off the roof and reach very soon the 100 USD mark and from there on, it could only continue to rise. Others consider that this recent rapid rise in petroleum price is just a glitch and it will come down from this high price as 2011 will progress, or at least won’t further rise.

As you may recall, crude oil prices started off the year at roughly 40 USD/b; from May the oil price picked up, reaching 70 USD/b, and the current crude oil prices are over 90 USD/b.

For those who consider oil prices to rise, they support their claim by presenting the following two arguments:

  1. Oil consumption is expected to rise – according to IEA (International Energy Agency) projections for petroleum demand worldwide in 2011 will be 88.8 million barrels per day, which is based on “stronger data from OECD North America and non-OECD Asia”. As a comparison in 2010 the daily consumption is estimated at 87.4 MB/d; thus the expected rise will be roughly 1.6% in demand for oil in 2011.
  2. OPEC, which is responsible for about 40 percent of the world crude oil supply, announced in the recent OPEC meeting it will sustain its current quota of 24.845 million which was set back in 2008.

Some also take the projections one step further, and are frightening us with oil reserves depleting as they are expected to run out within 90 years, long before replacement technologies will be ready. Since it’s hard enough to see into the near future let’s stay with looking at 2011.

Others consider that these arguments might make sense to drive oil prices up; however it won’t necessarily be true for 2011. Why?

Basically, demand and supply changes can make small fluctuations in crude oil prices, but for a price hike there will need to be a major crisis, as we have seen in the past.

Thus, crude oil prices depend more on the projections of a major crisis rather than the small shifts in supply and demand. Consider that for energy purposes, Natural gas provides a good energy source, and it’s a lot cheaper than crude oil, and is more abundant. However the problem with Natural gas is that it has fewer uses than crude oil, and therefore it’s not a perfect substitute.

Some present a different argument in this respect. Consider the argument made in regarding peak oil (the maximum capacity of inflowing oil to an economy): They claim that for crude oil we have already reached a production peak back in 2006, and, this could mean price pressures in the near future. They state that since petroleum is crucial for economic growth (seeing that economies rely on it), and there is a rise in demand, this will reflect into a rise in prices, until a recession breaks which causes prices to fall (as you may recall in 2008 crude oil price rose to 130 USD/b and by the end of the year it dropped to 30 USD/b). In the past, whenever the burden of petroleum costs, as a percent of nations GDP (they quote 5.5% of US GDP), reached a certain point, a recession broke, since, among other, the economy couldn’t continue growing with high energy prices. I think there is some merit to these claims, but I’m not entirely persuaded with these deterministic arguments.

In short, there is no short answer. Even if there won’t be an unexpected crisis, which should mean that crude oil prices won’t dramatically rise in 2011, I still wouldn’t bet on it, since we are dealing with an uncertain market and even this prediction is partially true.

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