Which Direction Will Oil Prices Go?

Economists have speculated that a shift toward clean energy production will lead to decreased demand for oil in the long run, but the short run supply and demand equation is much less certain. Down from last summer’s highs that neared $200 per barrel, today oil is priced much more modestly although supply constraints exist and global manufacturing is leading to increased demand for petroleum throughout Asia. These dual constraints suggest that oil prices will remain relatively high until alternatives allow demand to fall faster than the finite level of supply available for refineries.

In the short run, oil prices should remain relatively stable around $70 per barrel as supplies remain strong while demand is only slightly up. Consumers are paying more at the pump due to increased regulations and taxes more than just changes in the fundamental price of oil – increased costs of refinement, combined with higher municipal taxes on final product oil have resulted in increased prices at the pump even when crude oil prices have remained relatively steady. In California, taxes on oil are near all time highs, as legislators turn to petroleum taxes in an effort to help meet both fiscal and environmental goals at the local and regional level. Therefore, the end-user prices of oil may increase even if raw crude prices remain steady in the near future.

Many analysts are divided on the long-run prospects for oil prices, which reflect a variety of factors including economic growth in China and India. While these developing nations (referred to as BRICs by analysts) continued to experience robust economic growth, they are also actively restructuring their production capabilities so that prospects for immediate spikes in oil demand are somewhat limited. Look for oil prices to slowly increase over the next year based on this increase in demand, while consumers seek ways to mitigate energy prices through efficiency and conservation.

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