Conclusions
October 2010
Oil is central to both Canada and the world’s economy and will continue to be important into the future. Most countries are significantly affected by developments in the oil market either as producers or consumers of oil – or, as in Canada’s case, both. Given the importance of oil to Canada and the world, governments, industry and the public have an interest in understanding the fluctuations of oil prices.
This paper has shown that oil prices are affected by a combination of complex factors. Traditional factors, such as oil supply and demand, OPEC production strategies and spare capacity levels, technological advances, the marginal cost of production, seasonal and severe weather patterns, and crude oil inventory levels, all continue to be important in determining the overall direction of crude oil prices.
However, in recent years, new emerging factors such as the devaluation of the U.S. dollar have had a growing influence on oil prices. Geopolitical events and resource nationalism, although not new, have gained increasing influence as well.
According to analysts, the growing “financialization” of the oil market is likely to have contributed to increased oil price volatility by making the price spikes higher, and the price falls lower. Deregulation of the crude oil market allowed financial interests to significantly increase their volume of trades, and this may have supported increased oil price fluctuations. It remains to be seen whether the proposed regulatory changes in U.S. legislation under the “Dodd-Frank Act” (2010) will prevent “non-commercial traders47” from having undue influence on crude oil pricing.
Asian oil demand is likely to continue to have a significant impact on oil prices in the future because close to two-thirds of the projected increase in oil demand between 2008 and 2030 comes from China and India alone.
Crude oil is likely to see upward price pressure with the economic recovery, and a resultant recovery in oil demand. In the absence of another economic downturn, there are many factors which argue for strength in the price of oil. These include the recent devaluation of the U.S. dollar, OPEC production cuts, higher marginal costs for oil production, and an increased demand for crude oil as the world’s economy recovers.
There are two opposing long-term views on oil prices: one view is based on technological advances driving down demand, the other view is based on resource depletion and NOC/OPEC considerations causing prices to rise.
Some groups believe that long-term oil prices could trend downwards, due to gains in energy efficiencies, weaker than expected oil demand, and falling production costs due to technological advancement. One of the biggest uncertainties in this regard would be around the potential for greenhouse gas emissions regulations. The IEA envisages a scenario where new emissions regulations in various countries put downward pressure on crude oil and petroleum product demand. Such a scenario, if realized, could result in significantly lower crude oil prices over the long-term, as is shown in the IEA’s “450 Scenario”.
Other forecasts, including the reference cases of the U.S. EIA and the IEA, show a long-term trend towards rising prices, driven by resource depletion effects, scarcity concerns, and higher demand for crude oil from countries like China and India.
Of the reference forecasts surveyed in this paper, the lowest price forecast for year 2030 (in 2008$) is $65 US per barrel, while the highest is $123. In addition, to the reference cases, there are high and low price cases shown in this report which reveal the possibility of even greater variability in future oil prices. The lowest price case shown for year 2030 (in $2008) is $52 US per barrel, while the highest price case is $203. Obviously, there is no consensus on the future of global crude oil prices. This is an important conclusion of this paper. However, on average, the reference forecasts shown in this report do show oil prices rising in the future. This paper has reviewed the factors and issues which affect the price of crude oil. Given the impossibility of predicting the future of all the factors that can influence crude oil prices, we conclude that crude oil prices will continue to be very difficult to accurately forecast.