Fuel prices predicted to remain low through 2009Written by Jennifer Womack
Aaron Brady of Cambridge Energy Research Associates, Inc. predicts prices will remain lower through 2009. As with any such outlook these days, his prediction hinges on a few factors including the health of the economy both here at home and around the world.
“We are assuming the economy will begin to recover and by 2010 oil prices will begin moving back towards around $60 per barrel,” says Brady. “However, if economic conditions do get worse from here, which is a real possibility, crude prices could enter a sort of super slump, and average only in the low 30s next year and beyond.”
“On the oil markets research team,” says Brady of his career with Cambridge, “we spend a lot of time trying to figure out where the price of oil is going to go next. The past several years have been especially challenging as we’ve seen a rise in the benchmark for light sweet crude oil price from an average of about $31 per barrel in 2003 to a peak of $147 a barrel mid-way through last year and now all the way back into the 30s again.”
“From 1986 to 2002 the average price for light sweet crude oil was about $21 per barrel,” recalls Brady. “By the fourth quarter of 2004, the price began rising and prices actually rose to over $35 per barrel, a price that today many of us should remind ourselves that at the time was considered very high.”
With the world economy growing at its fastest pace in history between 2003 and 2007, Brady says, “In one year alone, 2004, oil demand grew by three million barrels per day.” That’s a rate he says is usually only achieved over the course of three years. “Oil was acting as the barometer of the world economy.”
Brady says people forgot oil’s cyclical market history as there was talk of it reaching $200 to $300 a barrel. Today’s “talk” centers on when the price will recover.
“This year aggregate world Gross Domestic Product will actually decline, the first time this has happened since the 1930s,” says Brady of a prediction made by a sister company of Cambridge. “We estimate that global oil demand fell last year by about half a million barrels per day and is likely to fall more this year, perhaps as much as one-half million barrels per day. This will be the first time since the early 1980s that world oil demand has seen declining demand.”
Brady says, “In just six short months the prices plunged more than $100 per barrel back to where we started five years ago. Of course, this is a boon to consumers and if low prices are sustained throughout the course of the year, as they are likely to be given the weak state of demand, it is equivalent to another several hundred billion dollar fiscal stimulus package. On the other hand, because industry costs have risen the last several years, the cost of oil is actually lower than the cost of production.” Brady says production costs are beginning to decline, but at a much slower pace than prices.
Noting several ongoing delays, Brady says, “If enough new projects get delayed or deferred, future supply may not be adequate to meet demand. About half of potential supply growth in the oil industry is currently at risk of being delayed or canceled because of the current lower oil price environment.”
Brady asks, “How will the oil price play going forward?” As expected, the answer is multifaceted, based on the answers to numerous questions that will be answered in the months ahead. “Are we at the beginning of an economic decade with very weak oil demand and a depressed oil price for several years? Or, will the economy gradually rebound after trillions of dollars of government spending leading to revived demand and a stronger oil price? Could there be a supply shock waiting in the wings that could send prices back over $100?”