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Why Are Oil Prices So High and Where are They Going?

This article explores the reasons behind the high oil prices and discusses the projected trends in the global oil market. It analyzes the impact of OPEC production decisions, low surplus production capacity, and uncertainties on oil prices. Additionally, it highlights factors such as non-OPEC supply growth, hedge fund activity, and the value of the U.S. dollar that influence oil prices. The article concludes by discussing the expected decline in prices over the next ten years due to production increases and unconventional supplies.

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Why Are Oil Prices So High and Where are They Going?

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  1. Why Are Oil Prices So High and Where are They Going? Guy F. Caruso Administrator Energy Information Administration Global Finance Forum Washington, DC March 11, 2008 www.eia.doe.gov

  2. Tight global oil market conditions are projected to continue through 2008. • OPEC production decisions will continue to influence the oil market situation. • Low surplus production capacity of 2 to 3 million barrels per day, concentrated in Saudi Arabia, weakens the market's ability to respond to supply disruptions. • Oil prices likely to remain high at least through 2009. • Many uncertainties could alter the outlook and create volatility in global oil markets. Short-Term Energy Outlook

  3. Crude oil prices, having recently exceeded $100 per barrel, are projected to decline slowly over the forecast. WTI = West Texas Intermediate crude oil. Short-Term Energy Outlook

  4. OPEC cut crude oil production in 20064Q and 2007Q1 to firm world oil markets. Change in Quarterly Production (million barrels per day) Short-Term Energy Outlook

  5. OECD commercial stocks have fallen to the lower bound of the average range. Forecast Short-Term Energy Outlook

  6. Market balance should loosen as demand growth slows and non-OPEC supply growth increases. Short-Term Energy Outlook

  7. We expect OPEC surplus production capacity to remain low until 2009. Short-Term Energy Outlook

  8. Dollar-based economies have experienced higher oil prices than those with other currencies. $95.39 $ per barrel €64.68 € per barrel Short-Term Energy Outlook

  9. Multiple and hard-to-predict factors drive oil prices. Non-OPEC Supply Growth Hedge Fund Activity OPEC Production Decisions China’s Oil Demand Weather Iraq Iran Economic Growth Refinery Outages Venezuela Value of U.S. Dollar Nigeria

  10. World oil prices ease in the near-term, but are likely to remain high relative to historic standards $180 High Oil Price Case $113 Reference Case $69 Low Oil Price Case Annual Energy Outlook 2008

  11. Why do we think prices will decline over the next ten years? • Production increases are expected in both OPEC and non-OPEC countries • Nigeria, Angola, and Saudi Arabia • Azerbaijan, Brazil, Kazakhstan, and U.S. Gulf of Mexico • The high oil price environment of the past several years has provided sufficient incentives to spur increased growth in unconventional supplies • Canadian oil sands • Brazilian and U.S. biofuels • Qatar gas-to-liquids • Significant projected growth in global natural gas liquids

  12. Periodic Reports Petroleum Status and Natural Gas Storage Reports, weekly Short-Term Energy Outlook, monthly Annual Energy Outlook 2008, March 2008 International Energy Outlook 2007, May 2007 Examples of Special Analyses “Economic Effects of High Oil Prices,” Annual Energy Outlook 2006 Analysis of Oil and Gas Production in the Arctic National Wildlife Refuge, March 2004 The Global Liquefied Natural Gas Market: Status and Outlook, December 2003 “Impacts of Increased Access to Oil and Natural Gas Resources in the Lower 48 Federal Outer Continental Shelf,” Annual Energy Outlook 2007 www.eia.doe.gov Guy F. Caruso guy.caruso@eia.doe.gov

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