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June 18, 2010

What the Oil Spill Means for Future Oil Prices

We aren’t out to “kick ass” over the oil spill, but we are out to examine what the oil spill means for the future of oil drilling, the oil supply, and broadly, the price of oil.
While commentators, the federal government, and others have exhausted what the oil spill means for the environment, jobs in the south, and the Gulf Coast ecosystem, there are long reaching economic consequences that are about to emerge as a result of this crisis.
In all likelihood, the 6 month moratorium on offshore drilling will be extended for a couple of years.  Now, before the moratorium I did a study on global oil supply and demand since 1970.  I also attempted to forecast supply and demand over the next decade.  Since I could not figure out how much oil was in stock globally, I created stock based on any excess supply created from 1970 on.

As we can see, the oil supply seemed to have topped in the late 2000s and there was a period where demand outstripped supply.  In addition to that, the drop in oil stock has not returned to 2006 levels yet.  This means that if demand were to outstrip supply in the near future, upward price pressures will return to the oil market.  

As we can see, during the height of the last economic cycle, oil demand grew at an annual rate of almost 4% per year.  This is from the growing demand in China, India, and the United States.  While U.S. demand is going to slow over the long term, the demand growth in China and India will easily overtake a reduction in demand from the United States.

My oil demand growth projections have a 1% reduction in 2010, half of the drop from 2009.  However, a three year period of economic growth (2011-13) will further strain the oil markets.  A recession in 2013-4 (non-oil related) will help to ease the strain on the oil stock.  However, by the time the markets recover, the high oil demand, coupled with the inability to produce more oil supply, will create an oil shortage by 2017.  This shortage will skyrocket prices and by a part of a recession that year as well.
All of these figures were calculated before the oil spill.  
If we take that much oil off of the market for a long period of time, what does that do to these projections?

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