The Department of Energy is predicting $50/ barrel prices indefinitely:
Oil prices will persist near or above $50 a barrel for years and force a shift to more fuel-efficient cars and alternative fuels, the government said yesterday, discarding earlier predictions that costs would drop to about $30 a barrel.
[...]
The report issued yesterday said that oil prices will remain in the mid-$40 range or higher in coming years and average $54 a barrel by 2025, increasing to an average of $57 a barrel by 2030 when adjusted for inflation. Crude-oil prices have been hovering around $60 a barrel, soaring as high as $70 earlier this year.
That seemed really low to me so I decided to make my own projection.
Using EIA monthly real oil prices from 1974 through October of this year, I predict oil prices will be either $81.51/barrel or $91.15/barrel in December of 2025. Click on the tiny little chart on the right to see my projections.
How confident am I in this projection. I predict I have a 100% chance of being wrong--the same chance the EIA projections have. I also predict I am within +/- a lot of being right. In other words, no one knows what the price will be, but the EIA took a lot of time to come up with their projection and I did mine in 1/2 an hour. I still think I have as much of a chance of being right as they do. Call me arrogant. Did I just guarantee I will never get EIA funding for my research?
Some annoying details:
To get my numbers, I assume that the market does a pretty good job of telling us what oil prices will be. Based on an eyeballing of the raw data, I assume that oil prices between 1979-1985 are not part of the normal trend. I can't decide whether today's prices are part of the long term trend or an anomaly like the early 80's, so I project using both possibilities. To get my projections I run linear regressions of real monthly oil prices on a time trend and the time trend squared. The yellow projection assumes oil prices over the last year are not consistent with the current trend and that the 'shock' will last through 2006. This is purely a guess on my part. The pink projection assumes current prices are not a shock but part of the long-term trend. For those who care, my projections explain about 88% of the within sample variation in oil prices.
