Time and time again, we hear or read on the news how the price of gasoline has gone up, which essentially means the price of oil has gone up. In the the short term, the words "oil price" and "volatility" seem to go hand in hand as assumptions in supply disruptions come and go. However, long term, there seems to be an indisputable upward trend based on three main themes: Oil Price, Oil Demand, and Population Growth.
If you notice the table to the right, you'll see the trend I'm referring to. As global population grows, consumption increases, and the price of oil goes up. However, these three aren't quite increasing proportionately. Notice how over the last 50 years population has doubled, while over that same period of time, oil demand and price (adjusted for inflation) have quadrupled, which means that on average every person today is consuming twice as much oil as they were 50 years ago.
Recently in my economics class, I was reminded of a few simple principles: Demand, Supply, and Elasticity.
In general, as price increases, demand decreases; however, the price of oil is highly inelastic. Nearly all economies depend on oil as a main source of energy to modernize, grow, and to go about daily activities. And even though developed countries like the U.S. are becoming more energy efficient, there still hasn't been a viable substitute for the growth in oil demand in emerging economies.
We know that the higher the price, the more incentive oil companies have to produce. The opposite holds true as well: the lower the price, the less incentive firms have to produce.
Putting all the pieces together we see that:
- World Oil Demand has been increasing. On average, every person today is consuming twice as much oil as people were 50 years ago.
- Higher oil prices don''t necessarily translate into lower demand, evident by the increasing consumption despite "high" prices for oil.
Another interesting fact pointed out by Dave Anderson: Population is expected to grow to 9 billion within thethe next 20 years.
If this trend continues,where will demand be? And where will price be?
The EIA expects a subtle increase in oil prices reaching around $125/ barrel while forecasting demand to increase to 112 mmbo/d by year 2030. They also consider a "High Oil Price," which is shown below by the black dotted line.
In the last 5 years:
- Demand increased by 7 mmbo/d
- Crude prices increased by a roughly $45/barrel. It's also important to note that the price of crude was just over $110/barrel in May before macro factors caused the decline.
- Demand increases by 10 mmbo/day
- Price increases by $40 in reference case, or
- Price increases by roughly $100 in "High Oil Price" case.