FYI

Where could oil and propane prices go over the next decade? (Our Take on the U.S. EIA’s Annual Energy Outlook 2012 – Part 3)

Over the next 10 to 25 years, energy prices, specifically oil, could be anywhere from twice as expensive as they are today to half the cost of current prices.  As we’ve noted previously, propane prices tend to follow oil prices very closely since propane is both a substitute for oil and some is derived from crude processing.  The U.S. Energy Information Agency (EIA) provides three cases in their annual outlook – we’ll examine their assumptions and what we think could happen to propane prices.

First, it is helpful to understand what can drive oil pricing.  The EIA does a nice job of summarizing this information:

Oil prices are influenced by a number of both soft- and long-term factors.  In general, supply and demand in the world oil market are balanced through responses to price movements. The key factors determining long-term prices for petroleum and other liquids can be summarized in 4 broad categories: the economics of non-OPEC (Organization of the Petroleum Exporting Countries ) supply, OPEC production decisions, the economics of alternatives (e.g. Biofuels), and world demand for petroleum.

Base (Reference) Case

In this case, the EIA assumes that current trends and policies continue including robust economic growth in emerging markets like China and India.  Emerging countries are expected to consume 21 million additional barrels per day by 2035 as compared to a decline of 2 million barrels per day in mature markets.  Given constraints in OPEC production, the additional supply will come from “from higher-cost resources, particularly for non-OPEC producers with technically challenging supply projects.”  Because of this, oil prices are forecast to rise “5% per year from 2010 to 2020 and then 1% per year through 2035.”  Unfortunately, like the EIA, we believe this is probably the most likely case going forward.  Oil and propane prices will probably be 20-30% higher in the next 10 years and nearly 50% higher by 2035.

Average annual world oil prices in three cases, 1980-2035 (2010 dollars per barrel) [Figure 18 from US EIA AEO2012]

Average annual world oil prices in three cases, 1980-2035 (2010 dollars per barrel) [Figure 18 from US EIA AEO2012]

Low Oil Price Case

In this case, economic growth is considerably lower than forecast, with GDP growth 30% less than expected in emerging markets.  This keeps overall demand low in these markets (14 million barrels per day in 2035 vs. 21 million) and because of this OPEC producers lose their ability to control the market.  This leads to considerably lower prices than forecast, 40-50% lower than today.  Although world markets are in somewhat of slowdown currently, we (as well as many others) do not expect this to last.  Emerging markets will continue to experience growth in oil demand as more of their populations move into middle class lifestyles.

High Oil Price Case

In this case, GDP growth in China and India is 20% higher than forecast and in other emerging markets, 10% higher.  According to the EIA, “Oil prices [would] ramp up quickly to $186 per barrel (in 2010 dollars) by 2017 and continue rising slowly thereafter, to about $200 per barrel in 2035.”

Our Opinion on Long Term Propane Prices

As of August 8, 2012, oil is hovering around $94 per barrel.  Sub-$100 per barrel pricing may last for a few months or even a year or two, depending on economic recovery worldwide.  But it’s pretty clear in our opinion that prices for oil and propane will rise over the next ten years and beyond.  Propane users should prepare as much as possible to upgrade equipment and take advantage of efficiency technology to help control overall energy costs.

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