Probable Domestic Prices of Oil and Natural Gas During the Next Five Years
Authors: Smith Arthur A. 
Published: December 2007

In a period of unprecedented uncertainties, forecasting oil and gas prices is hazardous; but some of the influencing factors seem predictable enough to be used as a basis for arriving at reasonable estimates.

Introduction

Forecasting anywhere in the realm of economics these days is hazardous, indeed. A time cannot be recalled when forecasting involved more assumptions about as many imponderables as it does now. Anyone trying to look into the future confronts an impressive array of unknowns and uncertainties that easily could upset his projections. A business analyst could ask for no more trouble than to try to figure out what will happen in Viet Nam or in the Middle East; what Congress and politics will do in this post election year; what the Communists' next move will be on the international checkerboard; what will happen to the official value of our dollar; or what the full extent of the Alaska Slope reserves will be and what influence they might have on the world market.

Because of the magnitude and importance of the petroleum industry, all these imponderables and many petroleum industry, all these imponderables and many others certainly apply when one considers the prices of oil and natural gas during the next five years.

Forces of Supply and Demand

In the strict economic sense prices are a function of the forces of supply and demand. Even prices regulated by authority obey this basic principle in the long run since the authority usually acts upon either the supply side or the demand side or both. In the short run, regulated prices may, and often do, deviate from free market prices, sometimes leading to black- market activities. But it is safe to say that in time even regulated prices will have to be (and will be) confirmed by a balanced demand and supply relationship. A regulated price that is not adequate in the long run to cover costs of production and leave a profit margin sufficient to reward the enterpriser for profit margin sufficient to reward the enterpriser for the risks he must assume will lower supply and force the authority to raise the price.

Demand

Let us approach this subject by way of an analysis of demand and supply, first looking at demand for oil. Total demand for oil in this country (including relatively modest exports) has increased, with only three minor exceptions, every year since 1932, with rather substantial gains since 1961. A careful study of demand over the past 40 years reveals not only a persistent upward trend, but also only modest persistent upward trend, but also only modest sensitivity to recessions. Principal users are motor vehicles whose demand for motor fuel has gone up every year since rationing days of World War II; and as the number of motor vehicles in use (now over 98 million) continues to increase, the growth in demand for fuel will increase. Demand for other major refined products appears to be every bit as persistent as the products appears to be every bit as persistent as the demand for motor fuel, leading to the conclusion that there is possibly a strong degree of inelasticity in the demand for oil in the domestic economy. It does not appear possible to determine the additional demand generated by the Viet Nam war, but it no doubt is sufficient to be a major factor at present, and will continue to be so while the war lasts which, of course, is one of our imponderables.

JPT

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