Moneycontrol
Mar 09, 2013 05:52 PM IST | Source: ft.com

OECD predicts Brent price of $190 by 2020

The OECD study - "The Price of Oil - Will it Start Rising Again?" - looks at how oil consumption in various countries has responded to changes in gross domestic product and changes in the oil price over the past 20 years


Brent oil prices have found a new normal: the five-year forward futures has been anchored in the USD 90-USD 110 per barrel range for some time.


Among official forecasters, the International Energy Agency suggests average oil import prices will reach only USD 120 by 2020. The US government even see prices falling from today's levels in real terms.


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But in a recent paper of USD 190 per barrel in today's prices by 2020, with the possibility of it climbing to as high as USD 270 a barrel.


How does the OECD come to such a different conclusion from other forecasters, including its own energy watchdog, the IEA, and should we be worried?


The OECD study - "The Price of Oil - Will it Start Rising Again?" - looks at how oil consumption in various countries has responded to changes in gross domestic product and changes in the oil price over the past 20 years, using this to model future consumption patterns. In India, China and Indonesia, the OECD finds that oil demand has grown almost one for one with income in the past 20 years.


Unlike industrialised nations, these countries have not been able to reduce the intensity of oil usage as their economies have expanded. Given that emerging markets are expected to account for the lion's share of global growth over the next decade, this has significant consequences for oil demand.


But as China and India grow richer, might they become more efficient users of energy? "It is possible that the oil intensity of non-OECD countries will converge (downwards) towards OECD countries," says Isabell Koske, an OECD economist, and one of the lead authors of the paper. "But it is not clear this will happen in a linear fashion, or when it will happen. In the short term, oil intensity in India and China could even rise as more people become rich enough to buy a car."


Critics of the OECD paper will point out that its model is simplistic, compared to say the US government - through its Energy Information Administration - and IEA, which estimate changes in demand at the micro level. But that doesn't mean the OECD report can be taken lightly.


Complexity does not necessarily beget accuracy. Moreover, the methodology underpins assumptions made in the OECD's economic outlook, a closely watched forecast that influences investors and policy makers alike.


Whether one agrees with the OECD's assumptions or not, they are important, and their implication is clear. "If oil prices rise as forecast in our model, they will clearly be a drag on growth," Ms Koske says.

The Commodities Note is a regular online commentary on the industry from the Financial Times.

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