How much is a 10-year forecast for cheap oil worth?

Annie Baxter May 11, 2015
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How much is a 10-year forecast for cheap oil worth?

Annie Baxter May 11, 2015
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The Organization of the Petroleum Exporting Countries predicts oil prices will hang below a $100 a barrel for as long as a decade. At least that’s what the cartel is forecasting in a draft strategy report obtained by the Wall Street Journal. OPEC did not respond to a request for the report.

Looking out to 2025, OPEC says crude will trade at about $76 a barrel in its most optimistic scenario.

Experts say it’s hard to predict what that would mean for the U.S. economy. One reason? The time frame isn’t meaningful.

“It is always a fool’s errand to be making predictions for oil prices — or frankly just about anything — 10 years ahead,” says Pavel Molchanov, an energy analyst with Raymond James.

Molchanov says cheaper oil has meant roughly a dollar-a-gallon decline in gas prices, translating into a $600 to $800 yearly benefit for a typical American household. But that benefit has been muted in the economy so far. 

“We had assumed the money would be treated as a windfall,  and consumers did better than that,” says Doug Handler, chief U.S. economist at IHS Global Insight.

Handler says instead of using their savings at the pump to splurge on clothing or dining out, consumers have been conservative, stashing their money away or paying down debt. That does little to goose consumer spending, a key driver of the economy.

Handler says cheaper oil’s benefits may be more noticeable in lower inflation, especially in combination with a stronger U.S. dollar.

“The lower inflation, of course, improves the buying power of consumers,” he notes. “We’re hopeful that that phase two of the impact will kick in this year.”

But the volatility of oil forecasts may complicate any prognostications about economic impacts.

“The average may be $70 a barrel, but the range could be $20-$150,” says Bob McNally, president of The Rapidan Group, an energy policy, market and geopolitical consulting firm. 

McNally says that volatility matters more for the economy, consumers and oil producers than oil’s average price.

 

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