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How Plausible is the Consensus Projection of Oil Below $25 and Persian Gulf Oil Capacity and Output Doubling by 2020?

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  • Dermot Gately

Abstract

A two-part consensus in three recent long-term projections of the world oil market states: oil's price will stay below $25 (1999 $/barrel), and OPEC oil capacity and production will increase rapidly over the next two decades to unprecedented levels, more than doubling in the Persian Guy, by 2020. Such are the projections by the International Energy Agency (IEA), by the Energy Information Administration of the U.S. Department of Energy (DOE), and in The New Economy of Oil by John Mitchell and others. Yet such projections are not based on behavioral analysis of Gulf countries' decisions; they are merely the calculated residual demand for OPEC oil, the difference between projected world oil demand and non-OPEC supply, given some assumed pric-path. Such projections by IEA and DOE are implausible because they rely on supply behavior by Gulf producers that is not in their own self-interest, The DOE projections of world oil prices could be reasonable, but only if world oil demand and/or non-OPEC supply are much more price-responsive than are represented in their numerical projections. Using an updated version of the model from Gately (1995), I show that the effect of greater price-responsiveness is to make faster output growth - not higher prices - the reliable path to higher OPEC revenue. I also demonstrate the effects of uncertainty about several key parameters (such as price and income elasticities) upon model results when parameter values are randomly sampled 500 times.

Suggested Citation

  • Dermot Gately, 2001. "How Plausible is the Consensus Projection of Oil Below $25 and Persian Gulf Oil Capacity and Output Doubling by 2020?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-28.
    • Handle: RePEc:aen:journl:2001v22-04-a01
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    Citations

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    Cited by:

    1. Franz Wirl & Azra Kujundzic, 2004. "The Impact of OPEC Conference Outcomes on World Oil Prices 1984-2001," The Energy Journal, , vol. 25(1), pages 45-62, January.
    2. Wirl, Franz, 2015. "Output adjusting cartels facing dynamic, convex demand under uncertainty: The case of OPEC," Economic Modelling, Elsevier, vol. 44(C), pages 307-316.
    3. Wirl, Franz, 2008. "Why do oil prices jump (or fall)?," Energy Policy, Elsevier, vol. 36(3), pages 1029-1043, March.
    4. Gately, Dermot & Al-Yousef, Nourah & Al-Sheikh, Hamad M.H., 2013. "The rapid growth of OPEC′s domestic oil consumption," Energy Policy, Elsevier, vol. 62(C), pages 844-859.
    5. Horn, Manfred, 2004. "OPEC's optimal crude oil price," Energy Policy, Elsevier, vol. 32(2), pages 269-280, January.
    6. Dermot Gately, 2007. "What Oil Export Levels Should We Expect From OPEC?," The Energy Journal, , vol. 28(2), pages 151-174, April.
    7. Wirl, Franz, 2008. "Energy conservation, expectations and uncertainty," Energy Economics, Elsevier, vol. 30(4), pages 1957-1972, July.
    8. Edward Hunter Christie & Joseph F. Francois & Waltraut Urban & Franz Wirl, 2010. "China's foreign oil policy: genesis, deployment and selected effects," FIW Research Reports series II-003, FIW.

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    JEL classification:

    • F0 - International Economics - - General

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