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Oil prices will remain at about $100 a barrel in the near term but will decline to $70 to $100 a barrel in the next five to 10 years, according to Stephen Brown, director of energy economics and microeconomic analysis for the Federal Reserve Bank of Dallas. “Recent energy price gains are a mild headwind to U.S. economic activity,” Brown said during the inaugural event hosted by the student-led GSB Energy Club at Gleacher Center on August 9.
The recent higher energy prices will register a cumulative real GDP loss of 1.1 to 2.6 percent in the United States, he said. “In other words, about two years from now GDP will be 1.1 to 2.6 percent lower than it would otherwise be,” Brown said. “Normal economic activity in the United States is about 2.5 to 3.5 percent growth in any given year. So this by itself is not enough to cause a recession. It could contribute to a recession, if there were other factors weakening the economy, like we are seeing from the housing sector in the financial meltdown.”
Oil prices have been driven up by strong growth in world oil demand, fear of supply disruptions in a tight market, a weaker American dollar, speculation or “frothiness” in the market, and price movement accentuated by inelastic oil demand and supply in the short run, he said. Over the past five years, world oil consumption has increased by 10 percent from about 80 million barrels a day to about 88 million barrels a day, Brown said.
“Had the price of oil not increased so much over that period of time, we estimate consumption probably would have increased another 10 percent,” he said. “In other words, world oil consumption would have increased by about 16 to 20 million barrels a day, had the price of oil not increased from $25 to $30 a barrel in 2002–03 to $115 a barrel at yesterday’s closing. That’s a big, big increase in demand, and that’s pushed OPEC close to full capacity.”
The dollar price of oil has increased almost twice as much as the Euro price of oil because the dollar has weakened against the Euro by that much, Brown said. “We estimate that $25 to $30 of the current price of oil per barrel is attributable simply to the weakness of the dollar, relative to other world currencies,” he said. “Part of the evidence is that as the dollar has strengthened in the last week, we’ve seen the price of oil come down. This dollar-oil relationship is something that only shows up when there are strong movements in the dollar.”
Prices will ease in the long term due to price-induced conservation, a reduction in governments’ subsidizing imports, increased development of conventional oil resources, and the potential development of alternative and unconventional oil resources, Brown said.
“All of these things have me saying the price of oil will sink back down—probably to the $70–$100 a barrel range—over the next five to 10 years,” he said. “That’s not hard to project at $115 a barrel, but I also said that earlier this year at $145 a barrel and I had a lot of people squawking at me for it.”
The student-led Energy Club invited Brown to speak at its inaugural event because of the effect most people believe high energy prices are having on the economy, said Samuel Ogundele, a student in the Weekend MBA Program who co-chairs the group. “From what he said, the price of gas evidently has an effect on the economy, especially areas like manufacturing,” Ogundele said. “When the price of oil rises, you can see the effect right away on some types of companies.”
Phil Rockrohr