Most commentators and oil analysts are convinced a further rise in prices is inevitable in the next few years as emerging market consumption grows and supplies increasingly come from more costly and technically challenging sources such as ultra-deepwater.
While there are disagreements about the extent and the timing of price changes, there is a remarkable degree of consensus about the direction: up. But the roller-coaster experience of the last five years should have taught forecasters to be much more cautious about extrapolating trends and assuming the future direction is obvious.
Price forecasts are notoriously unreliable. There are simply too many variables and too much uncertainty about the current state of the market let alone how supply and demand will evolve in future. The crucial role of expectations in price formation adds an element to “reflexivity” which is hard for forecasters to anticipate or model accurately.
Reflexivity is a concept attributed to billionaire financier George Soros, in which perceptions of market direction and market fundamentals influence one another.
Forecasters’ confidence prices can only increase in future seems misplaced. On closer inspection, many of the factors which make price rises seem inevitable are flawed or unpersuasive. At present there are no fundamental reasons oil prices must increase above the current level of around $80 per barrel in real terms (once inflation and exchange rate changes are taken into account). Nor is there any reason to expect a spike in prices similar to 2008.