Oil Price ‘Deniers’ Affecting the Case for Alternatives

By · May 12, 2014

Oil Price ‘Deniers’ Affecting the Case for Alternatives

Demand for gasoline for transportation is expected to go down in the United States in future years, thanks to the gains in vehicle fuel efficiency, which, in theory, could reduce the price at the pump. However, globally, demand for oil will increase by 12.2% between 2015 and 2025, according to OPEC.

Predicting the price of petroleum products in coming years is as difficult as predicting the Oscar winners before the movies are even made (unless you’re talking Meryl Streep). The global price of crude oil and gasoline is contingent on many factors that have nothing to do with the actual costs of extracting it from the ground, such as geopolitical stability, global and regional economic growth (and its impact on fuel consumption), and the availability of competitive alternatives.

As of April 16, the global price for crude oil is near $105 per barrel, yet some financial institutions, such as Citibank, are now predicting that price of crude oil will actually start to decline and fall to $75 per barrel in 2017.

However, historical data suggests that prices will continue to climb. The price of crude oil per barrel has grown by a substantial average of 12.9% annually since 1998 (when it was less than $11 per barrel), while correspondingly, in the United States, the retail price of gasoline has grown from $1.51 per gallon to $3.53 per gallon, or 5.8% annually (PDF).

Demand for gasoline for transportation is expected to go down in the United States in future years, thanks to the gains in vehicle fuel efficiency, which, in theory, could reduce the price at the pump. However, globally, demand for oil will increase by 12.2% between 2015 and 2025, according to OPEC. Since crude oil is sold on the global market, this will likely increase the price of gasoline in the United States. Also, while there are new reserves of crude in North America, much of it from the oil sands, the higher cost of extraction indicates that prices won’t likely be going down.

As the chart below illustrates, Navigant Research’s latest Electric Vehicle Market Forecast report estimates that the price of gasoline in the United States will go up by 2.9% per year through 2022. If the historical trend from the preceding 16 years is carried forward, by 2022, gas would be $6.18 per gallon. The World Bank (PDF) is predicting that despite increasing global demand (and the lessons of history), the price of crude oil will, however, be going down.


Gasoline and Crude Oil Spot Market Prices, United States: 2014-2022

Gasoline and Crude Oil Spot Market Prices, United States: 2014-2022


(Source: Navigant Research, World Bank)

If you ignore history, and assume that the price of gasoline will go down or stay the same, then you may be significantly underestimating the potential market for alternative fuel vehicles such as electric vehicles (EVs) or natural gas vehicles (NGVs). While some consumers select EVs for other benefits (excellent performance, reduced emissions, etc.), most want the fuel savings to provide a positive return on investment. If gasoline permanently goes above $4 or $5 per gallon, then the case for investing in EVs or NGVs gets correspondingly stronger. Based on Navigant Research’s assumption of slow but steady increases in the cost of petroleum fuel, Navigant Research’s Electric Vehicle Batteries report forecasts that U.S. plug-in vehicle sales will surpass 470,000 annually by 2022.

Those who are steadfastly against EVs, or who deny that petroleum-based fuel is likely to become more expensive, have a distorted view of the future of transportation that hinders businesses developing alternatives to a petroleum-dependent world.

Comments

· · 15 weeks ago

We are on a plateau right now because of tar sands, shale fracking, and ultradeepwater Gulf of Mexico drilling.

But as the shale plays start to hit the Red Queen syndrome, the price of oil might start climbing back up. That may be prevented by fracking done in other parts of the world. So I think we'll stay around the current price +/- 20% for the next 4 years or so.

· · 14 weeks ago

And then there is this:
http://www.resilience.org/stories/2014-05-25/the-great-imaginary-califor...

It seems we may not have anywhere near the reserves in the US that we thought even a few months ago. Reasonable oil prices might not even last through this decade. We could be sitting at $4-5 dollars in 2020, but it seems more likely that we'll be looking at twice that. Fortunately, there are alternatives available today, and more coming in the next 12-18 months. Combined with older EVs coming off lease (i.e. much more affordable to the secondary market), a lot of things seem to be coalescing towards a huge boom in EVs.

(meanwhile, FCVs will be late to the party, if they make it at all)

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