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Crude Oil at $190 in 2025? It’s Not Insane

By Shlomo Maital  

Recently, at the height of the pandemic panic, the price of crude oil was actually negative. That is: “I’ll pay you to take a barrel of crude.” Why? Demand collapsed, all the storage tanks were full – and shutting down production was exceptionally costly.

   Now comes a serious report from investment bankers JP Morgan, “Supercycle on the Horizon.”, published in March. The report states,

“The combination of the supply and demand side dynamics suggests that the global oil market could move into large and sustained deficits past 2022, reaching an extreme 1.7 mbd (million barrels per day) by 2025. Running this scenario through our pricing model suggests these balances would lead to Brent oil prices [the benchmark for crude oil prices] rising steadily from 2022 onwards, averaging around $80/bbl in 2023, $100/bbl in 2024 and $190/bbl in 2025.”

What?? From zero to $190 a barrel? What in the world?

  The reasoning is simple. Low prices are slashing development of new oil fields to zero, and forcing some smaller fracking companies out of business. This means that when demand for oil recovers, as it will, the supply will not be able to meet it. Since the demand for oil is price-insensitive — we need gasoline to run our cars, and have to pay whatever it costs — small shortfalls in supply can lead to huge rises in price. We have seen this repeatedly, in 1973, 1979, and later. Now, 1.7 billion barrels per day is a very small shortfall, out of total daily production of 100 million barrels – only 1.7%!   But it is enough to let prices soar, moving up a near-vertical supply curve.

   Note that JP Morgan is not alone (and even if they were, it is worthwhile to heed what they say – investment bankers’ business is based on a clear-eyed view of the future, because they put their money where their mouths are). Goldman Sachs also thinks the price oil will sore: its “Top Projects 2020” report released in late May said so in writing.

    OK, what does this mean for us ordinary folks?   Maybe – when you consider replacing your current automobile, think about an all-electric. I intend to. With a charging station in your garage, and with batteries improving all the time, your range on one charge is sufficient for most daily driving. Someone I know who has an all-electric says his gas tank needs refilling (you use gasoline when your electric battery is empty) about once a year.

   But, won’t soaring crude oil prices make electricity costly? Probably not. Because overall there is a worldwide glut of natural gas, and it is likely to continue, as more and more countries bring natural gas supplies on line. More and more electricity is being made with natural gas.  

   Food for thought.


Blog entries written by Prof. Shlomo Maital

Shlomo Maital