Long term oil prices

Abstract

In this paper we propose a model to estimate and simulate long term oil prices. Our model is based on properties of demand and supply for oil and it is able to reproduce historical real oil prices well. We use the model to estimate and simulate future real oil price scenarios. The results show that if we are not able to significantly increase demand elasticity, the yearly real oil price change can reach 12% in the years following the peak production level without taking a scarcity rent into account. Until peak production level is reached, the long term real oil price changes stemming from fundamental supply and demand changes are expected to be negative. Our simulation results based on an expected peak production year of 2020 and a scarcity rent of 3% suggest an expected real crude oil price of $169/bbl in 2040. For comparison the EIA outlook predicts a real oil price of $141/bbl for the same year. We also provide an on-line Appendix that allows the readers to change the assumptions underlying our analysis and see the results immediately.