In early 1973 it was forecast that domestic crude oil prices would increase sharply between 1972 and 1980. Gulf Coast 34 degrees API crude oil was projected to rise from a 1972 price of $3.63 per barrel to a 1980 high of projected to rise from a 1972 price of $3.63 per barrel to a 1980 high of $6.10. By the end of 1973 it was clear that the forces of change were much stronger than expected. 1980 had, in effect, already arrived! Introduction The decade of the 1960's was characterized by highly stable crude oil prices in the U. S. From 1969 to date (Feb. 1973), there have been a great number of physical, economic, ecological, and political developments bearing importantly on the political developments bearing importantly on the future level of crude oil prices. (See Table 1.) The purpose of this paper is to provide a systematic analysis of the probable impacts of these factors on the trend of domestic crude oil prices over the remainder of this decade. Although the forces of change have been strong during the past 4 years, their net effect on domestic crude oil prices was modest (Fig. 1). Indeed, over the past 15 years, the pattern of these prices has resembled a shallow saucer. Since 1969, average prices have advanced 31 cents/bbl equivalent to a prices have advanced 31 cents/bbl equivalent to a 3 percent annual growth rate to reach a level of $3.40/bbl in 1972. Virtually all of this increase, however, was needed to offset the increased tax burden imposed by the Tax Reform Act of 1969. With investment and operating costs rising throughout the past 15 year, there has been a general downtrend in the unit profitability of domestic crude oil production. Looking ahead, I arrive at the general thesis that the pattern of domestic crude oil prices in the remaining years of the 1970's will differ sharply from that of the past. I expect strong upward trends in prices. The lower prices of these prices will tend prices. The lower prices of these prices will tend to be established, as in the past, by the landed costs of foreign crude oil, and the upper limits will tend to be set by the prices needed to provide adequate incentives for vigorous exploration for and development of new domestic supplies, including both conventional petroleum and synthetic fuels. Most of this paper will be devoted to a discussion of me possible trends in prices associated with these outer limits and to a brief comment on other factors that will influence the timing and magnitude of price changes. World Petroleum Supply and Demand The single most important determinant of future domestic crude oil prices will be the landed cost of foreign crude oil. Before hazarding a projection of these future costs, some comments are needed on the outlook for world petroleum liquids supply and demand. First, from the viewpoint of world petroleum reserves, it is evident that these are petroleum reserves, it is evident that these are sufficiently abundant to meet potential requirements through 1980 (Fig. 2). If there should be any physical shortages of crude oil during this period, they will be man-made. Some people, in looking at the high ratio of reserves to current production, conclude that fundamental economic forces should lead to a downward trend in prices. I would note, however, that reserves as such do not constitute potential supples those reserves must first be developed and tied into appropriate transportation facilities. The investment programs required to transform reserves into productive capacity are discretionary and will depend, among other things, on the merits of alternative patterns of production. JPT P. 135
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