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In December 2021, West Texas Intermediate (WTI) and Brent averaged $71 and $74 per barrel. At the end of January, Brent was above $91 per barrel and WTI above $87 per barrel. Major investment banks are forecasting crude oil price hikes in 2022 and 2023. Goldman Sachs, for example, estimates that Brent will reach $96 in 2022 and $105 in 2023. Although investment banks’ estimates of the future price of crude oil differ by up to 30%, they agree on forecasting increases because demand currently exceeds the supply of hydrocarbons and current geopolitical tensions imply significant risks of supply disruptions.
The background to all these arguments is that since the beginning of the pandemic, governments around the world have imposed lockdowns; bureaucratically designated “essential” sectors; and increased their spending and debt, dismantling the delicate structure of capital. Logically, oil demand collapsed and inventories grew rapidly, but OPEC production cuts reduced the record accumulation of inventories and in December 2021 commercial oil inventories in developed economies reached their lowest levels since January 2015.
The Energy Information Agency (EIA) defines spare production capacity as a volume of production that can be achieved in a maximum of 30 days and maintained for a minimum of 90. Private oil companies do not maintain such spare production capacity voluntarily because of how costly it is. OPEC governments assume this cost through state-owned oil companies because as a cartel they need it to influence the markets.
The risk premium in the oil market is inversely proportional to OPEC’s surplus production capacity, which in 2020 was equivalent to 9% of world supply and currently stands at 4%. The truth is that with economic recovery limited by the cascading effects of the shutdowns, the inflationary impact of government spending across the West and the current rising crude oil price, it is logical to expect additional crude supplies towards the end of this year, with US shale production leading non-OPEC crude oil production growth.
So it would be reasonable to expect record US oil production levels in 2023, as long as shale oil production continues to increase spurred by relatively high prices. But the recovery from the impact of the shutdowns will be slower than the IMF projections predicted in October 2021. And the IMF itself already admitted as much in its January 2022 World Economic Outlook in which it lowered its growth forecasts for most major economies from those predicted three months earlier. It now forecasts global growth to fall from 5.9% in 2021 to 4.4% in 2022 and 3.8% in 2023.
What is clear is that in January 2022, investment banks revised upwards their estimates of the future price of crude oil. By December 2021, US inflation had reached 7%, its highest level in four decades. And the IMF is beginning to admit that the economic recovery after the impact of the shutdowns will be greater than it initially estimated.
Although the International Energy Agency (IEA) raised its global demand estimates upwards for 2022 due to the easing of government-mandated lockdowns, what we have is a scenario of high geopolitical risk, slow recovery, greater impact of restrictions than what banking analysts and multilateral organizations were forecasting. And with the US as the world’s largest oil producer and consumer, we have an administration in Washington willing to risk America’s energy independence for ideological reasons. With so many uncertain variables at stake, oil price forecasts are only dubious estimates.
Guillermo Rodríguez is a professor of Political Economy in the extension area of the Faculty of Economic and Administrative Sciences at Universidad Monteávila, in Caracas. A researcher at the Juan de Mariana Center and author of several books // Guillermo es profesor de Economía Política en el área de extensión de la Facultad de Ciencias Económicas y Administrativas de la Universidad Monteávila, en Caracas, investigador en el Centro Juan de Mariana y autor de varios libros