This is an excerpt from EERE Network News, a weekly electronic newsletter.

November 07, 2007

After Setting Records, Oil Prices are Projected to Decline

Oil prices climbed to record highs in October, with the price of West Texas Intermediate crude oil exceeding $90 per barrel late in the month. But DOE's Energy Information Administration (EIA) projects an eventual decrease in oil prices, assuming that oil producers will increase their output. Despite the predicted decline, the EIA's "Short-Term Energy Outlook," released on November 6th, anticipates that crude oil prices will average $87 per barrel for the fourth quarter of 2007 and will average $80 per barrel for all of 2008. EIA explains the high oil prices primarily as a case of supply not keeping up with demand, as the world experiences strong economic growth. The EIA projects surplus oil production capacity to remain fairly low through 2008, while oil inventories in industrialized countries, which are already at low levels, are expected to dip far below their five-year-average levels by the summer of 2008. But despite the supply crunch, the EIA projects increases of only 6% to 8% in the average cost of gasoline and diesel fuel in 2008, relative to the average price in 2007. See the EIA's "Short-Term Energy Outlook" and the special supplement, "Why Are Oil Prices So High?" (PDF 184 KB). Download Adobe Reader.

While oil prices have hit their record nominal price, it's difficult to say if they've reached their record inflation-adjusted price. As pointed out in the October 24th edition of the EIA's "This Week in Petroleum," the absence of a transparent global crude oil spot market in the early 1980s makes it difficult to come up with an inflation-adjusted number to compare with today. But where EIA fears to tread, others rush in, as Cambridge Energy Research Associates (CERA) has pegged the inflation-adjusted record at $99.04 per barrel. CERA doesn't take the next step, though, declining to predict if and when oil prices might reach that level. See the October 24th edition of "This Week in Petroleum," the CERA press release, and the latest crude oil prices (that is, the futures prices for December) on the New York Mercantile Exchange Web site.