# Forecasting Oil Price and Demand

Essay by review • May 4, 2011 • Research Paper • 1,187 Words (5 Pages) • 1,338 Views

**Page 1 of 5**

Oil demand (current and projected)1:

The current oil demand is 82.8 million bpd. The world population is expected to grow from 6.6 billion today to 6.9 billion in 2011. On an average, the world consumes 4.58 barrels per capita, every year. Based on this trend, due to the parallel growth of GDP in the same period, the projected oil demand for 2011 is 31.57 billion barrels. On a single day, say 1 Nov 2006, the demand would be 86.5 million bpd (barrels per day).

Year World

Population (Millions) Billion barrels

Consumed Per Year World (bcy) barrels/capita per year Price/barrel

1986 4890 22.54 4.60 $ 32

1989 5150 24.04 4.67 $ 32

1992 5400 24.43 4.52 $ 29

1995 5610 25.51 4.54 $ 25

1998 5870 26.62 4.51 $ 18

2001 6130 27.74 4.53 $ 31

2004 6400 29.75 4.67 $ 55

2006 6600 30.23 4.58 (average) $ 59

2011 6900 (Projected) 31.57 (Projected) 4.58 (average) ?

Oil Supply/Production:

The current capacity (oil production) levels will be able to meet the required supply/demand for oil in 2011 and in the near long-term. Hence, for the purpose of estimating the oil price in 2011, we can assume that the supply curve will remain constant and will not shift.

Oil - Elasticity of Demand2:

Based on various research studies, it has been determined that the oil elasticity of demand is approximately - 0.3. For our estimation for the oil price on 1 Nov 2011, we will assume that this remains constant and it is the whole demand curve that shifts outwards to the right, with the same slope (due to the increased demand as a result of world population growth and a proportional increase in GDP).

Oil ÐŽV Elasticity of Supply2:

Similar to elasticity of demand, the oil elasticity of supply is 0.3 (based on research studies). For our estimation for the oil price on 1 Nov 2011, we will assume that this remains constant and the supply curve doesnÐŽ¦t shift on either direction.

Estimation of Oil price for 01 Nov 2011:

For simplicity and easier calculation, we assume that both the demand and supply curves are linear. In todayÐŽ¦s scenario, the supply and demand curves meet at „Ñ- (82.8 m bpd, $59)

Equation of the Demand Curve:

At equilibrium, Elasticity of demand = - (∆Q/∆P) ÐŽÐ¡ (P/Q) = 0.3,

So, (∆Q/∆P) = -(0.3) ÐŽÐ¡ (82.8/59) = -0.421, which is the inverse of slope of demand curve.

Demand when price is 0 is 82.8 + (0.421 ÐŽÐ¡ 59) = 107.6

Equation of demand curve is Q = 107.6 ÐŽV 0.421P

Equation of the Supply Curve:

At equilibrium, Elasticity of supply = - (∆Q/∆p) ÐŽÐ¡ (P/Q) = 0.3,

So, (∆Q/∆P) = (0.3) ÐŽÐ¡ (82.8/59) = 0.421, which is the inverse of slope of supply curve.

Supply when price is 0 is 82.8 ÐŽV (0.421 ÐŽÐ¡ 59) = 57.96

Equation of supply curve is Q = 57.96 + 0.421P

Price at new equilibrium (86.5 m bpd, P1):

On 1 Nov 2011, the demand for oil will be 86.5 m bpd (based on above discussion) and the demand curve would have shifted right, with same slope as before. Hence the new demand curve equation is „Ñ- Q = {107.6 + (86.5 ÐŽV 82.8)} ÐŽV 0.421P = 111.3 ÐŽV 0.421P

At new equilibrium,

111.3 ÐŽV 0.421P (new demand curve) = 57.96 + 0.421P (equation of supply curve)

Solving for P, we get P = 63.34.

Hence the price of oil on 01 Nov 2011 will be $63.34

2. On 01 Nov 2011 - Oil at $63.34 a barrel, Forecast for the Demand for Light Trucks in North America3:

Light trucks consume more gas than cars to travel the same distance. Any long term increase in the price of oil will impact the sales of light trucks in North America. In such cases, the decrease in sales of light trucks will be offset by a corresponding increase in sales of cars. The recent spike in the oil prices, an increase of more than 50% since 2000ÐŽ¦s has severely affected the light

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