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Sunday, March 10, 2013

There was a time when US$ 90 - US$ 100 per barrel used to be a psychological barrier for crude. However, if five year forwards for crude are anything to go by, the range is a new normal for crude. Oil prices play a critical role in shaping macroeconomic policies. No wonder that we have a deluge of views and forecasts on the same. But what if two prestigious agencies come up with totally divergent forecasts for a commodity as critical as crude?

Well, this is exactly what has happened. The official forecaster International Energy Agency suggests a level of US$ 120 per barrel for crude by 2020. That implies a decline in real terms for crude. However, OECD has a different take on oil prices. It believes oil prices will see levels of US$ 190 per barrel. And as if that is not bothering enough, OECD suggests a possible level of US$ 270 per barrel.

At the base of OECD forecasts lies the historical movement in oil demand in response to GDP growth and oil prices. As per OECD studies, oil demand has grown almost one on one with income in the past 20 years in emerging economies. Unlike developed economies, the emerging ones like India and China have shown high intensity of oil usage. Since these are going to lead the global growth in the future, oil demand is likely to go up and so are the prices. However, we believe that such a scenario is unlikely. As emerging economies grow further, they are likely to improve energy efficiencies which will moderate the demand momentum. Also, with huge shale gas findings and investment, oil may not remain that critical in serving energy needs. 

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