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Oil Prices and the Economy: What Is the Outlook for Oil Prices?
Do oil's recent price declines augur continued lower prices? Not necessarily, says Laurel Graefe, director of the Atlanta Fed's Regional Economic Information Network, who recently spoke on the numerous hard-to-predict factors that affect the price of oil.
Transcript
Oil prices are one of those things that tend to be notoriously difficult to forecast, partially because there are so many factors that can impact the path of growth. On the one hand, there are the policy reasons. So, whether it's oil cartel policies, environmental and climate policies, or other geopolitical issues, politics has the potential to have an enormous impact on oil prices. Economics, of course—the pace of global growth, whether it accelerates or decelerates—can impact the pace of demand growth for oil. And then there's of course the influence of technology, where technology can both impact efficiency of oil consumption on the consumer goods and manufacturing side of things, and also has the ability to open up new resources. As drilling and production technology improves, it can really increase what is considered to be the supply of oil nationally and globally.
Additionally, I would say climate can play a big factor in oil prices just because the number of heating and cooling days and driving days can have a big impact on the amount of oil that is consumed worldwide, and that can have an influence on prices. Then, of course, geology and expectations—there are so many things that play a role. Even the most sophisticated models can really struggle to pinpoint an exact path of oil prices, even going out over a relatively short period of time.
I would say of the forecasts out there, futures prices tend to be about as good of an indicator as anything. Right now, futures markets are putting oil prices by the end of this year between 60 and 70 dollars a barrel—which, again, can be useful when thinking about the future, but I have to remind you that the confidence bands around this forecast are exceptionally large. It can be useful to think about the different factors impacting oil prices but difficult to pin down an exact price because the factors vary so widely.