Where Are Oil Prices Heading in 2010?

Updated: Alternative-energy companies not only compete with each other, they also compete in a sense with oil firms. While it’s easy to overstate the inverse relationship that oil prices have with the demand for and investment in green companies, it’s also helpful to keep an eye on them.

So where are oil prices heading now? Higher in the long-term, with some short-term factors likely to keep them volatile for months at a time. How volatile? As James Williams, an economist at WTRG Economics, told MarketWatch, the unreal volatility of the past two years could continue: “2010 could be another with prices as low as $40 or as high as $110 or even higher.”

After dipping below $35 a barrel early in the year, crude oil prices steadily increased throughout 2009, closing at $78.87 on Wednesday. Last year, the U.S. Energy Information Administration estimated that oil would average around $51 a barrel. They ended up averaging $62 a barrel, down from $100 a barrel in 2008.

And this year? The EIA is looking for crude oil to average about $79 a barrel and to once again rise through the year — to $82 a barrel by December 2010 from $75 a barrel early on. That will translate into higher pump prices as well. According to the EIA, gasoline retail prices will average $2.83 in 2010 (after peaking around $3 a gallon in the summer), up from the $2.35 a gallon average this year but below the $3.26 a gallon figure in 2008.

Longer-term, the imbalance of oil demand over supply that drove gas prices above $4 a gallon barrel will return. Charles Maxwell, an oil analyst at Weeden & Co., said in an interview with Bloomberg that global oil production will peak around 2015 and that demand from emerging economies will keep increasing.

“It’s mostly a surprise on the supply side, because of a combination of big, older oil fields becoming mature and not producing as much as we thought they might be able to,” Maxwell said in the podcast interview. “Combined with demand from emerging nations, it has put us in something of an energy pickle, particularly in oil.”

Maxwell said he expects oil to be around $69 a barrel in late 2010. Short-term factors, such as a truce in Nigeria, a major oil supplier to U.S. refiners, could add up to a million barrels a day to the world’s supply of oil, although recent concerns about the Nigerian president’s health could complicate that.

The EIA’s forecast assumes that the U.S. economy will grow by 1.9 percent in 2010. But the economy has proven to be as hard to predict as energy prices, and forecasters are increasingly divided over a return into recession or to robust economic growth.

What does all this mean for alternative energy? Short-term volatility may be a concern for energy traders and consumers watching gas prices, but not for green startups. In the long run, fewer expect there to be enough oil to meet demand. That means a growing market ahead for cleantech. It’s just a question of when.

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