So take the EIA forecasts with a grain of salt. The problem is that they, like many others, seem to believe that we’re in the middle of an oil bubble that’s being sustained by reckless speculators. My own hunch is that although speculation may be playing a role in the current runup, it’s only a small one. Fundamentally, prices are going up because demand is growing and supply isn’t. Paul Krugman agrees, and points out that artificially high prices can’t be sustained for long, since eventually supply will go up and demand will go down, breaking the bubble:
The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.
The lesson of those EIA forecasts is twofold. First, trying to predict short-term price fluctuations is a mug’s game. They might go up, they might go down, and nobody knows which. Second, the overall trend is nonetheless up. Eventually, high prices will reduce demand and prices should level out a bit, but this might take a while since energy consumption is famously inelastic in the short term. But that’s what it’s going to take: change in the real world. This isn’t a bubble, it’s Adam Smith in action.