$200 Oil? The Government Says It's Possible

Here's a sobering thought: What if, over the next twenty years, the price of oil were to double?

It's not necessarily a likely scenario, but the government thinks it's possible. The graph of oil prices below is from the Energy Departments 2012 Energy Outlook, which tries to make an educated guess about where the cost of power and fuel will be headed over the coming decades. The blue line, which assumes the world will keep marching along its current path for production and demand, has us reaching $145 a barrel by 2035.

The red line and the green lines are the extreme outcomes. They're both basically horror movies, but with different plots. In the high price case, economic growth in the developing world rockets forward, but world oil production stalls, sending crude prices to $186 a barrel by 2017 and up to $200 by 2035. In the low price situation, oil production increases, but the developing world only grows weakly. That would be wonderful for gas prices, but terrible for the rest of the global economy.

Now, here's the big caveat: These forecasts are probably wrong. It's pretty near impossible to accurately predict the price of any commodity a year from now, much less twenty years, and it's doubly difficult with the world's most important energy resource, given the million variables that can influence its price. So its not useful to think about these forecasts as a concrete map of the future. Rather, they give us a way of thinking about the factors that drive oil prices.

With that in mind, here's a simple lesson we can draw: No matter how much oil the United States drills, its price will never entirely be in our hands. We can try and increase the supply of crude a bit. But demand will be driven by the developing world. What we pay at the pump in the future will largely determined by the pace of growth in China, Brazil, India and other emerging powers. That's why the only way to ensure we spend less on oil in the future is to use less.