EIA Announces Higher Predictions for Oil Prices

Equities Editors Desk |

Oil prices should average $105 a barrel in 2011 according to an announcement from the U.S. Department of Energy on Tuesday. The rise in the crude price outlook for this year is the consequence of the unrest in Libya which has led to a disruption of crude exports from Libya. The DOE added there’s a 25% chance that gas prices will average $4 a gallon when driving is at its highest during the summer months. It can be expected that these prices will affect the number of day trips and weekend jaunts, travelers feel their check books can handle.

Only last month, before the Egyptian conflicts began, the DOE's Energy Information Administration said it expected crude prices to average $93 a barrel in 2011. Now that it’s clear that Egypt was not an isolated incident as much as the start of a larger trend of unrest in the Arab world that would end in the exit of Egyptian President Hosni Mubarak and turmoil in Libya born of dissatisfaction with dictator Moammar Gadhafi, predictions for oil have shot up. There is a fear surrounding the oil supply in the event that the conflict spreads past Libya and into surrounding oil-rich nations. This in turn, drives up prices at the pump and leads to more modest consumer spending in other areas.

"Rising crude oil prices are the primary reason for higher retail prices, but higher refining margins are also expected to be a contributing factor," the EIA said.

Current crude prices are at their highest levels since 2008, and though just yesterday predictions indicated 2012 oil prices would be at $105, today’s EIA now forecasts $106 a barrel as the 2012 average.

The EIA failed to mention whether the U.S. would do anything to attempt to drive prices down. Will there be greater pressure to adopt alternative energies, which have been all but cast off by many this year after being all the buzz in 2010 when funding subsidies didn’t translate to prices competitive with crude oil. Or is it time to begin drilling domestically so our consumer spending and general economic health are no longer so heavily tied to a region of the world that has proven itself unstable time and time again.
An article on Tycoon Report discusses this and the impact of commodity prices on the future.  The article asserts the higher future interest rates (to combat inflation, like during the late 1970s/ early 1980s), the more extreme interest the U.S. will have to pay on the money it borrows. Unfortunately, given how the price of oil affects the economy and the already mounting debt, the higher rates may be too much for the U.S. to pay. Also hard hit would be the finance companies that would be paid back, but with money less valuable then when they first lent it out.

News outlets and economists hold varying view points on what exactly the oil prices, which the EIA believes will surpass the $4 per gallon barrier at the pump this summer will have on the economy. Some believe it could result in a double dip, with others concluding the economy, which is predicted to grow 4% for the year, can withstand it.

Whatever the U.S. decides to do about the oil prices, whether that means drilling in the reserves in California and elsewhere in the U.S. or waiting until green technologies can become more reliable or affordable, one thing is for certain, a plan of action should be enacted. Each time oil prices rise this high, especially in an economy where the recovery is definite but slow as a result of lingering fear (among other things), investor faith is shaken. People are on high alert regarding factors that have the potential to rattle the economy and these signals are challenging to national recuperation.

 

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