Long Term Oil Prices: Goldman Sachs vs. OPEC PRICE ELASTICITY OF DEMAND ERIKA SOLEM

The Article Goldman Sachs predicted that oil prices will stay “low” for the next 15 years OPEC said the prices will “recover” back to $80/barrel by 2020 ◦The difference in their estimates is interesting because their positions on oil prices seem to have switched There have always been high levels of uncertainty in regard to elasticity of demand for oil There are likely increases in OPEC production of oil ◦Need an economic revival in China to absorb the surplus The “breakeven price” of shale oil is still uncertain Countries such as Iran, Libya, Mexico, and Venezuela have the potential to increase supply ◦Iran and Libya could start adding up to 2 mb/d (this would fulfill ~1/3 global demand growth) ◦This could pressure other OPEC nations to decrease production; this would lead to a “price war” Interesting because there is a lot of divergence in opinion related to long-term trends

Goldman Sachs’ Prediction Since they forecast that prices will remain low, we can expect they are counting on an increase in the supply of oil from countries such as Libya and Iran to lower prices Because of oil’s inelasticity of demand you can expect that the increase in supply will significantly lower prices D S1 S2 Quantity Price

OPEC’s Prediction Since they forecast that prices will jump back up, we can expect that they are counting on a decrease in the global supply of oil ◦Could stem from pressure to decrease production or failure to increase production by smaller oil countries Because of oil’s inelasticity of demand you can expect that the decrease in supply will greatly increase prices Price Quantity D S2 S1

Conclusion Inelasticity of oil shows how institutions like OPEC and Goldman can come up with opposite conclusions Goods with inelastic demand have more volatile reactions to change in supply If demand for oil were elastic, changes in supply would have less effect on the price Price Quantity D D S2 S1 Goldman OPEC

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