Oil price outlook: DISLIKE!

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Oil prices are dictated by supply and demand, and all signs point to modest oil demand growth and uncertain supply. Barring a strong economic shock, continued strong oil prices seem to be in order over the next three to five years.” –Marcela Donadio, Ernst & Young LLP

Oil prices provided nothing to cheer about this year, shooting up from around $85 or so per barrel in January to well over $100 per barrel by spring, falling back to around $92 to $93 per barrel of late.

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That price spike played havoc with everyone’s pocketbook, too, as the rising cost of oil pushed up prices at the pump for gasoline and diesel. Kenny Vieth, president and senior analyst with ACT Research Co., explained to me yesterday that high fuel prices hurts truckers two ways: first on their bottom line, as they must pay more for diesel, and second by siphoning freight out of the market.

“Roughly every penny’s worth of change to the price of gasoline or diesel equates to $2 billion more in annual spending of fuel,” he told me. “Right now, gasoline and diesel prices are up about 75 to 80 cents more per gallon than last year. That equates to about $160 billion a year extra being spent by consumers on fuel and not on goods – purchases that translate into freight.”

Unfortunately, the outlook is for more of the same, with the cost of oil projected to go on an upswing for the next three to five years, based on analysis conducted by global consulting firm Ernst & Young.

“In the first quarter of this year, with expectations for continued economic improvement and as a result of the supply disruptions from the Middle East, oil prices rose to over $100/barrel,” noted Marcela Donadio, Americas Oil and Gas Leader for Ernst & Young. “But after peaking in the second quarter, crude prices fell back slightly, in spite of the announced stock release by the International Energy Agency (IEA), as the economic recovery lost some steam.”

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The big unknowns for oil producers, Donadio (seen at left) added, are the short-term effects of the IEA's release of 60 million barrels from emergency supplies and disagreement among the members of the Organization of Petroleum Exporting Countries (OPEC) over supply increases.

“The IEA's release announcement brought prices down temporarily and is expected to fill the void of Libyan supplies,” she said. “However, as the market moves into the high-demand season, the IEA release will not meet that increased demand, and the market will need more supply from OPEC at a time when its spare capacity is at its lowest level in more than 20 years. Beyond the short-term, over the next three to five years, pressures on OPEC to increase capacity and production are expected to increase substantially.”

Barring a strong economic shock, continued strong oil prices seem to be in order over the next three to five years, according to Ernst & Young.

The Energy Information Administration (EIA) expects oil markets to tighten near term, as well, leading to continued fuel price increases for motorists and truckers alike.

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“Given projected world oil demand growth and slowing growth in supply from countries that are not members of OPEC, the projected U.S. average refiner acquisition cost of crude oil rises from $102 per barrel in 2011 to $108 per barrel in 2012,” the agency said.

“The crude oil price outlook remains uncertain,” EIA added in its most recent outlook. “Among the major uncertainties that could push oil prices above or below our current forecast are: risk of additional supply disruptions in producing regions, such as possible unrest in Sudan; the willingness and ability of key OPEC-member countries to increase and sustain higher production in response to the global increase in oil demand; the rate of global economic growth; and fiscal issues facing national and sub-national governments.”

What does all of that mean for fuel prices? Well, right now, EIA believes the annual average retail price of regular-grade gasoline will increase from $2.78 per gallon in 2010 to $3.56 per gallon by the end of this year, then hit $3.65 per gallon in 2012. In terms of the average retail price for on-highway diesel fuel, the agency said it’ll go from a $2.99 per gallon average in 2010 to $3.86 per gallon by the end of 2011, then inch up to $3.95 per gallon in 2012.

In the end, you can sum it all up for the trucking industry with just one word: bummer.

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Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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