Why oil prices will fall 1 of 3

We have all been watching the prices of oil very closely, and it has continued to climb adn climb. It seems to have finally stabilized, for the time being, around the min-ninety dollars/ barrel range. Much of the price is based in simple economic thoery:supply and demand. However, it was speculation that drove the price into the 90s in the first place. Under our latest outlook, world oil demand is anticipated to rise by 2.1%, or about 1.65 MMB/D next year, a downward revision from last month’s report by some 300 MB/D due to our higher price expectations.

While car and commuter traffic place a huge role in our energy consumption, we ofter forget about the other aspect of energy use: FOOD. We all have to eat, and the increased fuel cost lead to increased production and distribution cost. So that leads investors to look for new cost-effective ways to extract oil.

A further means of adding oil reserves is through investment in enhanced recovery. In
the context of a simple model, it could be treated in various ways. An extreme assumption is that enhanced recovery investment adds reserves but not capacity. Hence it would simply extend thelife of the reservoir. Here the value of the added barrel of reserves would be the value of a barrel produced in T years, or (P - C)vT, recalling that vT is the relevant discount factor. This would imply, from expression (1), that marginal replacement cost by means of enhanced recovery, mec, would be related to reserves value by: V(TvT/a) = mec.

A more appropriate assumption about the value of a barrel of reserves added through
enhanced recovery would be that it would reduce the rate of decline of production from a reservoir as well as increasing the reserves. This could be incorporated in a more general modelthan the one here that assumes constant output.