Taken from Meryll Lynch Global Energy Paper: The path for oil prices after 2011 is very uncertain Looking out after 2012, we see a very broad range of outcomes. On the one hand, should our base case scenario of a sustained recovery play out, oil prices could move firmly above $100/bbl. We find a strong and positive income elasticity of oil demand across all major countries and regions (Chart 60), so continued economic growth should contribute to reduce OPEC�s spare productive capacity. In effect, while subsidies and taxes can sometimes distort the underlying fundamental trends, economic development clearly requires more oil, at least for now (Chart 61). Thus, the shape and degree of the economic recovery will be the primary driver of global oil demand growth over the medium-term We see large fluctuations in oil prices past 2014 With OPEC capacity utilisation rates now running at around 81%, any return to the recent demand growth path will likely eat into spare capacity sooner rather than later (Chart 62). Much of the problem is, of course, a lack of competition among oil suppliers and limited potential for efficiency and substitution among oil consumers. Conventional crude oil output from non-cartelized producers already peaked, while much of the substitution out of oil into other fuels was achieved in the 1980s. The market structure for oil has thus become extremely static and price-inelastic. As a result, large fluctuations in prices will remain the norm to bring these medium-term supply and demand trends into balance. In line with this view, we see the band for oil prices widening from $70-$85/bbl at present, to $60- $100/bbl next year. By 2014, the range could expand again to the $50-150/bbl range observed in 2008 (Chart 63)..
