We are only a few weeks into the New Year and already the shape of the next 11 months is starting to form. To start, the U.S. Department of Energy sees two good years in front of us, with increases in domestic tight oil (also known as “shale oil”) production and falling demand in Europe offsetting what now looks like a million barrel per day increase in global demand in each of the next two years. Demand for oil in the U.S., which has been falling pretty steadily in recent years, is forecast to increase a bit in 2013.

The Paris-based International Energy Agency, however, is not so sure about the next two years. The Agency recently started talking about coming “tightness” in the oil markets as economic growth in China gives indications of starting to revive, increasing its demand for oil. If you want a really pessimistic forecast, you might be impressed by the Goldman Sachs chief commodity strategist who told a conference in Frankfurt that he would not be surprised to see oil prices reach $150 a barrel this summer from the current $112.

Needless to say, oil at $150 a barrel would cause serious economic dislocations. Back in 2008 when oil prices got into the $140 range all sorts of bad things happened, many of which are still with us.

Now everybody knows that a major reduction of oil exports could easily drive prices up by tens of dollars a barrel in short order. Last spring, when the rhetoric between the Iranians and Israelis reached a zenith, prices were driven up by threats to close the Strait of Hormuz. Although the current rhetoric is much lower, the Iranian nuclear confrontation is still with us.

There are other, more likely ways that oil exports could be curtailed. It is hard to believe that Iraq is not sinking into civil war. Bombs are going off nearly every day in Iraq and tensions between the Sunnis, Kurds, and the Shiite-controlled government in Baghdad are increasing with every passing week. Oil production is already slipping, several big western oil companies are pulling out of the oil fields under Baghdad’s control, the Kurds will no longer ship oil through Baghdad’s pipeline, and tanker shipments to Jordan have been halted.

It is difficult to foresee Baghdad increasing its oil production by any significant amount in the next two years, but easy to see domestic chaos increasing to the point where production starts to slip or even stops.

Another possibility for oil supply disruption could be the transition from a Chavez-dominated Venezuela to whatever follows. The U.S. is importing roughly a million barrels of oil a day from Venezuela. While the post-Chavez transition, whenever it comes, may take place without problems, it could be a difficult one involving coups and counter coups which would curtail oil exports for years.

In recent days the situation in Algeria and by implication Libya has come to the fore. So far the Algerian government has used oil revenues to keep discontent under control, but Libya is far from stable and accordingly the country’s oil production is 500,000 b/d lower than a few years ago. Given the instability there it could go even lower.

There has been little change in the Sudanese and Syrian situations. The chances that either will resume normal exports in the coming year range from low to non-existent.

Finally we have the trend to more extreme weather to consider. So far, most of the weather-related effects on oil production and distribution have been storms in the Gulf of Mexico; however, last year we saw a major disruption to the oil distribution system in the New York region. As floods and droughts become more prevalent, these too could impact oil production and distribution around the world, especially as more oil and gas production moves offshore.

If there are major export disruptions in the year ahead, prices obviously will go up – perhaps way up. If, however, the world manages to muddle through the next 11 months with the oil still flowing at roughly current rates, then the question of where oil prices go becomes more complicated. Conventional wisdom says European oil demand will go down this year and possibly next, U.S. oil demand will remain about the same, and demand from China and other developing and oil-exporting countries will go up by about a million barrels a day. We should all keep in mind that the Saudis are currently building three large oil refineries so that in 3 to 4 years their export of crude will be about 1.2 million b/d lower than it would have been otherwise.

As we have been told incessantly in recent months, U.S. oil production has been rising rapidly due to production from North Dakota and Texas tight (fracked) oil fields. Last year it grew by about 780,000 b/d and many are expecting such increases to continue for a while – hence the lack of concern about the global oil supply in the near future. Some geologists, however, noting the high cost of fracked oil wells and their short life, believe that this great upsurge in production will have to come to an end so that rates of production increases start dropping and eventually decline.

While there are already a few signs, such as lower initial rates of production from fracked oil wells, most observers believe the balloon still has a year or two to go before it pops. The cost of producing oil from fracked wells is very high and in some cases close to current selling prices. If economic conditions should lead to significantly lower oil prices in the next year or two, it is likely that new supplies of very expensive oil would dry up quickly and the whole fracked oil boom would be over.

As usual, there are too many variables, ranging from prices to insurrections to extreme weather, to make a reasonable forecast of what is going to happen.

Originally posted at Falls Church News-Press