Oil prices may recover at end of 2015

In late 1979, I began work on my PhD thesis, an empirical investigation of the Organization of Petroleum Exporting Countries' surplus and its disposal. It was the end of a decade in which oil prices had undergone two dramatic increases, and most of the geniuses of the day were confidently predicting that they would continue to soar, from under $40 a barrel - a historic high at that time - to above $100. By the time I finished my research in 1982, the price of oil had begun what would become a 20-year plunge. It would not hit $100 per barrel until January 2008.

I used to joke that the most important thing I learned from my research was never to attempt to forecast the price of oil. As 2014 comes to a close, the price of oil has just crossed the $100 threshold again - this time headed down. One of the big questions for 2015 is whether the decline will continue. Despite my earlier cynicism, I do believe that it is possible to make a broad prediction as to where oil prices are headed.

Over the course of my career, I have tried to determine whether there is such a thing as an equilibrium oil price. I have spent many hours trying to guide, cajole, and beg my energy analysts to create a model that might identify it, just as we have for currencies, bond yields, and equities. I have also discussed the idea with industry experts, most of whom believe that one exists, but that it moves around a lot, because it is greatly influenced by the marginal cost of oil production - itself an unstable variable. My conclusion is that a good indication of this moving equilibrium does exist: the five-year forward oil price, or the amount paid for guaranteed delivery of oil five years from now.