Diesel prices are likely to go up 10 to 15 cents a gallon next year over this year, said Tancred Lidderdale of the U.S. Energy Information Administration. Lidderdale heads the EIA's analytical team that produces the monthly fuel price forecast that is a key data point for trucking industry planners. He discussed diesel supply and demand at an Oil Price Information Service conference in Atlanta earlier this week.

His forecast is based on the expectation that oil prices will go up from $76 to $84 a barrel, driven mainly by rising demand in developing countries.

EIA's predictions for oil consumption are based on expectations of growth in gross domestic product, which vary widely between developing and developed countries.

The U.S. is expected to grow 2.6 percent this year and slow to 2.3 percent next year, while developing nations led by China will grow in the neighborhood of 4 percent.

EIA is forecasting world oil consumption growth at about 1.4 million barrels a day, which is generally in line with the predictions from OPEC (1.1 million barrels) and the International Energy Agency (1.3 million barrels), Lidderdale said.

What happens in China is the biggest uncertainty in the demand forecast, Lidderdale said, referencing that country's new focus on increasing the efficiency of its industrial sector, and continuing international concern about its exchange rate policy.

The Supply Question

On the supply side, the key fundamental has to do with the ability of non-OPEC sources to keep up with demand, he said.

"When world oil consumption growth exceeds non-OPEC supply growth we have rising oil prices. When world oil consumption falls below non-OPEC supply growth, we have falling world oil prices."

Lidderdale said that uncertainty about the supply forecast arises from varying views of how much oil will come from non-OPEC sources. EIA expects that these supplies will slow, but other important analysts, including OPEC itself and the International Energy Agency, are predicting growth.

In either case, however, non-OPEC supply will have to be supplemented by oil from OPEC sources that have surplus capacity - mainly Saudi Arabia, he said.

"As long as Saudi Arabia holds to $75 a barrel and can meet demand, then the upside potential will be limited," he said.

Another caveat is that it is impossible to predict political developments in the supplier countries. "We're forecasting June 2011," he said. "Between now and June 2011 there's no telling what (Venezuela President) Hugo Chavez is going to do, no telling what is going to happen in Iran, or Mexico."

Improvements in Forecasting

Lidderdale also said EIA has been making improvements in its analysis for the Short Term Energy Outlook.

"What we realized in 2008 and 2009 is that price forecasting is a very humbling profession," he said.

"We didn't do very well. Nobody did very well. Because of that we realized we had to understand more about what underlies price volatility."

The agency has developed a "confidence" measurement based on past performance that predicts the odds of fuel prices moving out of a predicted range. It says, for example, that there is about a 28 percent chance that the current per-barrel price of $77 will rise above $90 in the next three months.

Lidderdale has a cautious view of the role that commodities speculation plays in fuel prices.
He said he has seen no analysis that conclusively proves speculation drove the price-run up in 2008, and there are studies that show supply and demand can explain the spike - most of it, anyway.

This does not mean that it didn't happen, though, he said. "There's no definitive proof that speculation drives oil prices but it is hard to explain 2008 without referencing the financial market."