It’s easy to make fun of predictions about the future, since they so rarely come true. (Consider, for example, all the Popular Mechanics articles from the early 20th century suggesting that we’d all be living in domed cities and driving flying cars by now.)
But fair or not, I tend to hold economic forecasters to a higher standard than your run-of-the-mill technology booster. Consider oil prices: huge sectors of the economy, from car manufacturers to housing developers to road builders, make huge bets based on experts’ predictions about future oil prices. Since there’s so much money and so many jobs at stake, there’s a lot riding on the judgment of the experts.
But a look backward shows that the experts are…well, astonishingly inexpert at predicting oil prices.
Take a look at the chart to the right, based on data taken from various editions of the US Energy Information Administration‘s Annual Energy Outlook. As recently as 2004, the US government’s main energy forecasting body was predicting that oil prices would hover around $30 for the next few decades, rising only modestly. (All dollar figures in this post have been adjusted for inflation to today’s values.) In fact, the EIA’s “high price” estimate—the upper range of prices that they were willing to predict—foresaw that a barrel of oil would stay well below $45 per barrel through 2025.
Fast forward three years, and oil prices had already spiked north of $70 per barrel. And EIA evolved with the times—a bit. They stopped predicting $30/barrel oil as far as the eye could see. Still, they did project that oil prices would come quickly back to earth over the next few years, only starting to rise again in 2015.
And now, four years later, we’ve lived through oil prices that spiked well north of $100 per barrel—and EIA’s forecasters have changed their tune yet again, predicting price increases as far as the eye can see.
I suppose you could argue that the phenomenal price spikes of 2008 shocked the EIA out of a state of denial; no longer could they support the fantasy that oil would stay cheap forever.
But maybe they, and we, are every bit as deep in denial ever.
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Why do I say they (and we) are still in denial? Two reasons.
First, even though the EIA is, in fact, forecasting rising oil prices, they may still be underestimating just how fast they’ll go up. Their forecast for 2011 puts oil prices at $83 per barrel for the year, but NYMEX oil futures are already running at $92. We’ll see how the rest of the year shakes out, but so far EIA is still lowballing it.
But second—and more importantly—if this chart shows anything, it’s that the future is really, really hard to predict. I’ve singled out EIA here, but they had good company. Virtually all “respected” oil forecasters, both in the public sector and in private firms, domestic and international, were making the same mistakes: assuming that the future would look more or less like the very recent past. None of them were stupid people. But despite all the money on the line, and all the intelligence and economic tools at the analysts’ disposal, they still made a hash of it.
So perhaps the real lesson is that even though today’s long-term economic forecasters aren’t a whole lot better than yesterday’s fortune-tellers and tea-leaf readers, we’re in denial about our complete inability to predict the future. EIA’s proven time and again that it doesn’t do a particularly good job of forecasting oil prices, but it still keeps plugging away—and people keep reading about, and acting on, their predictions.
Our particularly troublesome result is that we prepare for what the experts think are the “most likely” outcomes—which, in 2004, meant that our children would be able buy a barrel of oil for $35—rather than for the full range of possible outcomes. So when the “most likely” outcome doesn’t come to pass, as it so rarely does, we all get caught flatfooted.
So perhaps we’d be better off if we simply didn’t rely on these sorts of predictions about the future at all. Maybe we should just admit that we just don’t know if oil will be $30 per barrel or $300 in 5 years. In a world in which we acknowledge that we don’t know what’s going to happen, we might be more eager to look forpolicies that can’t go wrong: ones that will function just as well in a world of high oil prices as with low oil prices. I’d argue that putting a price on carbon now is just such a policy: it would help prepare us for a future in which prices oil prices are much higher than they are today. And if oil miraculously gets cheap again—well, heck, we’ll at least have a more energy efficient economy—which is a good thing, no matter what the price of energy is.
Having followed the Peak Oil discussion for several years, I believe the EIA forecasts have been politically motivated to make inaccurate predictions. While the Pentagon can admit that oil will become rarer and more expensive and plan accordingly, realistic EIA forecasts would expose the systemic weakness of the US economy and the foolishness of our economic policies. These policies are not very different than they were in 1950, assuming infinite growth fueled by infinite cheap energy. The most influential political interests, business and labor, are both boosters of growth mythology, so there is little political support for reality.Of course, realistic energy price forecasts, which are quite possible if smoothed for the unknown sine wave of economic cycling, would be quite useful in setting policy. We could, for instance, realize that infrastructure investment in sustainable energy, public transportation, and economy localization would be better made quickly, while we can still afford the energy needed for such projects.The author’s recommendations in his last paragraph would make sense if humans were wise and reasonable. We are not for the most part. Clear indications are needed to support any significant alteration in economic direction [witness the frog-in-heating-wateresque response to climate change]. Until planners and forecasters can work free of infinite growth mythology, we will not have realistic vision of the future. Once they do, useful work will be quite doable.
Oh gee, future oil prices are hard to predict. Thanks for sharing that news with us.
There could also be a bias on behalf of the EIA (i.e. government) to not indicate oil going up so as to keep the investment dollars in ‘preferred and friendlier’ holdings (like financial institutions).My belief is that a forecast is a best guess, sometimes a WAG and sometimes an EWAG, but nonetheless still a guess.The question that is not being asked enough is ‘What if?’ and then to explore the potential scenarios arising from What if.jb
Great post Clark.Those who have followed EIA oil forecasts have seen them be totally wrong just a month later…at which point they issue another which is wrong a month or two later…at which point they repeat.I like your idea of just not forecasting. That would say far more than anything else to people. And it would be the most honest.Peak oil folks have also had prediction problems, usually that the price would be higher than it is. Then again they have been more accurate on the general direction and pace than EIA.The basic economics say that if you have a primary, essential input that you can’t forecast even the rough range a couple years into the future…then you have real problems and threats to your biz.The big push to electric motors for transport vehicles is driven in large part because oil has become an unpredictable and dangerous drunkard in our society. More and more people want out.Big Oil seems to be doing it’s best to moderate pricing to the range of “massively profitable yet not economically totally crippling”. But even so the reality is that cheap oil is running out and climate is in rapid destabilization.Oil is a threat more and more people are trying to run away from. I sure am.
Oil prices aren’t all that hard to predict, if you aren’t in denial and if you don’t require absolute precision.The problem isn’t that EIA can’t predict the price of oil, the problem is that it can’t face a Malthusian world in which supply does not meet demand. They don’t know how to predict anything without Adam Smith’s “invisible hand.” They’re stuck in Chicago School economics.What’s missing are the “error bars.” If EIA were to put out a prediction that said, “Here is the rate of decline of oil, here is the rate of growth we want in the economy, and as the spread between the two grows, the error bars approach infinity.”Then they could present a graph that shows that if we immediately adopt the Rimini Protocol, by voluntarily shrinking our economy in lock-step with fossil energy decline, we can at least have stable and somewhat predictable pricing.