Thursday, April 30, 2015

"Lessons In Oil Price Forecasting"

From Forbes:
When I published a working paper in 1992 at MIT called “The Fog of Commerce: The Failure of Long-Term Oil Market Forecasting,” many thought the lesson was that forecasting the long-term price of oil couldn’t be done. My actual point had been that bad theories and bad models lead to bad forecasts, specifically the belief that resource economics proved that fossil fuel prices had to rise exponentially.

Recently, I opened a talk with a slide showing the early-2014 survey of long-term oil price forecasts published by the Department of Energy, in which my forecast of $50 a barrel was far below all the others. But in the next slide, previous forecasts in which I had called for lower prices for the past ten years were included, in part, because I don’t want to cherry-pick my record (the way some peak oil advocates do), but also to focus the discussion on pertinent lessons from forecasting, not just the accuracy of any given prediction.

This is important because too many of late have been drawing superficial conclusions about forecasting, whether it is that it can’t be done (as many do) or Al Gore’s triumphant note that predictions of the failure of renewables have proved wrong, therefore the energy transition is under way. (Technology predictions will be addressed in a later post.)

The lesson to be drawn from the many oil company “Titans” that were convinced lower prices were unlikely or incredible is that they tend to let wishful thinking dominate their expectations, an all too human failing. T. Boone Pickens, claiming “…because I know more about it than they do,” shows that he hasn’t learned from the ancient Greeks about hybris, or pride, to say nothing of his own mistakes. Anyone who has been in the business of predicting oil markets should be pretty humble, because we’ve all gotten it wrong many times, sometimes spectacularly....MORE