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Forecasting: The game of fools?

Long-term energy forecasting is a fool’s game. “Almost always wrong and sometimes wildly mistaken” is the verdict of two pundits in the Journal of Energy Security, reflecting on predictions made by such august bodies as the Energy Information Administration and the International Energy Agency (IEA).

Analysts fare little better. Goldman Sachs analyst Arjun Murti was a lone voice a decade ago when he called it right with his “superspike” forecast, but he too called it wrong in 2008 with a US$200/barrel price target that was swiftly revised as prices tanked. Even The Economist predicted a long-term oil price of under US$10/bl, only for the price to rally.

The problem with oil and gas forecasts is there are just too many variables. On the supply side, geology is notoriously unpredictable – 10 years ago, no analysts foresaw giant gas finds off the east coast of Africa or that North Dakota would pump more oil than Alaska.

Indeed, technology continually defies all predictions of recoverable reserves as new techniques allow the flushing of additional barrels from aging fields.

All were blindsided by the North American production surge when hydraulic fracking opened tight shale formations. No one foresaw that the US would be building LNG export terminals to sell its glut of shale gas, or that Washington would overturn a 40-year oil export ban to allow US crude to return to world markets. The ramifications will be played out in forecasts for years to come.

On the demand side, the shocks come thick and fast: the Asian financial crisis of 1997, 9/11, the global banking crisis, war in the Middle East, supply disruption in Nigeria… And demand- side projections have continually underplayed the importance of environmental policy in chipping away at oil’s market share.

It’s a similar story for other sources of energy. Many forecasters missed the explosion in coal consumption following China’s inclusion in the WTO in 2001, and that the US fracking boom would see cheap exports of coal into Europe. These are driving increased burning of coal in countries such as Germany, which is building new coal-fired capacity to help address the supply gap left by its post-Fukushima nuclear power phase-out.

Coal may no longer be king, but nor is it a dead fuel. China may be stepping up the pace on renewables to combat pollution  ̶  its solar push has helped drive an 80% fall in solar photo-voltaic prices since 2009 and its production lines are turning out two wind turbines every hour  ̶  but there’s no doubt that less-developed countries will hope to emulate China’s coal-fired economic transformation.

Energy forecasters have consistently underestimated the role renewables will play in the future energy mix, with costs coming down faster than predicted and policy mechanisms continuing to drive investment. Since 2000, the IEA has raised its long-term solar forecast 14 times and its wind forecast five times.

And this is a virtuous circle: according to Bloomberg New Energy Finance, every time global wind and solar capacity doubles, costs drop 19% and 24% respectively.[i]  Only the most extreme projections got anywhere close: take a bow, the Greenpeace Energy Desk.

For now, as they have for decades, fossil fuels dominate global energy consumption: according to the BP Statistical Review of World Energy 2016, oil is the world’s top energy source (32.9%), followed by coal (29.2%), natural gas (23.8%), nuclear (4.4%), hydro (6.8%) and renewables (2.8%). By 2040, the IEA predicts the world energy supply mix will divide into four almost equal parts: oil, gas, coal and low-carbon sources. Other forecasts, including that of Greenpeace, suggest renewables could dominate by 2050. Will this prove to be “wildly mistaken”? Only time will tell.

[i] Bloomberg New Energy Finance New Energy Outlook 2016

 

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