Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on October 2, 2015
Oil Price Forecasting Lessons From 2008
Most people who attempt to predict the price of oil in either the short- or long-term soon learn humility, but some are so, shall we say, self-confident that they have no problem ignoring their records or ability to understand why they have been wrong, let alone correct it. For example, I have openly admitted my mistake in predicting the decline of oil prices much too early, but the reason for the error was mainly political instability in places from Iraq to Venezuela.
My personal interpretation of the 2008 price spike, when oil went from $100 a barrel to $145, then dropped to $30 by year’s-end, is that the surge was a classic bubble. The $45 increase in six months was far beyond anything that had occurred historically, and neither fundamentals nor geopolitical developments would seem to justify it. Coming at a time when other assets were soaring in value, particularly real estate, the high price seems likely to have been influenced by easy money and fed by trader psychology. Amazingly, some pundits looked at the price spike and saw it as the beginning of a long-term rise.
And this isn’t the first time for such behavior. In 1980, after oil prices had soared due to the Iranian Revolution, nearly all forecasters insisted that they would keep rising over the long term. John Mitchell of BP and Nazli Choucri and myself at MIT were notable exceptions: at Stanford, he predicted prices would be flat, we saw a five-year decline, followed by a rising trend. Our five year forecast was good, our long-term forecast, not so much. However, remember the story of the two hikers who encounter a grizzly bear. When one starts to change to running shoes, his friend remarks, “You can’t outrun a grizzly.” To which the reply is, “I don’t have to outrun the grizzly, I only have to outrun you.”
The same pattern occurred during the oil price surge in 2008. When I posted a two-part analysis on marketwatch.com in late May arguing that prices would come down at some point, the comments ranged from outrage to derisive, but especially disbelief at the thought that the prices might fall.
But there was a section of the industry who steadfastly insisted the prices had not reached a peak. T. Boone Pickens, for example, when prices dropped close to $100 by late August insisted that “In two or three years, we’re going to be at $200 a barrel—could be $300 a barrel for oil.” The late Matthew Simmons echoed Pickens’ price forecast at roughly the same time. The funny thing is that for several years, he had shown audiences a slide that had the famous Economist cover titled “Drowning in Oil” from 1998, in which the write-up predicted prices would remain at $12 or lower. Next to it, he displayed the cover “We Wuz Wrong” produced after prices soared. His reward was a story about him, which appeared July 10, just two days before the price peaked.
What’s amazing is the extent to which some remain unflustered by past predictions. When Pickens was reminded last year that he had been wrong about peak oil by CNBC’s Joe Kiernan, he exclaimed, “I’m the expert!” and continued to insist that oil production had peaked in 2005—if you ignore US shale (and NGLs and biofuels, which he doesn’t mention). Simmons had the same certainty, saying in September 2008, “I find it ironic that here we have the biggest industry on earth, and I’m one of the few people to figure out that we have a major problem.” Occam’s Razor would suggest that maybe he was wrong.
My father gave me the wonderful book Patton, Montgomery and Rommel, and the author Terry Brighton argues that self-confidence is probably a necessary quality for a leader. Unfortunately, in the case of Montgomery, this was combined with a tendency to insist every operation that failed was really a success—by redefining his goals after the fact. The practice didn’t endear him to colleagues or help him perform better.
Forecast consumers don’t help, since they prefer a specific forecast. Of course, if you have to draw up a budget for fuel use, you can hardly put in a range of prices, or scenarios. But additionally, it seems to be part of human nature to prefer certainty. (Michael Shermer discusses this in his book The Believing Brain.) As I argued in my 1994 paper, “The Failure of Long Term Oil Market Forecasting,” the problem is not just the uncertainty about both fundamentals and geopolitical trends, but the tendency to embrace incorrect theories, from the Hotelling Principle to Hubbert curves. Avoiding such a trap might not yield an accurate forecast, but it should help you beat the other hikers.
15 Comments on "Oil Price Forecasting Lessons From 2008"
ennui2 on Fri, 2nd Oct 2015 4:44 pm
—
My personal interpretation of the 2008 price spike, when oil went from $100 a barrel to $145, then dropped to $30 by year’s-end, is that the surge was a classic bubble.
—
And he’s right.
GregT on Fri, 2nd Oct 2015 4:57 pm
No mention of the rise back up to $130/bbl that led to the increase in unconventional oil production, that brought prices back down to current levels. Of course that was all just bubbles too.
The guy’s an idiot.
onlooker on Fri, 2nd Oct 2015 5:25 pm
That is also why oil companies increasingly are trying to obtain oil from more and more difficult places. That is why US has tried to supplement with ethanol. That is why we are devoting so much resources to the ME. That is why many experts on oil and resources weighed in with the opinion that we probably reached peak oil around 2005 in terms of light sweet crude. Yeah its a bubble alright go back to sleep. Oh and I second everything Greg stated.
Plantagenet on Fri, 2nd Oct 2015 6:08 pm
Oil supplies were tight from 2003-2008, and oil prices slowly ran up to $130. Then the global economy collapsed in 2008-9, and oil prices collapsed as demand collapsed. The global economy has slowly grown at ca. 2-3% a year since 2010, and fraking in the US grew US oil production by 4 mm bbl/day. Oil prices seemed stuck around $100 bbl for a couple of years, but then the price of oil fell rapidly when KSA altered their policy and started producing flat out. This produced a global oil glut of ca. 0.5 mm bbl/day in late 2014, and has resulted in the current low oil prices.
CHEERS!
apneaman on Fri, 2nd Oct 2015 6:22 pm
Gee planty, that’s a nice simple happy story you keep telling. Dead certain that it’s just a blip and everything will be awesome again? If commodities are tanking now because no one has any fucking money, what will happen to your simple story if oil prices go up again? You would think that a “glut” of “cheap oil” would be a boon to the economy. What going on little planty?
GregT on Fri, 2nd Oct 2015 6:26 pm
C’mon Apnea,
Everyone knows that commodities are tanking right now, ’cause we are in a commodity glut.
Cheers!
BC on Fri, 2nd Oct 2015 6:46 pm
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20TD
Tejas is feelin’ the “glut” and fixin’ to roll over into recession, y’all.
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20TF
ND already plumb done did the recession dip.
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20TI
And them roughnecks up ‘er in WY are lookin’, well, mighty rough.
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20TK
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1Pyq
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20RS
Combine all that with US orders, wholesale sales and inventories, and deceleratin’ gross output to “stall speed”, and we got ourselves a failure to achieve escape velocity, Houston.
I reckon that’s why we be lookin’ at a “glut”.
BC on Fri, 2nd Oct 2015 7:07 pm
Plant likes to keep things simple.
“Simple is as simple does.” (Paraphrasing Forrest Gump.) 🙂
Then again, Gump is sitting on a pile of cash from having stock in that fruit company from California. 😀
BC on Fri, 2nd Oct 2015 7:20 pm
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20Uu
apnea, right. Real working-class average hourly/weekly earnings have again decelerated back to the point at which the Fed went “all in” with QEternity in 2012 and at the onset of the recessions in 2007, 2000, 1989, 1979-80, 1974, and 1970. Exceptions occurred in 1995, 1985, and 1967 (mid-cycle pauses).
But that’s about empirical data. We humans don’t operate on that basis, as we all know. Ya gotta believe! 😀
MrNoItAll on Fri, 2nd Oct 2015 8:05 pm
Simple works real well for simple minds, until it doesn’t. So far so good, right Plant?
makati1 on Fri, 2nd Oct 2015 8:29 pm
Three words that every American should know:
Contraction – The antique word meaning ‘de-growth’.
Depression – The definition that concerns the economy, not the state of mind, although one usually accompanies the other.
Zimbabwe – A country that tried to print it’s way out of it’s economic problems and ended up with trillion dollar bills that wouldn’t buy a loaf of bread.
BC on Fri, 2nd Oct 2015 9:43 pm
FYI: Oz:
http://www.zerohedge.com/news/2015-10-02/australia-going-down-under-bubble-about-burst-rbs-warns#comment-6623717
http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20WA
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=20X8
https://www.youtube.com/watch?v=cRyKCJUXehM
https://www.youtube.com/watch?v=NxwW80Lb-lk
Epic real estate and equity bear markets ahead for our mates down under in the next 3-5 years.
nemteck on Sat, 3rd Oct 2015 12:45 pm
The boldest oil price prediction ever is by shortonoil on Sun, 26th Oct 2014 8:10 am
“And analysts believe the price could fall to as low as $60 a barrel.”We hate to inform these analysts but the price of oil is falling toward $0.00/barrel. That will occur sometime in the 2030-2035 time frame. This is happening because the world’s petroleum supply is depleting,….
It is hard to imagine how this world will look like when the price of oil is approaching zero in 15-20 years.
I though if supply of a vital commodity is depleting and cannot be replace by an alternative then the price will increase. For example, the pharmaceutical industry will pay any price for making drugs. For them it is not the energy content (i.e. the entropy shortonoil is dazzling us about) but the molecular structure.
GregT on Sat, 3rd Oct 2015 12:57 pm
“I though if supply of a vital commodity is depleting and cannot be replace by an alternative then the price will increase. ”
The price can only increase if the overall economy can afford it. The pharmaceutical industry, for example, will not pay any price for making drugs if there isn’t a large enough market for those same said drugs. For them it isn’t about the molecular structure, it is about the profits, and ROI.
zaphod42 on Mon, 5th Oct 2015 8:52 am
Is the price down because KSA is pumping all out, or is KSA pumping all out because the price is down? That makes a big difference.
It looks more, to me, as though the Saudis need to pump more to maintain their economy because of the drop in price. They are in a real bind… the more they pump the lower the price, the lower the price the more they must pump, just to stay even.
Until, that is, you hear that giant sucking sound near the end.