The Perils of Forecasting

I just came across an old energy market analysis by the U. S. Department of Energy, Energy Information Administration (EIA). Their Annual Energy Outlook published in 2003 projected that by 2010, the average annual price of oil would be $23.99 in 2010.

Wow! The actual number was closer to $80.00 per barrel.

This not only shows the pitfalls of forecasting the future, it also demonstrates the problems associated with simply predicting future values based on an extrapolation of past data. To its credit, the EIA has since broadened its forecasting methodology.

I gave up making specific predictions of oil prices, consumption and production in 2004. There are just to many variables, and much of the background data is either wrong or unavailable. Instead, we try to put together credible scenarios that make sense. Given the underlying assumptions, these provide a reasonably reliable indication of future trends.


Ron