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Forecasting with a cloudy crystal ball

Vernon Small, The Dominion Post (New Zealand)
The essence of economic crystal balls is that they are opaque.”

That was Finance Minister Michael Cullen, not on his advisers’ undercooking tax revenue forecasts for once, but on the wildly erroneous projections of oil prices by both his Treasury mandarins and their colleagues over the road at the Reserve Bank.

“There is a very, very high probability that any forecasts are likely to be wrong in this area – it is the nature of the high level of volatility of oil prices over both the short term and the long term,” Dr Cullen added by way of explanation to Green co-leader Jeanette Fitzsimons this week as oil prices threatened the US$100-a-barrel mark.

Before his death, Ms Fitzsimons’ co-leader Rod Donald repeatedly asked about the under-estimations by officials – and was rewarded with a change of attitude by officials from an initial tired scepticism to grudging admission that there was a problem – but perhaps no solution.

Yet it has as profound an impact on the Government’s fiscal and economic planning as poor tax revenue forecasts; from transport planning, to environmental policy, to urban design, to energy policy to decisions that impact on the current account deficit. It also sends the wrong signals to the economy and business in terms of adaptation to greater energy efficiency and climate change measures – as well as potentially over-estimating overseas demand for our exports.

And the gap between forecast and reality has not been merely margin of error stuff; it has been huge. You might even say “structural”.
(15 November 2007)

Aramco CEO pulls apart ‘doomsday’ energy forecasts

Business Intelligence Middle East
SAUDI ARABIA. Saudi Aramco’s President andCEO, Abdullah S Jum‘ah, on Tuesday addressed attendees of the 20th Congress of the World Energy Council, where he demonstrated that there are enough conventional and non-conventional liquid energy resources available for petroleum to be a significant part of the global energy mix for decades to come.

In a speech titled ‘Global Oil Resources and the World’s Energy Future: A Holistic View’, Jum‘ah examined the more than 30 years of doomsday forecasts that have been put forward about the petroleum industry and that have since been proven false. He offered a statistical basis for his argument that forecasts for the ultimate recovery of conventional oil resources have actually increased over time.

“In general, we have grossly underestimated mankind’s ability to find new reserves of petroleum,” he said, “as well as our capacity to raise recovery rates and tap fields once thought inaccessible or impossible to produce.”
(14 November 2007)
Related: WEC: Saudi Aramco chief dismisses peak oil fears. (Oil & Gas Journal)

Shaybah, technical marvel in the desert

David Ebner, Inside Energy Blog (Globe & Mail)
SHAYBAH, EASTERN SAUDI ARABIA – In the ongoing effort to prove its technical acumen and abundant oil reserves, Saudi Aramco on Wednesday afternoon ferried a planeload of international journalists to the remote Shaybah oil field, one of the more recent additions to Saudi Arabia’s crude production.

…In some ways, this week in Saudi Arabia ahead of the OPEC summit is like one long rebuttal of Twilight in the Desert, the Peak Oil treatise written by Houston investment banker Matthew Simmons several years ago that strongly argued that oil production in Saudi Arabia would soon be in significant decline. (On Tuesday, Saudi oil minister Ali al-Naimi didn’t name Mr. Simmons but dismissed such claims as having no foundation.)
Shaybah officials refused to say how much the expansion to 750,000 barrels a day costs, but the kingdom is facing higher prices just like every other energy developer in the world. Still, this is very cheap oil, the cheapest in the world to develop and produce.

…The scale of Saudi Arabia’s claimed reserves is otherworldly, just like the stark and beautiful desert that surrounds Shaybah that Aramco, in a promotional video, described as a “modern oasis.”

The unanswered question is whether the oasis suddenly dries up or supports voracious global energy demand for decades to come.
(14 November 2007)

Cost of oil felt beyond pump

Elizabeth Douglass and Ronald D. White, Los Angeles Times
Gasoline could soon top $3.50 a gallon in California, but a large swath of the economy is affected as well.

Oil had been steadily cruising toward $100 a barrel but took an unexpected U-turn Tuesday, plunging more than $3 a barrel in New York futures trading as worries mounted that the long, painful climb in energy prices had cut into consumer budgets, weakening demand and the U.S. economy.

More price hikes are on the way, because the cost of gasoline, diesel and other products has yet to fully reflect oil’s more-than-40% price jump since late August — a gloomy thought for consumers already struggling to offset their rising gasoline tab while getting ready for the holiday spend-fest.

“Normally, demand goes down at the end of the year, prices go down and we don’t even think about it,” said Phil Flynn, senior market analyst for Chicago’s Alaron Trading Corp. “But now the gas prices are catching up to the high cost of crude and they still have a way to go yet.”

…Analysts cautioned that record gasoline prices could lurk on the horizon. And oil prices could change direction again, given the market’s volatility this year.

“The sad part is that these prices are the launching pad for the price spikes we get every spring,” said Fred Rozell of Oil Price Information Service. “If they remain this high, it will be a real mess.”

Over the last few years, escalating energy costs were partially offset by the strong housing market, which allowed homeowners to take on more debt and keep spending. Then home prices tanked, mortgages soured and consumers lost the cheap credit that was helping them cope with expensive gasoline and other costs.
(14 November 2007)

Gas prices hit working class

Steve Hargreaves, CNN
Lower-income Americans spend eight times more of their disposable income on gasoline than wealthier residents do.

The disparity is dramatic. In Wilcox, Ala., people spend 12.72 percent of their income to fuel one vehicle, according to a new study from the Oil Price Information Service (OPIS). In Hunterdon County, N.J., people spend 1.52 percent.

The study illustrates the impact rising oil prices are having on people’s budgets. Many economists have downplayed the effect gasoline prices will have on consumer spending. But with prices now pushing above $3 and studies like this, some say the economy may take a hit.
(14 November 2007)

OPEC Secretary General Doesn’t See Need to Add More Oil

Natalie Obiko Pearson and Majdoline Hatoum, Dow Jones Newswires
The Organization of Petroleum Exporting Countries doesn’t see the need to add more oil to the market as requested by the U.S., the group’s secretary general said Wednesday.

“This question will be raised in Abu Dhabi where we will talk about supply, demand, inventories and fundamentals at this time,” OPEC Secretary General
Abdalla Salem el-Badri said, referring to OPEC’s next official production policy meeting Dec. 5.

“But frankly we don’t see that we should add more oil,” he told a news conference during the OPEC Heads of State summit hosted by Saudi Arabia.

El-Badri was responding to questions about U.S. Energy Secretary Samuel Bodman’s call on OPEC to raise production to address falling oil stock levels and high oil prices.
(14 November 2007)