Oct. 19 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan sent his staff of economists on an oil-and-gas exploration mission in preparation for a speech last week to the National Italian American Foundation in Washington.

He directed them to unearth data on oil supply and oil demand, on spot prices and deferred futures contracts, on inventories and refining capacity.

He had them dig up information on industrial demand from China and speculative demand in the U.S., on proven reserves and refining margins, on the spread between light sweet crude and heavy (with sulfur) sour.

He even had them look into the history of monopoly pricing by Standard Oil and then OPEC.

What Greenspan didn't have them do (or didn't pay attention to if they did) was save him from his fascination with the informational content in long-dated oil futures contracts.

Greenspan's fixation with contracts maturing far out in the future isn't new. For years, every time the spot price of crude shot up, he would cite the stability of contracts maturing five or six years in the future as an indication that any rise in spot prices was expected to be short-lived.

Given the deferred contracts' track record in predicting prices, it's not clear why Greenspan puts so much faith in them.

Informationally Challenged

Six years ago, the December 2004 oil futures contract was trading at about $19. The only information about the current $55 price per barrel of crude oil was dead wrong.

Why should the contract maturing in 2010 do any better predicting oil prices six years out?

Once you go out more than a few years, oil futures contracts ``are sparsely traded, with little, if any, open interest,'' said Rick Mueller, senior oil analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``I can't imagine there's much information there.''

Last week, 123 December 2010 crude oil futures contracts traded on the New York Mercantile Exchange. The open interest, or number of contracts outstanding, was 16,749 on Oct 15.

To be sure, there is an implicit forecast embedded in long- dated oil futures contracts, just as there is an interest-rate expectation in five- and 10-year Treasury notes or Eurodollar futures contracts maturing in 2010.

Current-itis

Those ``forecasts,'' however, are influenced by current information extrapolated into the future. When the current news changes, the implicit forecast changes.

``Long-term futures contracts mean something except when they don't,'' said Michael Lynch, president of Strategic Energy & Economic Research, a consulting firm in Winchester, Massachusetts. ``They tell us what a small number of traders are thinking about.''

Greenspan puts a lot of faith in the markets, which is understandable. His faith in a small number of trades by a small number of traders in deferred oil futures contracts is less so.

Where Greenspan sees value in the 2010 oil futures contract, energy traders just roll their eyes.

``I'd be skeptical to draw any conclusions'' from the 2010 futures contract, Mueller said.

Structural Change

What's different this time around, Mueller pointed out, is the response of the entire strip of oil futures contracts to the current rise in spot prices.

``A spike this dramatic is usually only reflected in prices two to three months forward,'' he said. ``The rest of the strip reverts to the long-term average.''

This time, the higher expected prices are evident out to 2010, ``suggesting a structural change in oil markets,'' he said.

Greenspan noted as much in his speech last week. A few years ago, ``distant futures exhibited little variation around $20 per barrel,'' even as spot prices ranged from $11 to $40 a barrel, Greenspan said. ``Such long-term price tranquility has faded dramatically over the past four years.''

The December 2010 contract finished the week at a record $38.30.

Greenspan's obsession with long-term forecasts isn't limited to financial and commodity markets. He's been taken (and taken in) by rosy earnings forecasts by Wall Street equity analysts during the late 1990s stock market bubble and by budget forecasts as well.

Tunnel Vision

In the Fed's semiannual monetary policy report to Congress on Feb. 13, 2001 -- almost a full year after the bubble burst -- Greenspan cited ``three- to five-year average earnings projections of more than a thousand analysts'' and corporate managers' optimism as reasons to be upbeat about long-term capital accumulation and profits. At the time, corporate managers couldn't de-accumulate capital fast enough.

``Greenspan said that stocks must be priced right because analysts had taken what corporate CEOs had told them and made projections,'' said Bill Fleckenstein, president of Fleckenstein Capital in Seattle.

Faith in budget forecasts turned out to be equally misplaced. In January of 2001, days after a new Republican president with a passion for cutting taxes moved into the White House, Greenspan threw his not inconsiderable weight behind George W. Bush's agenda.

Swing and a Miss

Confronted with forecasts of a projected cumulative 10-year surplus of $5.6 trillion, Greenspan told the Senate Budget Committee it was time ``to consider a budgetary strategy that is consistent with a preemptive smoothing of the glide path to zero federal debt or, more realistically, to the level of federal debt that is an effective irreducible minimum.''

Unless taxes were cut, Greenspan said, the government could find itself in the untenable position of having to buy private assets -- no Treasuries left -- with the surpluses.

How quickly things change. The lack of marketable Treasuries is about the last thing anyone worries about today.

In its September budget outlook, the Congressional Budget Office projected a cumulative $2.3 trillion deficit over the next decade, or $4.3 trillion if all the Bush tax cuts are made permanent, as the president wishes.

Every time the 78-year-old Greenspan uses the 2010 oil futures contract to predict prices, I'm reminded for some reason of an old joke my father used to tell. An ill, elderly man goes to his doctor to get his test results.

``So, doc, how am I?'' the patient asks.

The doctor replies: ``Don't buy any green bananas.''

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: October 19, 2004 00:07 EDT