Here's what you can do with those oil forecasts.

Photographer: Daniel Acker/Bloomberg

Pity the Oil Forecasters

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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In a report out today, the Organization of Petroleum Exporting Countries says that U.S. oil production is about to stall. Meanwhile, in a report out Wednesday, the U.S. Energy Information Administration says that surging U.S. oil and gas production is going to turn the country into a net energy exporter.

That’s a fun juxtaposition, huh? It’s mostly a matter of time-frame -- OPEC’s report doesn’t look further into the future than 2015; the EIA’s forecast runs through 2040. But it’s still worth exploring, because it says something about what makes oil price and production forecasting so complicated.

OPEC’s projection, from its Monthly Oil Market Report, is pretty simple: the big fall in oil prices that started last summer has led to a decline in U.S. rig counts, which will translate into an outright drop in production in some of the big shale-oil basins and a slowdown in total production growth. Which happens to be exactly what OPEC wants to see happen, and is also probably right.

The EIA’s new Annual Energy Outlook, meanwhile, sets itself the much-harder task of projecting the shape of the energy industry decades into the future. Here’s how it sees U.S. oil production shaping up:

Go by the reference case above, add in natural gas and coal production, subtract the EIA’s projections of U.S. energy demand and you get exports exceeding imports from 2029 through 2032, and again from 2037 through 2040. In the EIA’s scenario the U.S. would still be importing crude oil to meet its needs -- and not exporting any because exports are now banned by law -- but exports of petroleum products, other liquids (such as ethanol and biodiesel), natural gas and coal would more than make up for it. For the first time since the 1950s, the U.S. would be a net energy exporter.

Still, as the diverging lines on the chart indicate, things could also turn out quite differently. The “high oil and gas resource” projection is a new thing, added in the 2013 Annual Energy Outlook after the EIA (and everybody else) failed to foresee the boom in U.S. production. Here, for example are the reference-case projections from the 1998 Annual Energy Outlook, compared with actual production numbers and (for 2015 and 2020) the latest forecasts from the EIA:

The main explanation for this big change is that “advanced technologies are reshaping the U.S. energy economy,” as EIA Administrator Adam Sieminski put it upon release of the new Energy Outlook. But what unleashed those technologies was, to a large extent, almost a decade of high oil prices -- high prices that the EIA failed to even contemplate in 1998, when the Brent crude price averaged a little more than $13 a barrel. The high-oil-price case then put the price at $27 a barrel (in 1996 dollars) in 2010; in reality Brent crude spent almost the entire year higher than $85 ($61 in 1996 dollars) and went substantially higher in subsequent years.

Now, though, an oil price collapse is bringing rig shutdowns and big cuts in investment. The EIA’s new low-oil-price case has the Brent price at $58 in 2020 and $69 in 2030 (it’s currently about $64). It would surely seem unreasonable to forecast that prices would go much lower than that. But hey, what if they do? What would happen then to production, and to the pace of technological progress in energy?

My point is simply that long-run energy forecasting is really hard. Supply affects prices; prices affect supply. Technological change and political forces can bring big surprises. The EIA’s new outlook offers a generally encouraging view of the country’s energy future, so that’s great. But it's a view that's all about trend lines continuing, or shifting slightly. And the really interesting stuff in energy markets happens when the trend lines don't do that.

  1. Unless you'd like to see a much bigger role for renewables -- the EIA projects they’ll account for just 9.5 percent of U.S. energy consumption in 2040, up from 7 percent now.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net