What real forecasting looks like
Competitive Futures has a theme for all of our products and services in 2010: real forecasting.
When we look back at the good and bad decisions of the past twenty years, we ask, “Were you looking at real forecasts or fake forecasts?” Did you listen to forecasts that told you, comfortingly that the positive scenario was 5% growth, the negative scenario 1% growth, or the “middle” scenario dead on at 3% growth? Or did you ask which assumptions were behind that view of the future? Did you ask complex questions and get mature answers?
More on this – much more – in the month of January.
In the meantime, to illustrate the difference, check out Chris Nelder at GetREAList in his blistering takedown of the EIA energy forecasts, entitled What if the Annual Energy Outlook Were Written by an Honest Person: Why the EIA Should be Statutorially Barred from Making Predictions:
Suppose you worked at the Energy Information Administration (EIA), the agency within the U.S. Department of Energy charged with keeping data and making projections on energy, and you had to produce an annual report with a scenario for the next 25 years.
Being an intelligent and informed investor, you might grapple with the $147 to $33 range in oil prices over the last year and try to imagine how such volatility might happen in the future.
You might be tempted to model a few economic factors such as GDP growth rates and credit availability, and how they affect investment in energy supply.
You might consider the price at which producing a barrel of oil or a thousand cubic feet of natural gas becomes profitable, and the price at which it becomes too expensive and destroys demand.
You might take peak oil, peak gas, and peak coal into account, since the best available models on those subjects all suggest peaks within the time frame of your scenario.
Wow, great analysis from Mr. Nelder, and an appropriately systemic approach to energy forecasting. That’s what the EIA forecasts look like, right?
But then, you’re not working for the EIA.
If you were, you’d do something like this…
You’d get out your crayons and your graph paper, and starting with your most recent data, you’d plot a nice, steady 1.5% global growth rate for energy demand over the next 25 years.
You’d do something similar for supply so that it matches demand at prices that also climb at a nice steady rate. For oil prices, call it, oh, how about 0.4% per year? That sounds pretty good.
You’d draw basically flat lines into the future for all the fuels dominant today, since you know they have serious challenges ahead, and then draw sharply rising lines for the latest and greatest technology, projecting enormous growth rates for things like shale gas and enhanced oil recovery.
You’d be sure to count all possible supply from new sources — like a new gas pipeline from Alaska — even if those projects don’t yet exist. Hey, it could happen!
You would not, however, factor in any CO2 reduction, because policies to control it don’t exist.
Naturally, you’d assume that the next 25 years would show gradual economic growth, so there wouldn’t be any troublesome issues like credit availability or depressed consumer demand to worry about.
Ouch.
If you are making forecasts about where to build a factory, planning to ship your finished goods to the markets of the world, and you are calculating energy costs per unit, whose forecasts are you going to use? The EIA is more of an authority, but then again – who’s got the more authoritative forecasts?