Monday, March 20, 2006

NZ Ministry of Economic Development - US$40 Oil Soon.
Level 3 NCEA "Oil Forecasting"




"Both theory and empirical evidence suggests that oil futures markets are probably the best source of future oil price projections."
Oil Price Assumptions and Scenarios (Samuelson, 2005)

This report goes on to argue that after 2010 oil will drop back to around US$40 per barrel. I doubt Mr Samuelson would ever dare walk under a ladder or cross a black cat.

"Why are you whistling?", "Why to keep the elephants away of course." "But there aren't any elephants." "Ah you see it must be working".

For anyone aquainted with the topic of peak oil the above article makes interesting, if not comical reading. So, I recently asked Ralph Samuelson Senior Energy Analyst at the MED if he had any further information about their oil price projection modelling. What I wanted to know was how they go about coming up with the so far out of whack figures that are supposed to represent where the oil price should be.


This stuff always makes me laugh because economic arguments essentially display the classic characteristics of the Post-Hoc fallacy. "oil price plummets on increased stocks", followed closely by, "oil up after Bahgdad violence", and then today hilariously, "Oil trades near one-week low on speculation US supplies rose". Laugh if you like, yet this is how the MED's pseudo-scientifically titled "energy analysts" do their projections.

I can imagine headlines, "Oil price plummets after Federer wins Open", "Oil price reaches 6 week high after Mahmoud Abbas farts", "Oil price plummets after Sharon Stone wins Oscar". Ok, so I'm having some fun. However, such causal factors are quite possibly just as reliable as arguing because the NYMEX futures price for oil delivery 2011 is US$44.50, it shall be so. Or, as MED argues, this is the best way to figure out what oil will costs in 2011.

And there instantaneously is your justification for spending billions on Transmission Gully, by the end of the decade oil will be 40 bucks a barrel, how do you know? The futures market says so - excuse me but these fuckers are clueless.

The response to my email to the MED regarding where the get their figures from follows.

Hi Steve,
The assumptions shown in that document are still the ones we plan to use in Energy Outlook. Although the oil market is changing constantly, we believe the assumptions are still consistent
with the latest developments.

For a recent comparison of what other modellers
are saying, see
http://www.eia.doe.gov/oiaf/aeo/pdf/forecast.pdf, Table 20 (their p. 108).
For the latest futures market prices, see
www.nymex.com and click on the “crude oil” link.
I hope to see you at this afternoon’s workshop:
http://www.med.govt.nz/templates/StandardSummary____15339.aspx.
Cheers, Ralph


Forget any scientific basis for the models or the assumptions, forget any actual analysis. The only qualifications you'd need to be an energy analyst for this Government is the ability to use Microsoft Explorer.

My reply to Ralph Samuelson,

Ok, so I would be correct in assuming that the modelling is purely economically (ie. post-hoc) based.

I can't make the workshop although I did see it advertised, have classes to teach unfortunately. I think there is the "oil market" and then their are studies, figures and concerns of a more scientific nature which could validly inform modelling processes, perhaps that's outside your brief? At a minimum such scientific opinion could provide mitigating factors in your projections. I think the ASPO data and models are a good place to look first. It surprises me that (given we are supposed to living the "knowledge economy") that the MED use the futures markets to project the oil price, but fail to consider an international scientific bodys modelling and data.

That is, whatever the "market" says unless significant oil is discovered to offset current depletion rates the market might be in for a surprise. Ralph my argument is that the "market" assumes that oil is an infinite resource and it's just a case of getting it out of the ground. The EIA figures suggest this, when every single respected body on the planet are suggesting that by 2030 there will be significant structural supply issues in the oil market, yet the EIA (in AEO2006) have oil at (hopefully) US$33 bl. This is laughable. Are you able to do some modelling based on current depletion rates on all the majors against discoveries?

North Sea decline percentages are much higher than anticipated (7-8%) putting the UK on an increasing net import trajectory. News last month that Mexicos Canterell, third largest field I think is in decline, news in January that Kuwait's Burgen feild (second largest to Ghawar) is in decline. Rumour that the same thing is in store of Saudi's Ghawar very soon, I guess time will tell.

Both parties (the economists and the scientists) can't be correct in the long run (but I know who I'd rely on for reliable information). That is the economic arguments have oil returning to "normal" prices after 2010. How could that possibly be the case unless more oil the size of Saudi or Mexico is discovered based on current demand growth and offset against ever increasing depletion revelations (last year was the worse year for discovery since the second world war, in fact the price paid for exploration exceeded the value of the discoveries).

I would argue that to simply run with the economic arguments ignoring the scientific could be doing the country, the Government a big dis-service. Not sure what you think about this. As I say it's probably outside your brief to look beyond market indicators.

But Ralph, you have a very responsible job. You argue that oil will return to some reasonable figure by the end of the decade and the Government will pump billions into roads based on the data you guys provide. You present data however that oil won't return to 30 bucks a barrel, that it is on an upward trajectory, well over $100 a barrel by the end of the decade and investment in a more sustainable infrastructure might ensue.

Just on the EIA data again, the current AEO2006 high price scenario, that is the worst possble scenario $ value for oil projects the cost of oil at less than the current price. In fact the average of all the current figures is $31.91 (I quickly worked it out) - that's a discrepancy of 100%. They are all out by 30 odd dollars. They have been wrong for about 3 years now, how long do they all have to be wrong before you all start looking at the modelling? If you look to the last published (on the MED website) NZ Energy Outlook by your projections we all should be enjoying US$23 (from memory) a barrel oil right now.

How can all you guys be so consistently wrong? Have you considered that you're not taking into account what the scientific community is saying that we are on a irreversible upward trajectory ?

Steve McKinlay

1 comment:

Milo said...

Hi Steve

Good post.It is when you look at bthe methodology, time series, that it is obvious they are commenting on trends and past behaviour.

The Key to this is not only future supply decline but also falling Eroi

Miles