In 2003, The Mirage, one of the premiere casino hotels in Vegas, lost an estimated $100 million and 10,000 visitors a week when a hand-raised tiger bit and grievously injured Roy Horn, half of Siegfried & Roy.
That bite — which no executive or show producer ever expected — ended the run of one of Vegas’ richest and most-important headline acts.
And they had no way to see it coming.
Every year, the Energy Information Administration (EIA) — the U.S. government’s official arbiter and prognosticator for all things energy — releases various reports that look at factors driving the oil and gas market. It throws all the data into whatever statistical numbers grinder it uses and produces projections for global energy production, consumption and prices five to 20 years out.
They assume that whatever sort of predictions they can make today will be at all statistically relevant that far in the future.
Now, let’s all agree that no one can predict tomorrow, much less a tomorrow that we won’t see for another 9,000 or so sunrises. But we’re going to assume we can predict the future of oil and gas prices that far ahead, because there’s a useful moral that comes out of it.
The EIA’s International Energy Outlook 2014, which arrived in September and which Forbes used over the weekend to mock the “Peak Oil” theory, projects that global energy production will rise to the equivalent of 119.4 million barrels a day from roughly 90 million barrels today. Much of that growth will, in theory, come from the U.S. and all the shale oil and gas we have underneath our land (and that’s assuming the estimates of probable reserves are not overstated, as experts are beginning to suspect).
That jump in production is coming even as other organizations talk about declining demand because of a weak global economy, conservation efforts, a move toward green power, yada yada yada.
All of that is helping push oil prices to a level that even OPEC ministers who want a (temporarily) low price are now saying do not reflect current supply/demand realities.
So, with that in mind, I went back in time to retrieve previous EIA estimates and see how those have fared and changed through the years. The look-back is telling for those who are today basing investment decisions on current predictions…
Stuck in Normalcy
Just to give you some context for how far theyHere’s what the EIA had to say in 1990:
- Global oil consumption by 2010 reaches, at most, 65 million barrels a day.
- Oil prices rise between 2% and 5% annually over the forecast [out to 2010].
- By the late 1990s, as production from all non-OPEC sources declines, the market share for OPEC will steadily increase … the net result will be increasingly concentrated production capacity within a small group of producers, particularly the Persian Gulf “core” producers of Saudi Arabia, Iran, Iraq, Kuwait and the United Arab Emirates.
- Much of the growth in oil consumption is projected to occur in the United States.
- OPEC production by 2010 will be as much as 61% of total global production.
- Non-OPEC production will reach, at most, 25.6 million barrels a day.
So, how well did the EIA fare in reading its crystal ball?
- Global oil consumption in 2010 was 87.8 million barrels a day, not 65 million.
- Oil prices between 1990 and 2010 grew at a rate of more 9% a year, nearly double the EIA’s highest expectation of 5%.
- The OPEC “core” saw its market share increase to 27% of daily production from 24%; not much of an “increasingly concentrated production capacity.”
- U.S. oil consumption by 2010 had grown at an average annual rate of just 0.6%. Brazil’s consumption grew by more than 3% annually. China’s grew by nearly 12%. India grew by 4%. In fact, almost every non-developed country consumed oil at a dramatically faster pace than America. And though we consume more barrels than anyone else, China’s daily consumption outstripped us by a factor of three. India nearly matched us … and Saudi Arabia wasn’t far behind.
- OPEC controlled just 42% of world production instead of the projected 61%, while non-OPEC countries controlled 58%.
- Daily, non-OPEC rose to nearly 52 million barrels, double EIA projections.
Clearly, the EIA missed the mark dramatically.
When I look at other specific years, like 1985 (amid an oil-price crash), 2000 (as the new millennium began) and 2007 (before the global financial crisis hit), it’s clear that EIA’s crystal-ball gazers generally suffer from the same biases that plague the rest of society. Their projections tend to reflect the normalcy of the moment. They largely project a continuation of the status quo … because, like all of us, even the experts don’t know to expect the tiger bites that represent the unseen risks.
Prepare for the Unexpected
EIA forecasters in the spring of 1990 had no way to project the Iraq war later that year.
They could not project the 2001 terrorist attacks that would give rise to the lies and deceits the Bush/Cheney administration would use to go back into Iraq in 2003 — lies and deceits that have effectively screwed up certain oil producing countries and given rise to an even more-virulent band of militants/terrorists that are a larger threat to global oil than Al Qaeda ever was.
They could not predict the moon-shot in commodities prices that lead to a massive oil spike in 2008, or the rise of the shale-oil production boom in the U.S., or the rise of the Arab Spring.
They had no way to envision the European debt crisis or a quasi-war in the Ukraine that has led to sanctions on a major oil nation, Russia, and pinched demand in a major consuming region, Western Europe.
All of those have had various types of impacts on oil supply and demand … and prices.
I’m not faulting the EIA. No one could have predicted that particular stream of events. But, of course, that means no one — including the EIA — can predict the exact stream of events that are coming.
Which leads us to today’s moral: We cannot know what we do not know … which means we cannot base investment decisions on long-range projections, because those projections assume a normalcy that simply does not exist.
What we can do, is look at the cards we have before us and make our best guess.
Logically, it’s easy to see that energy demand must rise because of the rising middle class in the developing world. Logically, it’s easy to see that many oil-producing nations need higher oil prices to maintain social spending priorities domestically or risk a citizen-led coup like those that toppled governments in Tunisia and Egypt. Logically, it’s easy to see that U.S. production tops out in just a few years, and that U.S. shale production is not very cheap.
When you consider these variables, it’s easy to see that oil prices ultimately go higher, because lower prices lead to unemployment in America’s oil patch, social instability in the developing-economy oil nations, and declining production in non-OPEC nations that cannot produce oil at relatively cheap prices.
How we get to that future, we have no way of knowing. But we know it’s coming.
And that’s the reason you want oil exposure in your portfolio these days.
Until next time, stay Sovereign…
by Jeff D. Opdyke, The Sovereign Investor
shortonoil on Fri, 19th Dec 2014 8:40 am
Logically, it’s easy to see that energy demand must rise because of the rising middle class in the developing world.
An herein lies an unexpressed fallacy; he is assuming that increasing oil production will satisfy that demand. But, oil production has never had a 1:1 correlation to the energy it supplies to the general economy. The reason is because the energy in a unit of petroleum is fixed, while the energy to produce it continues to increase as it is extracted. Or in other words you get wrong answers when all you do is count barrels, and don’t take into consideration that the value of a barrel of oil is changing.
Of course, that may be a little complicated for someone who compares tiger bites to oil production. Could be that the EIA is using the “hairy marsupial attack index” for their projections?
http://www.thehillsgroup.org/
lucidmind on Fri, 19th Dec 2014 8:47 am
Shoronoil, where is your line in your graph that says “The minimum price producers afford to sell” for a barrel of oil?
It’s funny you don’t take that into your model. because that seems to go up in time, no down.
But heck, before the prices of oil were starting to fall down your model predicted that prices will go above $200 a barrel. oh well, but who remembers that, right?
Dredd on Fri, 19th Dec 2014 10:40 am
“We Can’t Predict the Future of Oil and Gas Prices”
I don’t know who “we” is, but the cost of using what is still in the ground is whatever civilization is appraised at.
So, how much is your family worth?
shallowsand on Fri, 19th Dec 2014 10:52 am
The only thing we know for certain about future oil supply/demand and prices is that we don’t know and won’t know. I’d like to see someone post the news stories from the spring of this year that predicted WTI below $55 in December, for example. Bet there are not many.
shortonoil on Fri, 19th Dec 2014 11:53 am
Shoronoil, where is your line in your graph that says “The minimum price producers afford to sell” for a barrel of oil?,/i>
Think I read that five times, and still can’t figure out if that is a sentence, or if it was produced by a random number generator.
“The minimum price producers <b][can][/b] afford to sell”
Which producer? The average producer, or some jack ass five miles south of the Arctic Circle in 20,000 feet of water?
J-Gav on Fri, 19th Dec 2014 12:10 pm
Good point Dredd. But of course it’s darned if you do and durned if you don’t. Is it a choice between hard times and extinction? I’m not qualified to say but it seems clear that there are ample reasons to be concerned.
Whatever the case, as far as price predictions go, I don’t see them as the primary issue. Depletion is depletion and ability to pay is just as important as available resources for the end-users who wants to heat their houses and cook their meals.
lucidmind on Fri, 19th Dec 2014 12:44 pm
shortonoil congratulations I glad you found the missing word. Now to answer your lame question just take a ruler and draw a line from your graph straight to your head and see if it goes through $20 a barrel. LOL
Apneaman on Fri, 19th Dec 2014 1:08 pm
If Jeff D. Opdyke did just a teeny tiny bit of research on circus/performing animals, he would have used a different analogy. I wonder what else he just pulled out of his ass?
Bob Owens on Fri, 19th Dec 2014 5:10 pm
The question is simple: can we predict oil prices? The answer is equally simple: predicting oil prices is a fool’s errand. The author is absolutely correct. We can make some assumptions about the short term future, keeping in mind that predictions are at best poor. At short term I would limit it to 5 years. So here is my prediction: The laws of supply and demand rule. We have hit peak oil back in 2005. The high prices of the last 5 years have finally done enough damage to the economy that the price crash was required. It seems reasonable that prices could stay low, or lower, for the next 5 years; barring unforseen events. Keep in mind that low prices don’t mean we can afford it.
That is for another comment.
Davy on Fri, 19th Dec 2014 6:01 pm
Bob, I agree with your comment but I also believe there is a place for Shorts analysis. I don’t know if I agree with Shorts actual dollar figure for oil. I just can’t get a handle on that step to an actual market price but I do agree with the economic value rate of decline that Short’s analysis exhibits. I understand it as a demonstration of the thermodynamic/economic declining value per general depletion of oil. I can handle that value judgment. Where it gets difficult for me is forecasting a market price over time.
shortonoil on Fri, 19th Dec 2014 6:13 pm
The answer is equally simple: predicting oil prices is a fool’s errand.
We have developed a function that matches the last 53 years of oil prices with a correlation coefficient of 0.965. Mathematically that is as close to perfect as one is likely to get. The function was derived from a thermodynamic analysis of petroleum production.
There was a time, when in most people’s “opinion” flies sprang from rotting matter, bleeding should be the preferred method for treating disease. and the earth was the center of the universe. We now have another opinion – “predicting oil prices is a fool’s errand”. Fortunately, we don’t pay much attention to opinions. Historically, opinions have often been marked by a fool on an errand.
http://www.thehillsgroup.org/depletion2_008.htm
http://www.thehillsgroup.org/
Speculawyer on Fri, 19th Dec 2014 6:33 pm
Yep. You can make an educated guess and you may be right. But there are just too many factors that go into oil prices to really be able to predict them:
-Wars
-Drilling technology improvements
-new discoveries
-Transport efficiency developments (hybrids, EVs, etc.)
-Sanctions
-Civil uprisings (Libya, Syria, ISIS, etc.)
A big shift in any of those (or even small shifts that are aligned) can make for big unpredictable changes in oil price.
Bloomer on Fri, 19th Dec 2014 6:39 pm
I believe what shale oil has done is put a ceiling on oil prices as least for the near term. The Saudis will not be able to make up for the loss of production when the marginal producers shut in their loser wells in order to stop burning cash. Therefore, I believe the price of crude for the next few quarters will settle somewhere between todays price and last summers’.
However, if the lower price of oil stimulates the global economy and spurs higher then expected growth in demand. It is not out of the question for prices spike very quickly as producers as the marginal producers fire up their drill bits again and open up the spigots. The oil bears are in for a good mauling.
Apneaman on Fri, 19th Dec 2014 7:57 pm
Russian Roulette: Taxpayers Could Be on the Hook for Trillions in Oil Derivatives
http://ellenbrown.com/2014/12/19/russian-roulette-taxpayers-could-be-on-the-hook-for-trillions-in-oil-derivatives/
Makati1 on Fri, 19th Dec 2014 8:00 pm
Bloomer, the questions are:
How many “marginal producers” will be left if oil stays low for a year or so?
How many suckers will be available to jump back into the “marginal producer’s” dreams?
How will the market itself change in those years?
The answers will depend on the timeline and the swings in price/financing/economy during it, won’t they?
farmlad on Fri, 19th Dec 2014 8:17 pm
Short,
A lot of what you have to say makes a lot of sense to me, but just because the US$ has been quite steady up till now, does not convince me that it will remain that way. There is a lot about money that I don’t understand but having lived next door to Brazil during the 80’s I’ve witnessed just how unrelated money can be to real value. more than once they crossed off the last three zero’s from their money. Whether that was either one of their Cruzeiros, or their cruzados I don’t remember.
Inflation was so bad at times that workers were reported to demanded their pay at the end of each day so that they could quick go buy something before their money became next to worthless
Perk Earl on Fri, 19th Dec 2014 10:35 pm
“…oil production has never had a 1:1 correlation to the energy it supplies to the general economy. The reason is because the energy in a unit of petroleum is fixed, while the energy to produce it continues to increase as it is extracted. Or in other words you get wrong answers when all you do is count barrels, and don’t take into consideration that the value of a barrel of oil is changing.”
That’s what I keep noticing, i.e. most articles authors simply take ‘today’s’ equation regarding what sources are being tapped as a benchmark for decades to come, instead of recognizing the equation is incrementally going down as to the net energy available from a barrel of oil over time.
My impression is the human brain is designed to do inventory in the present and project it into the future. It’s not really very good at understanding incremental time factored adjustments.
It may be due to most people being rooted in their emotions rather than their intellect. 1st/2nd brain layers vs. neo-cortex.
Perk Earl on Fri, 19th Dec 2014 10:40 pm
Correction – need to add to one sentence. Maybe my 3rd layer is tiring late in the day.
…incrementally going down as the net energy available from a barrel of oil is also going down over time.
That’s a wrap folks.
Davy on Sat, 20th Dec 2014 5:48 am
Perk, your observation is a great one and has been part of my evolution of PO dynamics. Before I really munched on then feasted on Shorts analysis I was deep into all the other dynamics of PO. All those above and below ground issues that systematically set oil apart from all other economic factors and other economic resources.
I see the problem with MSM & economist as one of science and pseudo-science. Science through thermodynamics and chemistry has a different view of oil as a unit of energy then MSM and economist. If one looks at the big picture we then have the eroi with its expanded definition to include Short’s depleting net energy economic contribution to the economy. I would take Short analysis coupled with all POD issues further and mix them with Korowiczian systematic relationships.
Everything in a system is in a relationship. Disturb that relationship and we get consequences and unintended consequences. In a normal system not under stress and in a natural stable state of general equilibrium we have regular predictable cycles. Growth and decline are dynamic and stimulate beneficial change but in a long term stability. This age old dance of life has been disturbed in the Anthropocene with the introduction of the human element of knowledge, technology, energy intensity, and increasing complexity.
Oil is the most critical element of our Anthropocene cycle epoch. We are now approaching or past peak in oils effective contribution to the energy intensity part of this system through normal depletion. We must add the other critical element of a possible approaching bifurcation of the human economy complexity element. Debt and increasingly the complex production, distribution, and trade mechanisms of the economy are experiencing diminishing returns and limits of growth.
We have a twin predicament of limits of growth and diminishing returns of oil contribution of net energy value to the economy in conjunction an economic system in diminishing returns to the all-important element of growth to maintain the trade mechanisms. When one sees oil and the economy in this disturbed relationship systematically both oil and the trade mechanism mutual disturbance then become a perturbation to the overall Anthropocene epoch cycle. We must acknowledge a nearness or danger of a collapse of this cycle from its long term equilibrium experienced over the last 200 years of industrial man.
The two primary critical elements of energy intensity and increasing complexity needed to support human population and consumption growth is losing the battle with entropic decay. Energy value and economic complexity have recently plateaued from limits of growth of debt and depleting energy value of oil. We now appear to be in a bumpy descent of declining economic complexity and energy intensity.
Both variables are converging variables meaning they are both locked in codependence and mutual feedbacks. Their mutual codependent disruptions created turbulence, stress, and instability throughout the system. They ae the key links and appear to be the Liebig’s weak link variables to the Anthropocene cycle.
Current economic principals are not acknowledging this fundamental change of a descent, limits of growth, diminishing returns, and the peak energy substitution. Both debt and oil are the end of the line as far as evolution and transition of man to ever higher states of complexity and growth. The critical question for us is time. We have a time value as humans is this dangerous condition an immediate threat or a longer term threat? I see it as a 3-5-10 threat. 10-15-20 we are toast and I am dooming on that.
Bandits on Sat, 20th Dec 2014 7:08 am
We’ve got all these sages announcing low oil prices will stimulate the economy and cause the oil price to rebound. Okay how low? How high will it rebound and at what price does the rebound falter? Maybe they think it won’t falter, that it will rise and find a new high, satisfactory to consumers, producers, banks, governments and exploration.
It appears most don’t understand that constant lower prices are required. CONSTANT and reliable with a ready supply, just like the good old days. But low prices prevent high priced oil production. How can an economy grow and increase demand, if only high priced, economy destroying oil is available to increase the supply.
Market volatility seems to be the death throws of the oil economy. There is just no way for prices to settle on some conjured up low figure, they are not discovering or producing cheap oil any more, that alone should be clear to all, that we have been living above our means and on borrowed time since 2005.
If prices rise it will be because it has been artificially induced, it won’t be because of natural supply and demand market economies.
Perk Earl on Sat, 20th Dec 2014 6:45 pm
“Current economic principals are not acknowledging this fundamental change of a descent, limits of growth, diminishing returns, and the peak energy substitution.”
Great post, Davy – that incremental descent is apparently not recognizable to mainstream economists. Oh well, it’s going to happen anyway.
“It appears most don’t understand that constant lower prices are required. CONSTANT and reliable with a ready supply, just like the good old days. But low prices prevent high priced oil production. How can an economy grow and increase demand, if only high priced, economy destroying oil is available to increase the supply.”
Yeah Bandits, there’s an affordability price wall we’ve hit. You’ve nailed it right there. The conundrum people don’t want to look at.