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When oil forecasts get it wrong

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Shannon Stapleton/Reuters/File

(Read caption) A man demonstrates how an oil sample is taken at a drilling rig site outside of Williston, N.D. Even in the United States drillers have ended up focusing on a few 'sweet spots' that yield commercial quantities of oil or natural gas, Cobb writes.

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The famous Danish physicist Niels Bohr once humorously observed, "Predictions are very difficult, especially about the future." And so, as the world considers yet another rosy oil supply forecast, this time from the Paris-based International Energy Agency (IEA), it is worth reviewing the agency's record.

Back in the year 2000, the IEA divined that by 2010, liquid fuel production worldwide would reach 95.8 million barrels per day (mbpd). The actual 2010 number was 87.1 mbpd. The agency further forecast an average daily oil price of $28.25 per barrel (adjusted for inflation). The actual average daily price of oil traded on the New York Mercantile Exchange in 2010 was $79.61.

(The IEA included in its 2000 supply projections not only crude oil plus lease condensate, which is the definition of oil, but also natural gas plant liquids--only a small fraction of which can be substituted for oil--and refinery processing gain which is the result of applying energy to break oil into its components, causing the final volume to expand. The agency refers to the resulting number as "oil" supply. But, clearly this number is not really just oil supply, and this practice continues to confuse policymakers and the public.)

So, what made the IEA so sanguine about oil supply growth in the year 2000? It cited the revolution taking place in deepwater drilling technology which was expected to allow the extraction of oil supplies ample for the world's needs for decades to come. But, deepwater drilling has turned out to be more challenging than anticipated and has not produced the bounty the IEA imagined it would. This is not to say that it hasn't been a critical adjunct to world oil supplies. It's just that deepwater oil production hasn't been able both to make up for declines in production elsewhere AND grow supplies beyond that--something that has resulted in a bumpy plateau for world oil production (crude plus lease condensate) starting in 2005

Now, the IEA tells us that a "revolutionary" new technology called hydraulic fracturing--actually, a newly deployed variant called high-volume slick-water hydraulic fracturing--is going to cause what it calls a "supply shock" that spells ample and rising oil supplies. But, despite years of such drilling in the United States--which the agency says will be the center of this "shock"--world oil prices remain near all-time highs as measured by the average daily price. And, world oil production (crude plus lease condensate) has only occasionally bounced above 75 mbpd in the last seven years before retreating downward.

Perhaps the IEA means that using these new techniques to unlock so-called light tight oil deposits beyond the United States will bring about this supply shock? Nope. The report states specifically that over the forecast period through 2018, the IEA does not expect significant development in other countries of these deposits using the new type of hydraulic fracturing.

Perhaps the agency noticed the withdrawal of ExxonMobil Corp. last year from Poland. The company said it could not find commercial quantities of hydrocarbons in what had been billed as Europe's most promising shale gas deposits. Shale gas, of course, is extracted using the same fracking techniques as tight oil. And, both oil and natural gas tend to appear together in such deposits.

And then, just prior to the release of the IEA's latest forecast, Talisman Energy Inc. and Marathon Oil Company pulled out of Poland as well for similar reasons.

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The point is not that there is no exploitable tight oil or shale gas outside the United States. Rather, the quality of those resources varies far more than the industry has led the public to believe. At first, the oil and gas industry portrayed such deposits as subject to what it called the "manufacturing model." The notion was that a company could drill anywhere within known deposits and extract commercial quantities of oil and/or natural gas.

The reality is far different. Even in the United States--the center of the putative boom--drillers have ended up focusing on a few "sweet spots" that yield commercial quantities of oil or natural gas. These can represent as little at 15 percent of the total area of the formation.

The IEA seems to be unaware of certain key information that is publicly available or doesn't understand the significance of that information. And, the agency doesn't seem to remember what it said in its last forecast. Here is a sampling:

It's not unusual for government-sponsored organizations such as the IEA to be given contradictory directives, in this case, to promote adequate energy supplies and also to warn about climate change. There has been little mention of this contraction in the media because the media has focused on what it perceives as sensational news about oil and natural gas supplies in North America

Given that focus, it is troubling that neither the agency nor the media have bothered to revisit past forecasts. It turns out such forecasts fail so often that it's puzzling that the media, governments, corporations, and the public put so much faith in them. Those whose plans were based on the IEA's 2000 forecast were completely blindsided by developments just a few years later.

We would be much better served by looking at what we know right now from publicly available figures about actual trends. It's not as exciting as dramatic predictions about a future of plenty--or one miserable from want. But it's a far firmer basis for sound policy.

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