Around the world, petroleum industry executives at companies from Chevron to ExxonMobil to BP to Continental Resources are praying for oil prices to "recover," and quite a number of forecasters are predicting that they will. One news story from last month put the average price predicted for 2015 at $82.50/barrel, which would be about 60% above where they are now.
The first and largest problem for forecasting is bias: people almost always start from their particular beliefs and preferences before analyzing the facts. Few in the industry, or governments that rely on oil revenues, considered the possibility that prices could drop below the $100/barrel level for any length of time.
An October story described how "Igor Sechin, head of Rosneft, Russia’s largest oil company, has been even more bullish, claiming that oil prices cannot plummet below $90 per barrel. On top of that, he believes that within the next five to seven years, oil prices might reach $150." This might be an extreme case of price bullishness, but a common one.
When I suggested, at a 2012 OPEC conference, that long-term prices were likely to be in the $50-60/barrel range, not only was it suggested (from the audience) that I was joking, or (from a panel member) that I was possibly an idiot, but no one seemed to think such a decline even worthy of consideration.
Which highlights the biggest problem in forecasting and planning: we’re all human. An unbiased assessment of possible futures is extremely hard to achieve, as almost no-one likes to hear bad news. (Some colleagues were astonished that I would go an OPEC conference with a bearish price forecast.)
Too many people prefer to hear good news–and even shoot the messenger, or bearer of bad news. The story of Mussolini, asking an ambassador which poison gas was the most deadly, being told perfume, or flattery, epitomizes this tendency perfectly. Leaders like him, who surround themselves with yes-men, are usually surprised when reality finally overwhelms the happy talk they’ve been receiving.
My personal guess for this year is for a slight recovery, Brent to $60. (At Harvard, they call it judgmental forecasting, at MIT we said guessing.) That assumes that Libyan production will be modest, perhaps 500 tb/d, and no serious disruption elsewhere (i.e., Venezuela) or major OPEC quota reduction. Demand will probably be weak, but picking up later in the year with economic recovery. Iraqi/Kurdish production will grow significantly, as will US shale oil, albeit slower than last year. But the supply/demand balance will not improve enough to bring prices back anywhere near the $100 that many think is required for the business or budgets.
Longer term, the primary determinant of oil prices will be the cost of producing shale oil, which seems likely to be below $50 a barrel. Despite all the insistence that it can’t be done from the nattering nabobs of negativism (look it up!), the industry has shown its true colors in overcoming all of the technical challenges involved in flooding the world with oil.
