Publications: Notes at the Margin

"Forecasting Is Difficult, Especially about the Future" Data, Not Anecdotes, Needed (February 15, 2021)


There are many famous quotes about economics. Our title features one of the best. Another was offered by Alan Greenspan, then chairman of the Council of Economic Advisers, to this author in 1976 in our first meeting. "Phil, remember that whenever possible, never put a number and a date on the same page."


Nobel laureate Robert Solow made a less-quotable comment when describing supply-side economics in a talk. According to Solow, Keynesian economics was macroeconomics with data but lacking a complete model, while the alternative, rational expectations, was macroeconomics with a theory but no data. In his view, supply-side economics was macroeconomics unsupported by theory or data, relying instead on anecdotes.


These pronouncements came to mind last week as the multinational oil companies announced their financial results. Firm after firm made clear their intentions to limit spending on oil and gas exploration. Shell was most specific, indicating it expected production to decline by two percent. These announcements are in line with projections of falling oil demand issued by BP and the International Energy Agency. Among other reasons, the companies’ strategies also recognize the mounting social pressure to reduce hydrocarbon use.


In response to this news, an oil-industry-sponsored organization—the Energy Policy Research Foundation, Inc. (EPRINC)—issued a report that viewed cutting capital expenditures as a mistake. The EPRINC document also challenges the projections developed by the meticulous professional economists at BP and published last September.


The EPRINC report, unlike BP's forecast, relies on anecdotes, not the data or facts, to predict the future. The EPRINC analysis posits that the transition away from oil will be prolonged. The authors base this conclusion on certain historical transformations, especially that of railroads. In doing so, however, they ignore the importance of disruptions that can slow or accelerate transitions. In fact, the EPRINC report unwittingly makes a strong case for oil use being down twenty to thirty percent by 2030.


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