Publications: Notes at the Margin

The Random Accuracy of Long-Term Forecasts (February 26, 2024)

 

Energy consultant Robert McNally spurred an international controversy on February 12 when he blasted the International Energy Agency in The Wall Street Journal for distorting and politicizing its long-term forecasts.[i] Then, on February 23, he told Bloomberg TV that oil prices would go higher.[ii] He is likely wrong on all counts because he understands neither the process of economic modeling nor the risks to market supply and demand that undermine long-term forecasts made with such models. As a veteran, well-trained, and experienced former modeler, we see a downward slide in oil prices toward 2030, a trend that will slow the energy transition.

 

McNally’s screed was more than specious because it reflects the views of someone ignorant of the art, science, mystique, and futility of building or using long-term forecasting models. As noted below, we built one of the first such models and then realized the futility of the effort. One reason we abandoned long-term modeling is that clients such as McNally do not willingly accept projections that belie their preconceived views.

 

McNally’s commentary is important, though, because it highlights Saudi Arabia’s developing dilemma. A February 20 Wall Street Journal piece highlighted the economic squeeze on Saudia Arabia’s grand expansion plans.[iii] The Saudis likely based these aspirations on the predictions made with models of that type McNally admires but seems unequipped to understand. We suspect that the Saudi plans were developed using models adjusted or “tweaked” to produce results that supported their leaders’ desires.

 

Very few policymakers or corporate executives who rely on long-run forecasts from models comprehend the models’ critical inability to anticipate major technical changes or sudden shifts in consumer behavior. All they want is confirmation of their foregone conclusions. Those who build or have built such models often watch in horror as long-term forecasts prompt catastrophically bad decisions. The Brown and Dulaney article on Saudi Arabia’s megaproject funding woes highlights a vision likely based on long-term projections that were terribly wrong.

 

The Saudi problems are not unique. Today, auto companies, oil refiners, airlines, and many other firms are suffering from forecasts developed in windowless rooms by economists very good at crunching data but not experienced in the whirlwinds that drive model forecasts wildly off course. As we discuss below, the IEA’s criticized effort to model the effects of the global warming crisis is unusual because it attempts to address the shortcomings of these models.

 

As mentioned, economic developments that have not been modeled and often are impossible to model will likely maintain downward pressure on oil prices. Hence, $40 per barrel for oil in 2030 is not out of the question.

 

To receive the full report along with future issues of Notes at the Margin, please Contact Us or send us an Information Request for subscription information.