Projecting natural gas wellhead prices, and basically anything else concerning natural gas, hasn’t been easy for the Energy Information Administration (EIA). In fact, forecasting consumption, production and prices for just about any other energy commodity has been easier.
According to a new analysis of the agency’s forecasting accuracy in its Annual Energy Outlooks (AEO), since 1982 the EIA has seen a 61% average error in its forecasts (compared to actuals) of gas wellhead prices, which compares to only a 1.9% error in forecasting total energy consumption.
“In the earlier forecasts, EIA’s technology improvement expectations proved conservative, as technological advances made natural gas less costly to produce, while in the more recent forecasts, EIA overestimated technology improvements,” the evaluation said.
The agency noted that it also underestimated the influence of environmental pressures that made natural gas an increasingly attractive fuel source, particularly for electricity generation. But prices proved much more of a headache to predict than consumption. The absolute error for predicting gas consumption from 1982 through 2002 was about 5.5%, compared to 4.4% for gas production, 15.4% for gas imports and a 61% error for gas prices.
“Historically, natural gas price instability was strongly influenced by natural gas resource estimates, which steadily rose, and by the world oil price, which was subject to its own error,” EIA said.
But predicting prices for any energy commodity has been tough, EIA said. “While energy price forecasts in the AEOs published in years 1994 to 2003 have improved, petroleum, natural gas, coal, and electricity price projections continue to be more difficult to accurately forecast than consumption, production, and net imports.”
EIA’s forecasts of average electricity prices from 1982 through 2002 have had an absolute error of 11.4%. It has seen a 36.4% error in projections of coal prices paid by electric utilities over that period. The error for EIA’s world oil price projections has been about 49.4%.
While the largest errors have been seen in EIA’s gas price projections, EIA also has shown the greatest forecasting improvement in its gas wellhead price projections. The absolute error of EIA’s forecasts from 1982 through 1997 is 76%. But by 2002, the error declined by 15 percentage points.
“Despite growing uncertainty regarding the ability of future natural gas production to meet demand, natural gas wellhead price projections have steadily improved…,” the agency said.
Another significant finding is that the agency generally has overestimated rather than underestimated energy prices, natural gas prices in particular. A variety of factors have led to this, including more rapid technological improvements than expected, the erosion of OPEC’s oil market power, excess productive capacity and market competitiveness, the agency said. But that may be changing.
“In the 1980s and 1990s, productivity and technology improvements, as well as the effects of gradual deregulation and changes in industry structure, have offset the factors known to result in higher energy prices, such as resource depletion and growing energy demand. However, the tendency to overestimate energy prices may be stabilizing or even reversing,” said EIA.
“In more recent years, better adherence by the oil-producing countries to crude oil production quotas, evidence of increasing rates of depletion in producing fields (natural gas and oil), short-term supply constraints (natural gas), or the unexpected consequences of deregulation policies (electricity), have led to generally higher prices than expected only a few years ago.”
For more details from EIA’s forecasting evaluation, go to https://www.eia.doe.gov/oiaf/analysispaper/forecast_eval.html.
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