the uncertainties in oil products forecasting to the year 2000

The uncertainties in oil products forecasting to the year 2000

Gilbert Jenkins THE ASPINAL REPORT, published in 1972, made some key points which are as valid today as they were then. Following a study of 35 energy forecasts, the report concluded that “little attention is given to a correct interpretation of the forecasts. The crucial issues of supply and price are all but ignored.” In the last 15 years, the methodology of forecasting has not evolved to the posi- tion that we can deal, in a completely convincing manner, with the criticisms made in the Aspinal Report, but we can deal with the points overtly and admit to the uncertainties. In doing so, we should improve the value of current forecasts to those who will take the decisions influencing the way nations and companies will move towards the year 2000.

We should immediately admit that we can do little to forecast the impact of changing oil prices on energy consumption:

While it is definite that a significant shift in energy prices over a period of several years would cause a change in energy consumption levels, shifts which are transient have little impact on long-term trends. Thus the dip in oil- prices in the middle of 1986 caused a large increase in imports of crude oil to the United States, on the expectation that prices were at a temporary low level. Similarly, low gas prices in West Germany (they follow closely the Rot- terdam spot market prices) led to consumers stockbuilding substantially in the second quarter of 1986.

Hence, if oil prices average $10 per barrel in one year in the 199Os, we can expect a relatively high level of crude oil liftings and stock build-ups. Conversely, if the oil price is at the %50/b level and is expected to fall, we can expect destocking to occur and crude oil liftings to be at a relatively low level. What we do not expect is for price oscillations to change the underlying energy consumption trend. In the US in 1986, energy consumption was 74.093 quadrillion British thermal units, compared with 73.964 in 1985; hardly a significant increase, given the very low levels of crude oil prices pre- vailing in 1986.

We should remain aware, however, that oil companies have the ability to create aberrations in the normal pattern of oil supply and demand by the

The author is Director of Associated London Energy Consultants, Editor of ‘Energy Explora- tion and Expoitation’ and Author of the Oil Economists’ Handbook. This paper was pres- ented at the APS Coderenee entitled aMiddle East strategy to the year 2000: held in Nkosia, Cyprus, on 6 - 9 October 1 98 7.

Summer 1988 145

way they react to the market. In one respect, the next oil ‘crisis’ will be generated by the management of the oil companies and the policies of the In- ternational Energy Agency/Organization for Economic Co-operation and Development nations. The stop-go cycle, a cycle without a regular pattern, is the necessary market mechanism for restoring equilibrium to out-of-balance posi tiops between supply and demand.

We should define what we mean by ‘crisis’. The term has been used for the 1956 and 1967 Suez disruptions and for the 1973 and 1979 crude oil price hikes or ‘oil shocks’.

One of the main forecasting methods employed in the 1950s, trend extrapolation of a macro series, is now considered naive. Forecasting is now carried out on highly disaggregated series and the individual forecasts aggregated. Thus a change in the mix, if forecast, can be accommodated. The use of matrix methods to establish coherence may also be of benefit. But there have not been improvements in forecasting technology which allow us to claim that forecasts made now will prove to be more reliable than those made in the 195Os, 1960s and 1970s.

The starting point for any forecast is the present, i.e. we need a base. This may be done objectively. There are grumbles about poor timeliness of data, but good quality data for world energy supply and demand are available about six months after the year end. The problem is that, when making a forecast, judgement is heavily influenced by present values. The forecast price of oil has always tended to be the price of the day and the same has been true for many trend projections. When the economy is buoyant, relatively high forecasts of economic growth into the next decade are produced, and vice versa. Forecasting will remain highly subjective. And the use of mathematical, statistical and econometric models does not reduce the subjectivity.

Nearly a century ago, the oil industry became highly planned and,orga- nized through the Standard Oil Trust. The success of Standard Oil led to the US Anti-Trust Act of 191 1 and the break-up of the Trust.

The rise of Shell and BP in the 1920s led to the notorious Athnacarry Agreement in 1928, where collusion with Esso had been prompted by the awareness that substantial surpluses of oil and facilities were likely to exist for some time and depress trading conditions.

The forecasting and planning which provided the basis for the Standard Oil Trust and for the Achnacarry Agreement were not as formalized and as quantified as forecasting and planning is now. ‘Gut feel’ was the basis of the decision-making and it still is.

The OPEC decision-making in relation to crude oil production agree- ments has a better statistical basis than that which was available prior to

146 OPEC Review

World War 11. Excellent statistics are available from the IEA/OECD, producing perhaps as much as 90 per cent of the statistics on the supply and demand for oil that OPEC would like to know. Many other organizations, public and private, provide data related to the missing ten per cent, and so the ‘gut feel’ is concerned with a relatively small proportion of the world oil demandhupply balance.

Quantifying uncertainty without providing the decision-maker with an understanding of the analytical procedures involved will not necessarily be of help. Invariably, deriving precision data using the standard statistical methods, provi<fes estimates of precision which show that relatively wide limits should be applied to single point forecasts if there is to be a high probability that the outcome will fall within these limits. The conclusion that a decision-maker arrives at is that the probability of any particular forecast being correct, within limits which he defines as being reasonable, is very small. That conclusion is strictly correct. Further knowledge is therefore necessary, if the decision-making is to be made on a logical basis.

The oil products forecasts made now for the year 2000 are based on the best estimates of the present levels of consumption, an analysis of the economic and political forces which are likely to influence the demand for oil products through to the year 2000, and, whether overtly acknowledged or not, assumptions concerning the availability of oil. In all probability, the supply assumptions anticipate a plentiful supply of oil, but the price at which the oil will be available is uncertain. The link between the price of oil and the level of consumption is not firmly established. Furthermore, it would not necessarily improve the degree of confidence in the forecasts of demand for the year 2000, if we were certain that oil would be %25/b or %50/b in 1987 money terms.

We rely on the forecasts for the year 2000 to guide our long-term, or strategic, planning. The scenario approach, described by Peter Oppenheimer, is of considerable help in strategic planning, but has its limitations. In many ways, the scenario approach is superior to the standard world surprise-free developmental planning approach for strategic decision-making. What we are concerned with in this paper is being as realistic as we can be about the uncertainty associated with forecasts which are an extrapolation of the status quo. We have been preparing such forecasts, using essentially the same technique, for about 30 years. During this period, we have accumulated experience by comparing forecasts with outcomes and by observing how forecasts have changed as the environment has changed. It should be to our benefit if we can quantify this experience and use it as an aid when making decisions.

Summer 1988 147

There is no stipulated procedure for quantifying the uncertainty associated with oil products demand forecasts to the year 2000. The sequence we shall employ is to consider the following:

(i) Changes due to external shocks;

(ti) Changes due to a reappraisal of the economic environment and over- or underestimating total energy demand;

(iii) The reliability of the forecasts for the various energy sources within total energy demand;

(iv) The relative precision of oil product forecasts.

A. Review of forecasts We can consider the forecasts made since World War I1 in three

periods: 1945 to 1973,1973 to 1979,post-l979.

1 945- 1 973 The immediate post-World War I1 period was influenced by energy

rationing. Although various international organizations exerted a stabilizing influence, there was a severe shortage of energy in some countries.

In 1955, the Organization for European Economic Co-operation (a fore- runner of the OECD) set up the Hartley Commission to provide energy forecasts for the period through to 1975. The Robinson Commission in 1960, under the OECD, carried out a similar exercise. In the 1960s, many organizations, including the mJor oil companies, were making detailed forecasts for up to seven years ahead in support of their developmental planning. Although termed ‘confidential’, theg forecasts were invariably published.

Because the forecasts were usually based on similar economic and energy supply assumptions and because there was extensive exchange of information between forecasters, the forecasts were similar. The nearer a forecast was to the norm or average, the higher was its credibility. Forecasters were not encouraged to make forecasts which deviated significantly from the norm.

Energy price forecasting was not part of the forecasting procedure. Many assumed that the oil majors would price crude oil at $2/b for evermore and other prices would be in line.

What lessons can we earn from the forecasts of this period?

1. Bias. Underforecasting total energy and oil demand was a ‘plague’. Year after year, forecasts were produced which needed upward

148 OPEC Review

2.

3.

revision. To be making forecasts or to be associated with forecasting during that era had its problems. The story of the man who was given the gift of seeing into the future comes to mind. Although he could see into the future, he could see himself taking the decisions that would lead to the mistakes being repeated time and time again.

The underforecasting of crude oil demand was quantified by the formula: World oil demand underforecast (per cent) = 1 - 3N, where N was the number of years ahead forecast. This equation, ob- tained by a statistical (regression) analysis of data over the period 1960 to 1970, had a standard error of 0.33 and a correlation coefficient of 0.99, which indicate very consistent underforecasting.

Cause of bias Underforecasting economic growth rates was a prime cause. To present a simple picture of this underforecasting, we can take the Robinson forecasts made in 1960.

Western Europe economic activity forecasts made in 1960

196s 1975 k W C 8 S t Actual Forecast Actual

GNP ‘ 138 165 183 243 ~ndex kustrial 147 170 208 240 I1 974 = 282)

Total primary energy 130 151 172 21 1 11973 = 221) production

Thc above numbers aTc index numbers, with 1955 - 100.

Energy becoming cheaper in real terms was partly responsible for the levels of economic activity being higher than forecast.

Responsibilities for forecasting and for planning were often found vested in the same ptople. Over-ambitious planning was aided by underforecasting. It was realized that over-ambitious planning linked to an over-optimistic forecast for energy and oil demand could be a ‘disaster’.

Revision of forecasts When holding post mortems on forecasts made for five, ten and 15 years ahead, it is correct to consider the errors on a simple statistical basis. In commercial organizations, however, long- term forecasts are revised annually. Important planning and invest- ment decisions may be reviewed in the light of changing forecasts. The major cost Penalties for poor forecasting are associated with strategic decisions which can be irrevocable rather than with developmental planning.

Summer 1988 149

4. Non-oil energy forecasts. The solid fuel forecasts over-estimated solid fuel consumption. Forecasters did not anticipate cheap oil making coal uncompetitive, nor was the poor productivity of the European coal industry anticipated.

Natural gas demand forecasts did not anticipate the large finds of natpral gas made during the period; they were in accordance with the supply forecasts. They will, of course, continue to be.

Hydropower forecasts were precise. The long lead times for de- veloping new hydropower schemes, with each scheme being specified, means that a hydropower forecast should always be reliable. Many nuclear power forecasts were usually wildly optimistic, made to en- courage some governments to allocate an unreasonably large proportion of the funds available to the nuclear industry.

Forecasts of nuclear power made in 1966 for EEC-6 mtoe high factor

Forecast Actual

1970 6 4 1975 30 12

28 1980 70 1 g90 225 2000 600

- - Forecasts of nuclear power made in 1956 for UK

mtoe high factor

Forecast Actual

1965 4 4 1975 ‘40 6

It was not necessary f i r the nuclear power forecasts to be so wild. In France, the forecasts provided in a dedicated programme proved reliable.

Forecasts of nuclear power made in 1 971 for France mtoe high factor

Forecast Actual

1975 4 4 1980 13 13 1985 34 39

150 OPEC Review

5 . Oil product forecasts Although total oil demand was substantially underforecast, the underforecasting was not uniform across the barrel of products and varied from country to country. In general, low growth rates were forecast better than high growth rates. Forecasters never seemed to have the courage to forecast the continuation of the oil growth rates of nearly 20 per cent which occurred in Japan during the 1960s. On the other hand, the growth rates of the order of five per cent in the US were more precisely forecast.

Much of the error in the total oil forecasts were due to fuel oil. In 1955, less than one million tonnes (mt) of naphtha were used to make ethylene and the existence of the petrochemical sector was not acknowledged as a major sector. In 1974, over 34 mt of naphtha (a figure net of steam-cracked gasoline) was used; a quantity which was missed in the forecasts prepared to 1955. From the mid-l960s, however, naphtha for petrochemicals in Europe was overforecast.

The transportation sector has always been relatively well forecast for a few years ahead, even from the early 1950s.

Forecasts for OEEC area made in 1956 mtoe

1960 1975 Forecast Actual Forecast Actual

Mogas for road transport 28 30 50 90 Gas oil for road and 11 11 25 48

Gas oil for ocean bunkers 3 3 3 5 Fuel oil for ocean bunkers 1 3 13 27 30

rail transport

One of the fears of forecasters, that extrapolation of high growth rates would lead to substantial ovexj'orecasting, materialized in the early 1970s, even with motor gasoline forecasts.

Total Western Europe motor gasoline forecasts for three years ahead million long tons

Forecast Actual

Forecast in 1966 for 1969 Forecast in 1967 for l-970 Forecast in 1968 for 1971 Forecast in 1969 for 1972 Forecast in 1970 for 1973 Forecast in 1971 for 1974 Forecast in 1972 for 1975

69.95 71.1 1 -75.38 81.34 87.50 92.87 100.1 5

66.50 72.50 7805 83.84 89.34 86.1 7 88.70

Summer 1988 151

In the period to 1973, the errors were such that they could readily be accommodated with the flexibility present in all aspects of the industry. Beyond 1973, over-capacity was to be a problem.

From detailed examinations of the forecasts made to 1973 with respect to the rate of growth, number of years ahead, type of energy source, type of oil product, by sector and on absolute and percentage bases, it is possible to provide guidance in quantifying the errors possible with current forecasts.

1973-1979 During this time, oil and energy prices increased substantially. Fore-

casters did not respond to the prospect of higher energy prices by issuing a new set of forecasts on 1 July 1973, to replace those operative to 30 June 1973.

In early 1972, there was unease in the international oil industry concerning the validity of the long-term oil supply and demand forecasts. Deci- sions were taken at OECD Council Meetings on 26 May 1972 and on 24 October 1972, to commission a detailed report on energy supply and demand in the OECD area. This was the Schneider Report, which was published in February 1975. The report assumed prices of $3/b, $6/b and $9/b fob (1972 US$>. It concluded that, if real prices of energy remained at their end-1974 level, economic growth forecasts would be in the range of 3.5 -4.0 per cent, instead of the five per cent hitherto assumed, and that the OECD area would produce almost 80 per cent of its energy requirements by 1985. Nuclear energy was to provide ten per cent of the total requirement (7.5 per cent was achieved and oil was to be about 43 per cent, which proved exactly the case). There was no substance in the relationship between the the %3/b, $6/b and $9/b oil prices and the demand forecasts, but the Schneider Report was substantially correct in forecasting how demand would change in response to changes in governments’ policies.

During 1973, there was no unanimity within the major oil companies on how the forecasts should change in response to the likelihood of higher oil prices, nor on the level of the oil price itself. Within British Petroleum, for example, various views were held and were made public. In August 1973, the Policy Planning Group published the ‘confidential’ long-term forecast of Corporate Planning Department prepared in June 1973, showing a potential cross-over between the forecasts for world oil supply and demand. At the Financial Times Energy Conference in September 1973, the BP chairman spoke with the message “problems, yes; crisis, no”. At the same conference, BP Exploration (Warman) gave a paper on “The future availability of oil”, which did not give an over-rosy view of future oil supplies.

152 OPEC Review

In the event, the fall in world oil consumption in 1974 from the 1973 level and a further fall in 1975 made forecasters forget about the ‘crisis’. Pro- jections of world energy demand tended to be lower than those made in the early 1970s and no further ‘cross-over’ forecasts were produced.

A major forecast produced during this period was that published by the OECD in 1977. The report used a scenario approach, with low and high gmwth scenarios supplementing a reference case. The report sounded a note of caution on rising oil consumption in certain countries, but considered that OPEC production capacity could be at the 45 million level in 1985.

In some ways, a more interesting OECD publication was the IEA mono- graph “A comparison of energy projections to 1985”, published in January 1979. A total of 78 forecasts were listed and analyzed. The following are ex- tracts from the analysis.

us W. Europe ’

~ ~ t a i OECD

Oil production forecasts for 1985 mt

Minimum Mean Maximum Actual

350 45 5 571 50 1 154 223 420 192

605 767 1,007 708

Net oil import forecasts for 1085 mt

Minimum Mean Maximum Actual

us -66 576 802 202 W. Europe 140 745 1,215 37 I

Total OECD 1,019 1,720 2,666 776 *

The oil production forecasts were not good if the wide range is considered, but the mean values were in sensible agreement considering that all the forecasts were for at least six years ahead.

The oil import forecasts are, of course, sensitive to errors made in all the other forecasts, since this is essentially the balancing item. The precision of these forecasts is poor. Oil-importing govemments’ policies were more ef- fective than most forecasters considered they would be. The net result was that there was considerable pressure to be expected on the Middle East oil- producing countries from 1985, if they had planned to meet the forecast oil import levels.

Summer 1988 153

The final forecast we shall consider for the period to 1979 is that produced by BP’s Policy Review Unit in September 1979. It was entitled “Oil crisis again?”. The forecasts contained in the document were those published elsewhere, but the interpretation was different. The events in 1979 were held to demonstrate an underlying crisis in the energy industry. This publication demonjtrated that what could be part of the normal stop-go economy to one man could be a crisis to another.

Subjectivity is a large element in the interpretation of forecasts as well as in their construction.

1979-1 987 In October 1978, the price of crude oil was $13/b; by December 1979, it

was $40/b. This rapid change in the oil price led to some fanciful projections of oil and energy prices up to $lOO/b and some silly projections of the amounts of synthetic fuels which could be produced by the year 2000. By 1983, the wilder elements in the forecasts had been dropped as had large OECD governments’ subsidies for unconventional energy developments.

The characteristic of the major forecasts from 1979 to the year 2000 (such as Exxon 1979 and Chevron 1986) was world energy demand growth at the two per cent per annum level and world oil demand expanding at the one per cent per annum level. There is no reason to change this forecast. One point of view is that the forecasts may now be considered to be energy supply dominated. Sound OECD government policies could dictate that economic growth should be held in check (at the three per cent per annum level) which could be fuelled by energy expanding at two per cent per annum, which in turn would hold oil consumption down to a growth of about one per cent per annum through to the year 2000. If the level of economic activity is allowed to rise substantially and sharply in the OECD area, oil supplied from OPEC would sharply increase, wiping out ‘the surplus production capacity with a consequent rise in the oil price. Sharply fluctuating levels of economic activity and energy prices present problems for OECD and oil-producing countries.

Nevertheless, forecasts can change over time and it is interesting to compare the Chevron forecasts made in 1985 and 1986.

The two forecasts are substantially the same and reflect a flat picture as far as oil is concerned. All trends are steadily upwards, however, to at least the year 2000. Chevron’s commentary pointed out the uncertainty associated with business cycles and oil prices. Certainly it was possible for events such as 1973 and 1979 and the very low prices of mid-1986 to be repeated.

Taking non-Communist world oil demand as 46.3 mb/d in 1985, possible levels of demand in 1990 were placed at 48 mb/d and 5 1.7 mb/d. A similar

154 OPEC Review

Chevron world energy outlook to year 2000 per cent

Nh-Communist world Energy consumption GNP Oil consumption Natural gas consumption Coal Nuclear

us Energy consumption GNP Oil consumption,. Oil imports in year 2000

June 1985 forecast

2.2 p.a. c. 3.0 p.a.

1 .O p.a. 2.4 p.a. 3.2 p.a. 5.6 p.a.

1.3 p.a. c. 2.5 p.a.

0.7 p.a. 50

June1 986 forecast

2.1 p.a. c. 3.0 p.a.

1 .O p.a. 2.2 p.a. 3.0 p.a. 4.5 p.a.

1 .O p.a. c. 2.0 p.a.

0.5 p.a. 53

range was quoted in the very detailed Energy Information Administration forecast published in April 1987; this was 47.6-52.1 mb/d.

We may conclude from a review of energy forecasting that, while we can quantify some of the uncertainty associated with current forecasts and we understand more about the limitations of forecasting now than we did 40 years ago, we still lack the ability to provide forecasts which can plan our path exactly to the year 2000. We can expect forecasts to be modified year by year in the light of contemporary experience and it is likely that forecasters will over-react to contemporary events.

B. Forecasts to the year 2000 We are setting out here not to produce a better forecast than anyone

else has produced, but to improve our understanding of forecasts, in particular how they will change between now and the year 2000 and which elements will be the most susceptible to change.

Uncertainty can be considered under various categories:

- level of economic activity and the energy intensity - primary energy supply variations - energy consumption on a sector basis - oil product demand by main sector

Summer 1988 155

Economic activity/energy intensity The forecasting of total primary energy demand has been made by

taking the most suitable forecast of the rate of expansion of economic activity and deducing the primary energy demand. This was done by forecasting the PE/GNP ratio. To forecast this ratio precisely, we need to forecast the level of economic activity on a sector basis and the energy requirement, including improvements in the efficiency, in each sector.

For the OECD area, we have no more ability to produce these forecasts more precisely now than we did ten, 20 or 30 years ago. We can now guarantee a greater degree of coherence in the forecasts. We are also aware that high economic growth rates could bring problems with energy supplies. But a forecast of the GNP growth rate for the OECD area of three per cent per annum through to the year 2000 needs to be qualified. Even with the benefit of examining previous forecasts and their outcomes, giving probabilities for possible outcomes is completely subjective.

OECD area: GNP growth rates to year 2000 % per annum

GNP Probability Comments

< 1 1 to < 2.5

b 2.5 to < 3.5

3 3.5 to 5

> 5

0.0 5 Revolutions, wars 0.35 Major slump 2-3 years 0.50 Standard world

Surprise free projection 0.09 Well managed economies

worldwide 0.0 1 Unreasonably fast deple-

tion of oil and gas reserves

-

Everyone reading a list of probabilities is likely to disagree with them. However successful, planning depends on being aware of the possibility of events outside the limits of the standard forecasts.

If we accept the probabilities associated with the economic activity level forecasts, there is a 90 per cent chance that the economies of OECD countries will expand by 3.5 per cent per annum or less. Naively, we could postulate that there is a 95 per cent probability that the rate of expansion will turn out to be within the range of 1.0-3.5 per cent per m u m . But, if we accept that progress to the year 2000 will be dynamic, periods of low economic activity are likely to be followed by periods of relatively low oil prices. Although not

156 OPEC Review

all economists might subscribe to the view, in the next few decades levels of economic activity could well be dependent on the availability of energy supplies. It is therefore possible to argue the merits of a way through to the year 2000 in which OPEC has a comfortable level of supplies at a price near $20/b in 1987 dollars. This price is chosen because it is a price at which there is .sufficient incentive to develop coal, gas and nuclear resources.

In the period to the year 2000, we expect half the oil consumed to be used in the transportation sector (tables 1-3). In this sector, increased activity is expected to be counter-balanced by increased efficiency in the use of fuel. Developments of improved engines and other measures to improve fuel efficiency have acquired sufficient momentum to guarantee that increased levels of activity will at least be partly offset by technical gains.

Unanticipated shifts in the pattern of disposable income leading to more being spent on travel could increase the amount of oil being used in the transportation sector of OECD countries as beyond the 18 mb/d forecast (tables 1-3) for OECD countries. The motor industry is responsive to car buyers’ demands and many buyers want, and are able to afford, cars with high fuel consumption. This industry, however, has demonstrated that it can manufacture efficient diesel engines for small cars and has improved the efficiency of petrol engines. Governments can make ‘gas guzzlers’ and cars with relatively poor fuel economy unattractive to the consumer by changing the basis for taxation. The commercial vehicles are also becoming increasingly efficient and there is unlikely to be any reversal of this trend.

We therefore expect, given the good precision of fuel forecasts in the transportation sector over the last 20 years, and with governments now likely to curb any strong tendency for demand to increase dramatically even for a couple of years, that the outcome in the year 2000 will be in close agreement with the current forecasts.

The present level of oil demand in the transportation sector is near 17 mb/d. The probability limits quoted are askew, because there is only a small chance that further technical improvements coupled with a fairly low level of economic activity could hold the level in the year 2000 to near 17 mb/d. The error range is doubled on changing from 70 per cent probability

-

Transportation sector, total OECD region, oil demand year 2000

mb/d _ _

Best forecast for year 2000 70% probability limits 95% probability limits

18 17-20 17-23

Summer 1988 157

limits to 95 per cent limits in accordance with statistical expectations. But, if oil consumption exceeded the 20 mb/d level, it is likely that there would be increased taxation on motor fuels. OECD governments would be concerned that, if energy consumption was allowed to exceed the 23 mb/d level, it would be likely to precipitate an oil 'crisis'.

There is no significant interfuel competition for oil in the transportation sector; the data in table 1 are in accordance with this for the present and for the year 2000.

In the residentiaVcommercia1 sector, oil is subject to severe interfuel competition. Although coal consumption has been reduced to the two per cent level, both gas and electricity are likely to gain market share at the ex- pense of oil.

ResidentiaI/commerclal sector, total OECD region oil demand to year 2000

mWd

Best forecast for year 2000 70% probability limits 3.7-5.7

4.7

'95% probability limits 2.7-6.7

The 95 per cent limits are largely concerned with the uncertainties associated with natural gas supplies. Large discoveries or imports of gas would push oil demand forecasts to the lower levels. Relative afthence coupled with poor gas supplies would push oil demand to the higher levels. '

Excluded from this trend forecast is the effect of a particularly mild or cold winter in the Northern Hemisphere. This would increase the demand for space heating fuels by ten per cent.*

Energy consumption in the industrial sector is obviously critically dependent on the level of economic activity, on the index of industrial production (IP) rather than the GDP. The mix of sectors contributing to the IP as well as the energy intensity in each sector will be important. Interfuel competition adds to the uncertainty. For example, in the petrochemical sector, naphtha will not be preferred to 'wet' natural gas supplies if these become available. Consequently, the level of uncertainty is relatively high compared with the transportation sector.

*See Oil Economists'Handbook, 4th edltlon, table 198. Elseti& Applied Science, 1986.

158 OPEC Review

Industrial sector, total OECD region, oil demand to year 2000

mb/d

Best forecast for year 2000 10.2 70% probability limits 7.7- 12.7 95% probability limits 5.2- 15.2

In the electricity generating sector, where interfuel competition can also be severe, oil consumption is forecast to be at less than ten per cent in the year 2000. Oil, however, will be the balancing fuel in the year 2000 and shortfalls in the supplies of coal and gas could result in more stations using it. We should also take into account the fact that it will always be unecon- omic to convert the bottom ten per cent of the barrel into distillates; this will be produced as a low grade fuel oil or as petroleum coke. In terms of the best forecast of total OECD oil demand in the year 2000, this corresponds to about four mb/d. With allowance for fuel oil usage in ocean bunkers, this sets a lower Iimit for the combined use of heavy fuel oil in the industrial and electricity generation sectors.

I Electricity generation sector, total OECD region, oil demand to year 2000

mb/d

Best forecast for year 2000 3.5 70% probability limits 2.5-5.0 95% probability limits 2.0-7.0

When we examine the -ucertainties associated with the total oil demand, it is not plausible to simply arithmetically sum the uncertainties for the four sectors. For the OECD as a whole, it is acceptable for oil consumption to run ahead of forecast levels in one sector if the levels attained in another sector are lagging. We should therefore take a view on the uncertainty associated with total oil demand, which reflects the individual uncertainties weighted proportionately and takes into account OECD oil policy. Superimposed on these demand uncertainties will be the oil supply uncertainties. Further large discoveries of oil, thereby increasing the supply potential, could allow demand to increase above the currently forecast levels, without causing stress in the supply system. And the converse is true. The performance of the lower 48 States in the US will be critical. Even more critical will be the need to ensure an adequate level of income to the oil-exporting countries.

Summer 1988 159

Total oil demand to year 2000, total OECD region mb/d

Best forecast to year 2000 70% probability limits 33-39 95% probability limits 32-44

36

Furthermore, these levels of uncertainty, which although as stated here are associated with OECD demand levels, are in reality associated with both total world oil demand and supply levels.

The five most recent forecasts quoted in the April 1987 EIA's Inter- national Energy Outlook are given for comparison.

Oil forecasts to the year 2000, world excluding CPEs mb/d oil or oil equivalent

OPEC Energy Oil production

1986 EIA IEO Ashland Chevron Conoco DRI

129.9 125.9 "

125.0 - -

51.3 28.3 52.6 28.1 -32.7

53.0 28.0 53.1 32.1

- 265

C. Conclusion The analysis of forecasts made over the last 30 years has provided us

with guidance as to which elements of present forecasts should prove to be reliable and which have considerable associated uncertainty. The basic forecasting methodology used for energy forecasting will always be subject to all the uncertainty associated with forecasting levels of economic activity, Energy supply forecasts, however, now carry much more weight than they did in the 1960s and 19709, and the forecast levels of economic activity are in accordance with energy supply forecasts. Consequently, uncertainties associated with energy supply forecasts will impact on energy demand forecasts. Such uncertainties are relatively small within the period to 1995, but could be much larger for oil and gas in the period 1995-2000. The availability of 'new' oil and gas supplies from the Middle East during the last five years of this century will be a critical factor on the level of world economic activity and on its political stability. The range of uncertainty on oil supplies alone in the year 2000 is estimated to be 12 mb/d.

160 OPEC Review

Analysis of oil demand forecasts by sector indicates that they should be more stable and relatively precise through the 1990s than they were in the 1960s, 1970s and early 1980s. This is partly due to the increasing share of the barrel accounted for by the road transport sector. In this sector, the precision of previous forecasts has been good and there is no significant interfuel cqmpetition.

In the industrial, domestic/commercial and electricity-generating sectors, the present forecasts should prove fairly reliable to 1995. Beyond 1995, energy supply uncertainties will make an increasing impact and there is adequate scope for interfuel competition.

Forecasters have demonstrated that there is little possibility of using energy price data to improve forecasts qualitatively. Energy supplies and the energy policies of governments will remain important parameters in for- mulating energy and oil demand forecasts.

Summer 1988 161

Table 1 Total OECD energy demand by sector

quadrillion Btu

1986 1990 2000

Trantpprtation 0 il Gas Coal Electricity

Total

(Oil in mb/d

Residential/commercial 0 il Gas Coal Electricity

Total

(Oil in mb/d

Industrial Oil Gas Coal Electricity

Total

(Oil in mb/d

Electricity generation Oil Gas Coal Nuclear/hydro

Total

Total oil

(Oil in mb/d

(Total oil in mb/d

34.6 36.9 36.5 0.5 0.5 0.5 0.0 0.0 0 .o 0.7 0.8 1 .o

36.8 38.2 38.0

16.9 18.1 17.9)

9.0 9.6 9.5 12.2 12.9 14.1

1.1 1.1 0.9 32.3 * 36.2 46.8 64.6 59.8 71.2

4.4 4.7 4.7)

19.7 21.0 20.8 12.2 12.5 13.2 8.6 8.9 9.4

26.5 27.7 38.1 67.0 72.2 81.6

9.6 10.3 10.2)

5.7 5.3 7.1 5.7 5.7 8.1

23.7 26.1 34.7 24.4 29.6 35.9 69.6 66.7 86.8

2.8 2.6 3.5)

69.0 72.9 73.9

33.8 36.7 36.2)

162 OPEC Review

Table 2 Total OECD oil demand forecasts, summary

m b/d

Transportation Residential/commercial Industrial Electricity generation

Total *

'Unmunded.

1986 1990 2000

16.9 18.1 17.9 4.4 4.7 4.7 9.6 10.3 10.2 2.8 2.6 3.5

33.8 35.7 36.2

Table 3 Oil demand, total 'free world': Texaco forecast to year 2000

Pmbld

1985 1990 2000 Forecast Actual

Mogas Jet Middle distillates Residuals Others

Total

Date of forecast, December 1983.

12.7 13.0 12.4 12.7 2.4 2.6 2.7 3.2

12.8 13.3 14.4 17.7 9.3 7.6 9.5 9.5 9.7 9.7 10.5 12.3

46.9 46.2 49.6 66.4

Summer 1988 163

References

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May 1956.

1972,pp. 212-220,222.

Aspinal Report: Energy "demand" studies. An anabsh and appraisal prepred for the Committee on Interior and Insular M a i n of the House of Representatives, 92nd Congress, 2nd session, US Government Printing Oflie, September 1972.

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Schneider Report: Energy prospects to 1985, Vok I and 11, OECD, Paris, February

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164 OPEC Review

the uncertainties in oil products forecasting to the year 2000

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