The Value of Oil Price Projections

W O R K I N G P A P E R

The Value of Oil Price

Pro jectiom

Nebojsa Nakinnovic Leo SchrattenhoLzer

O c t o b e r

1935 IQ-85-68

l n t e r n r t i o n r l I n s t i t u t e tor -lid System, Anrlyth

NOT FOR QUOTATION WITHOUT THE PERMISSION OF THE AUTHORS

The Value of Oil Price Projections

Nebo j s a Nakicenovic Leo SchrattenhoLzer

October 1 9 3 5 TW-85-68

Working Papers a r e interim r e p o r t s on work of t h e International Institute f o r Applied Systems Analysis and have received only limited review. Views o r opinions e x p r e s s e d h e r e i n do not necessarily r e p r e s e n t those of t h e Institute o r of i t s National Member Organizations.

INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg, Austria

-ABSTRACT

AND

S U B X A X Y

The c e n t r a l theme of this p a p e r is t h e development of t h e international p r i c e of c r u d e oil. A s h o r t overview of oil p r i c e h i s 6 r y is followed by a discussion of t h e f a c t o r s t h a t were responsible f o r previous, sometimes e r r a t i c , changes. W e con- clude t h a t t h e s e f a c t o r s are likely t o maintain t h e i r influence in t h e f u t u r e , thus giving t h e f o r e c a s t s of oil p r i c e s a high uncertainty. This uncertainty i s reflected in s e v e r a l r e p o r t s containing oil p r i c e proje[ctions. W e a r g u e , t h e r e f o r e , t h a t a question soieiy about f u t u r e oil p r i c e s must remain unanswered. Tnis does not r e n d e r t h e e f f o r t s t o examine t h e f u t u r e futile; i t simpiy means that t h e question shouid be r e p h r a s e d . W e o f f e r one possible problem formulation t h a t explicitly accounts f o r t h e high uncertainty. This formulation r e q u i r e s t h a t specific policy probiems and options f o r solving them b e specified before oil p r i c e s are projected

-

a condition t h a t does not always hold o r , at least, t h a t does not s e e m t o b e regarded as important enougn t o b e described in many r e p o r t s on oil p r i c e studies.

PREFACE

The internationai p r i c e of c r u d e oil is one of t h e most visibie and most impor- t a n t variables of any e n e r g y system. Nonetheless, i t s f u t u r e deveiopment i s highly uncertain. Many e n e r g y s t u d i e s explicitly r e f l e c t t h i s uncertainty, but even t h o s e t h a t d o not impiicit!~ reflect i t through comparison with o t h e r studies. However, i t i s a n open question whether t h e t h e o r e t i c a i i n c r e a s e of information concomitant with t h e i n c r e a s e in t h e number of oil p r i c e projections h a s actually improved t h e p r a c t i c a l knowledge of t h e consumers of t h e r e p o r t s . W e a r g u e t h a t "inconclusive"

is a more iikely initiai r e a c t i o n and have t h e r e f o r e attempted to e x t r a c t t h e full information content from a collection of oil p r i c e projections. I t t u r n s out t h a t t h i s information content could b e improved if t h e a u t h o r s of e n e r g y r e p o r t s made p a r t i c - u l a r e f f o r t s in this direction.

Page

1

1

INTRODUCTION

2 2 ENERGY PRICES. CONSUMPTION ANJl ECONOMIC GROWTH 10 3 A COLLECTION OF OIL PRTCE PROJECTIONS

13 4 A SURVEY OF ENERGY STUDIES 17 5 DISCUSSION

19 6 DECISION MAKING UNDER UNCERTAINTY 45

APPENDIX

The i n t e r n a t i o n a l p r i c e of c r u d e oil i s o n e of t h e most visible and most impor- t a n t v a r i a b l e s of a n y e n e r g y system. E n e r g y planning at many l e v e l s i s c r u c i a l l y dependent on t h e e x p e c t e d f u t u r e development of c r u d e oil p r i c e s . The importance of oil p r i c e is f u r t h e r amplified by t h e widespread p r a c t i c e of linking t h e p r i c e s of o t h e r f u e l s t o it. I t i s t h e r e f o r e not s u r p r i s i n g t h a t most e n e r g y s t u d i e s include a p r o j e c t i o n of t h e i n t e r n a t i o n a l p r i c e of oil. However, t h e information gained by studying a single r e p o r t i s o f t e n diminished when u n r e s o l v a b l e d i f f e r e n c e s are r e v e a i e d by comparing i t with o t h e r studies.

In t h i s p a p e r w e r e p o r t a s u r v e y of a number of e n e r g y s t u d i e s t h a t contain p r o j e c t i o n s of t h e f u t u r e oii p r i c e . A f t e r a n i n t r o d u c t o r y overview of t h e h i s t o r y of oil 9 r i c e s w e d e s c r i b e t h e r e s u i t s of a n i n t e r n a t i o n a l poll on long-term e n e r g y pro- jections. The r e s p o n s e s t o t h i s poll inciuaed 61 d i f f e r e n t p r o j e c ~ i o n s of t h e c r u d e oil p r i c e f o r t h e y e a r 2000. W e t h e n examine in more d e t a i l some s t u d i e s t h a t a r e r e p r e s e n t a t i v e f o r t h e r a n g e of a l l p r o j e c t i o n s . Finally, we t r y t o a r a w some con- clusions t h a t may b e helpful in assessing t h e significance of a wide r a n g e of dif- f e r e n t crude-oil p r i c e p r o j e c t i o n s .

P a r t of t h i s work w a s done u n d e r a c o n t r a c t with Planning Consultants Oy ERG Ltd., Helsinki, Finiana.

2

ENERGY P X C Z S .

C C N S m m C N

A N D ECDWOMIC

GROWTH

The causal relationship between oil p r i c e s and economic growth is two-way. Oil p r i c e s a f f e c t GDP growth and GDP growth determines e n e r g y demand, which in t u r n influences e n e r g y p r i c e s . One of t h e links between t h e two i s e n e r g y efficiency, e x p r e s s e d as t h e amount of energy consumed p e r unit of GDP. In this section w e give a n overview of t h e h i s t o r y of e n e r g y efficiency and discuss t h e interpiay between GDP growth and e n e r g y p r i c e s t h a t h a s led t o t h e p r e s e n t situation.

During t h e l a s t two c e n t u r i e s o v e r a l l energy-use efficiencies h a v e continuously Uyr/S

Figure 1. Gnergy Efficiency in t h e US.

improved. F o r example, Figure 1 snows t h a t t h e amount of e n e r g y used t o g e n e r a t e a doilar of value added in real terms in t h e US d e c r e a s e d on a v e r a g e a b o u t 1% p e r y e a r during t h e l a s t 100 y e a r s (including t h e two a b r u p t oil p r i c e i n c r e a s e s in 1973 and 1979). Tnese improvements were partially d u e t o more efficient ways of e n e r g y conversion and use, t o new conservation measures (e.g., b e t t e r housing insulation), and a i s o t o a continuous shift from oia t o new energy sources. The latter point is i l l u s t r a t e d by Figure 2, which snows t h e substitution of primary e n e r g y s o u r c e s ir.

t h e U S f o r t h e same time period.

fraction ( f )

Fi,-e

2. P r i m a r y Energy Substitution in t h e U.S.

Thus, although t h e r e is no doubt t h a t in t h e long r u n oil will slowly b e r e p l a c e d 5 y a l t e r n a t i v e e n e r g y forms and t h a t t h e high oil y r i c e s of t h e iast d e c a d e h a v e r e d u c e d oil demand, i t i s s t i l i a n open question as t o what s h a r e of t h i s reduction is r e v e r s i b l e . In fact. some of t h e l a r g e s t e n e r g y "savings:' ex7erienced. during r e c e n t y e a r s h a v e been d u e t o t n e low levei of activity of t h e more energy-intensive indus- t r i e s . such as steei azd. shj3buiiding. Some of tine c h a n g e s in e n e r g y consumption and economic p a t t e r n s will h a v e a permanent s t r u c t u r a l c h a r a c t e r , o u t o t h e r s will b e reversed. when t h e world economy r e c o v e r s . An important p u r p o s e of e n e r g y p r o j e c t i o n s will b e t o d i f f e r e n t i a t e which changes are which. Figure 3 i l l u s t r a t e s t h a t even t h e s n o r t e r term oil consumption variations in t h e OECD c o u n t r i e s during t h e l a s t d e c a d e h a v e been "synchronized" both with t h e cyclical fluctuations of r e a l

Oil

Consumption

-9.0 ^a-

F i g ? ~ r e 3. O i l Prices, Consumption, and. GDP Growth.

GDP and t h e oil p r i c e changes. I t a p p e a r s t h a t t h e two major oil p r i c e i n c r e a s e s , t h e so-called oil s h o c k s t h a t o c c u r r e d in 1973-74 and 1979-80, entailed, with a lag of a b o u t o n e y e a r , profound fluctuations in both GDP and oil consumption in t h e OECD countries. The f i r s t oil p r i c e i n c r e a s e had caused c o n s i d e r a b l e disruption and, b e f o r e a n a d e q u a t e p e r i o d for complete adjustment h a s e l a p s e d , t h e second i n c r e a s e gave anot'ner significant impact. But, more importantly, i t established e x p e c t a t i o n s of rapidiy rising p r i c e s in t h e f u t u r e . Consequently, m o s t oil p r i c e p r o j e c t i o n s of t h e l a s t d e c a d e envisaged high oil p r i c e levels in t h e f u t u r e .

3 e s e r e c e n t deveiopments are in s h a r p c o n t r a s t t o t h e situation p r i o r t o 1973 when t h e muitinational oil companies r e g u l a t e d oil p r i c e s and supply u n d e r t h e p r e s - s u r e s of r i g o r o u s competition and t h e regime of incrementai production costs.

S i n c e t h e production costs were l o w and e v e n d e c r e a s i n g , especially in t h e P e r s i a n G-df a r e a , t h e oil p r i c e s aiso d e c r e a s e d in c o n s t a n t value terms. Figure 4 shows t h a t oil p r i c e s d e c r e a s e d continuously from t h e end of World War I1 to t h e e a r l y 1970s, when t h e d e c a d e of m a r k e t dominance by OPEC began. Despite t h e sometimes d i s r u p t e d s p i r i t of unity among member c o u n t r i e s , OPEC managed to r a i s e p r i c e s and subsequently, t n r o u g h supply regulation. k e p t them from falling to lower levels.

During t h i s d e c a d e of OPEC dominance t h e r e w a s a simultaneous c h a n g e in t h e organization of tine international oil market. The m a r k e t became more open and t r a n s p a r e n t in t h e s e n s e t h a t more t r a n s a c t i o n s passed through t r a d e r s and s p o t m a r k e t s t h a t were not contained within t h e m a j o r oil companies. These majors lost much of t h e i r c o n t r o l of t h e international m a r k e t , but a l s o lost w a s t h e i r stabilizing influence on p r i c e s t h r o u g h timeiy supply r e s p o n s e s t o demand changes. A t t h e same time, tine hign oii p r i c e leveis e s t a b i i s h e a by OPEC caused a r a p i d i n c r e a s e in oil proauction in non-OPZC c o u n t r i e s (e.g., Mexico), which f u r t h e r i n c r e a s e d t h e

- -

^{Defleated Defleated by by} Manufacturing Until Value (MUV) Index OECD GDP Deflator

Figu,?re 4.

History of Oil P r i c e s

flexibility of t h e internationai oil t r a d e . Without t h e dominating r o l e of t h e majors t o c o n t r o l supply and p r i c e s in r e s p o n s e t o cnanging demand, t h e world oil m a r k e t became more similar t o o t h e r international commodity m a r k e t s , such as coffee, s u g a r , and wheat, in which inventory changes a i s o have a s t r o n g e f f e c t on prices. In f a c t , inventory accumulation as a r e s u l t of t h e f e a r of rapicily rising p r i c e s ( o r acquisition of s t r a t e g i c r e s e r v e s , as i t is sometimes called) of oil a p p e a r s t o have played a v e r y important r o l e in c r e a t i n g a n e x c e s s of demand f o r oil, t h u s leading t o p r i c e increases. (An impressive example of self-fulfilling expectations.) This inven- t o r y accumulation, p e r h a p s inadvertently, i s a n additional r e a s o n f o r t h e s o f t e r oil m a r k e t s t h a t have developed during t h e l a s t f o u r y e a r s , weakening OPEC dominance.

After p a r t s of t h e s e inventories were unloaded during 1981-82, t h e oil p r i c e s s t a r t e d t o fall in 1983 f o r t h e f i r s t time in t e n y e a r s . In r e s p o n s e t o t h e sudden

t h r e a t of a n impending oil glut, OPEC h a s now introduced formal production quotas f o r i t s members in a n attempt t o limit t h e supply. These quotas a r e not a n e a s y con- s t r a i n t f o r a l l oil-producing countries. The financial difficulties of many of them, notably Nigeria and Venezuela (and Mexico, which a p p a r e n t l y a t t e m p t s t o "mirror"

OPEC s t r a t e g i e s t o some e x t e n t ) c a n probably b e resolved only by i n c r e a s e d oil production, s i n c e t h e s e c o u n t r i e s must r e a l i z e c e r t a i n minimal r e v e n u e s because, f o r them, oil e x p o r t s are t h e only possible way t o balance t h e i r t r a d e deficits.

Thus, p r e s s u r e s a p p e a r t o b e s t r o n g on t h e supply s i d e toward increasing produc- tion levels and, t h e r e f o r e , a l s o d e c r e a s i n g p r i c e s due t o lower oil demand.

W e h a v e a l r e a d y mentioned that a number of long-term :!structural" changes could a c c o u n t f o r lower oil demand. Tnus, p a r t of t h e demand reduction could b e due t o t h e substitution of c r u d e oil by o t h e r e n e r g y s o u r c e s and a n o t h e r p z r t t o genuine e n e r g y conservation and b e t t e r efficiences of e n e r g y end-use. A p a r t of t h e reductions in t h e t o t a l demand f o r e n e r g y , on t h e o t h e r hand, i s usually a t t r i - buted t o t h e o v e r a l l fall in consumption, due t o t n e worldwide economic recession.

T h e r e f o r e , a number of a l t e r n a t i v e mechanisms, ranging from e n e r g y substitution and conservation t o p r i c e and income e f f e c t s , o r some combination of them, could account f o r t h e r e c e n t demand reductions f o r e n e r g y in g e n e r a l and c r u d e oil in

p a r t i c u l a r .

During t h e l a s t two y e a r s t h e adequate supply of oil and t h e r e d u c e d demand have contributed t o f a i r l y s t e a d y e n e r g y and oil p r i c e s , b u t t h i s stability may b e deceptive. F o r instance, a f u r t h e r escalation of hostilities between I r a n and I r a q could eventually r e s u l t in a n oil supply disruption of unprecedented scale. The p r i c e of oil couid t h e n s u r g e , followed by t h e p r i c e s of o t h e r e n e r g y s o u r c e s . In t h e a b s e n c e of a s e r i o u s disruption, however, a continued weakness of oil and e n e r g y

p r i c e s is conceivable. In t h i s event, OPEC c o u n t r i e s would have t o a b s o r b most of t h e decline in demand by reducing production in a n e f f o r t t o stabilize p r i c e s . On t h e o t h e r hand, a n i n c r e a s e in oil demand would c a u s e h i g h e r OPEC oil production and p r i c e i n c r e a s e s . in t h i s s e n s e , OPEC r e p r e s e n t s t h e world's residual s o u r c e of e n e r g y , filiing t h e deficit o r absorbing t h e s u r p l u s in e n e r g y supply. Thus, even relativeiy smaii i n c r e a s e s in globai e n e r g y demand lead t o ove,rproportional i n c r e a s e s in OPEC oil demand and, presumably, upward p r e s s u r e s on oil p r i c e s . The r e v e r s e of t h i s phenomenon i s demonstrated by r e c e n t events, when a 1% decline in global e n e r g y consumption (between 1979 and 1982) t r a n s l a t e d into a 40% decline in OPEC oil production (see, e. g., [I]).

Since OPEC a p p a r e n t l y r e p r e s e n t s t h e residual s u p p l i e r of e n e r g y at t h e world level, t h e p r i c e of OPEC oil provides a r e f e r e n c e p r i c e not only f o r o t h e r crude-oil t r a n s a c t i o n s , but a l s o f o r o t h e r e n e r g y s o u r c e s . Crude oil r e p r e s e n t s a b o u t 80% of internationally t r a d e d e n e r g y and, as such, i t s p r i c e s e r v e s as a m a r k e r f o r all o t h e r e n e r g y s o u r c e s t h a t are t r a d e d internationally ( a f t e r quality differentiation i s accounted f o r ) . Owing t o t h e c r i t i c a l r o l e s of c r u d e oil in t h e global e n e r g y sys- tem, as both t h e main and t h e residual e n e r g y s o u r c e and t h e p r i c e l e a d e r , f u t u r e oil-price p r o s p e c t s r e p r e s e n t o n e of t h e most 'important indicators of t h e develop- ment of t h e whole e n e r g y system.

I t i s t h e r e f o r e not s u r p r i s i n g t h a t most e n e r g y studies and projections d e a l with f u t u r e oil p r i c e s . Unfortunately, c r u d e oil and e n e r g y p r i c e s are t r e a t e d (and r e p o r t e d ) quite differently in t h e various studies. The scaie r a n g e s from i n f e r e n c e s t h a t assumptions on e n e r g y p r i c e s have o c c u r r e d somewhere in t h e analysis t o explicit p r e s e n t a t i o n s of p r o j e c t e d p r i c e t r a j e c t o r i e s . Because of t h e importance of anticipating f u t u r e p r i c e developments in prudent planning and decision making

and because c r u d e oil p r i c e s will be instrumental as a n indicator of o t h e r changes throughout t h e e n e r g y system ana t h e whole economy, t h e objective of this p a p e r is t o assess and compare p r i c e projections published in t h e l i t e r a t u r e . In analyzing t h e s e projections and t h e scenarios on which they are based, i t is nevertheless v e r y important t o be always aware of t h e fact t h a t t h e uncertain p r o s p e c t s of actual f u t u r e events cannot, even in principle, b e overcome o r predicted by a comparison of different projections. R a t h e r , projections c a n help t o outline t h e limits and probable r a n g e s of f u t u r e developments. Furthermore, a comparison of different projections and t h e i r underlying assumptions o f f e r s t h e possibility of identifying t h e importance of various f a c t o r s and developments connected with oil p r i c e changes in t h e s e projections. In o t h e r words, t h e s t r u c t u r e and t h e n a t u r e of t h e assumptions a n d / o r t h e model used in projecting oil p r i c e s is at least as important as t h e actual values of t h e projected t r a j e c t o r y . In this review of t h e l i t e r a t u r e w e analyze both t h e methodology and assumptions, as w e i l as t h e resultant p r i c e t r a j e c t o r i e s .

3

A COLLECTION OF OIL PRICE PROJECTIONS

A l a r g e collection of long-term oil p r i c e p r o j e c t i o n s is o n e of t h e r e s u l t s of t h e International Energy Workshop (IEW), a n institution t h a t r e g u l a r l y polls p r o j e c t i o n s of c r u d e oil p r i c e s , economic growth, primary e n e r g y consumption and production,

280 r INDEX NUMBER (1980 = 100)

. a

m a

a

60

160

120 MEDIAN _- -

oooo

- ^cn 40 ³⁴

80 t PROJECTIONS

1990 2000

YEAR

Figure 5. P r o j e c t i o n s of t h e Internationai P r i c e of C n a e Oil.

and e n e r g y t r a d e [2]. Figure 5 is a summary of t h e 1983 poll r e s u l t s o n t h e interna- tional p r i c e of c r u d e oil. The f i g u r e i s in t h e form of a time s e r i e s of histograms of

projections with t h e medians marked s e p a r a t e l y . The units chosen in t h e original presentation of t h e poi1 r e s u l t s are index numbers with t h e basis 1980

=

100. E e r e w e have added a s c a l e with absolute numbers using a n oil p r i c e of f34/bbl f o r 1980.

The median of t h e 6 1 independent* poll r e s p o n s e s f o r t h e y e a r 2000 i s 148, corresponding t o a n annual a v e r a g e p r i c e i n c r e a s e (between 1980 and 2000) of almost e x a c t l y 2%. A more a p p r o p r i a t e s t a t i s t i c i s t o calculate t h e a v e r a g e a n d t h e v a r i a n c e

(5

and s ) of t h e logarithms of t h e projections (as if t h e y were d i s t r i b u t e d log normally). Doing t h i s and retransforming t h e r e s u l t s yields 1 3 9 as a n a v e r a g e and t h e i n t e r v a l [106,184] f o r

[z -

s-;z'

+

s ] .

The e x t r e m e projections f o r t h e y e a r 2000 are 6 2 and 240 (on t h e r e l a t i v e s c a l e ) , corresponding t o absolute values of $23.6 a n d $91.2/bbl, respectively, t h u s covering a r a n g e of almost 1:4. To understand t h i s wide r a n g e i t i s n a t u r a l t o look f o r a n explanation of t h e s e e x t r e m e projections. One of t h e projections f o r t h e y e a r 2000 t h a t i s n e a r t h e low end i s t h e High Demand Case by t h e International Energy Agency (IEA). I t r e p r e s e n t s a "what if?" case in which t h e demand f o r oil a t a given (low) p r i c e i s calculated. Since t h e r e s u i t a n t oil demand in t h i s s c e n a r i o e x c e e d s t h e p r o j e c t e d supplies, t h e oil p r i c e in this IEA s c e n a r i o i s more a c c u r a t e l y a s c e n a r i o p a r a m e t e r r a t h e r than a projection. The projection of 240 (correspond- ing t o a n annual a v e r a g e growth rate of 4.4% s t a r t i n g from 1980), on t h e o t h e r s i d e of t h e spectrum, i s t h e outcome of a disruption s c e n a r i o t h a t d o e s not contain a n inconsistency comparable t o t h e one in t h e IEA s c e n a r i o , but which c o n s i d e r s a d i s r - uption of e n e r g y imports, a n assumption not made by most of t h e o t h e r respondents.

*

W e use t h e term "independent" h e r e quite loosely. A l l i t means at t h i s point i s t h a t those r e s p o n s e s t h a t belonged t o d i f f e r e n t geographical regions but t o t h e s a m e o v e r a l l s c e n a r i o w e r e counted only once.

S t a r t i n g thus from t h e extremes may r a i s e t h e intuitive expectation t h a t this p r o c e s s should converge t o single out t h e median ( o r any o t h e r unambiguous) value as "the best" projection. However, this comfortabie and easy p i c t u r e is grossly dis- t u r b e d by t h e i n h e r e n t uncertainty t h a t surrounds real-worid development. The median of t h e projections i s only a description of t h e c u r r e n t thinking of energy e x p e r t s and i t s i n t e r p r e t a t i o n as t h e most likely f u t u r e vaiue would r e q u i r e some nontrivial assumptions. The purpose of t h e

IEW

should not b e misinterpreted as t o mean t h e resolution of uncertainty. R a t h e r , t h e

IEW

discussions are meant t o make differences of opinion explicit, to heip make s c e n a r i o s and assumptions consistent, and t o widen points of view through challenging them with different perspectives.

This can be called quantification ( r a t h e r than elimination) of uncertainty.

4 A SURYE;Y

OF

ENERGY STUDIES

Whet'ner one wants t o e x t r a c t t h e information content of a set of oil p r i c e pro- jections by formal s t a t i s t i c a l methods o r by d i r e c t discussion, t h e question of t h e independence of t h e individual projections a r i s e s . And although t h e r e i s no p r a c t i - c a i , unambiguous definition of independence, w e s e t out h e r e t o evaluate t h e indepenaence of some oil p r i c e projections in auaiitative terms. To d o t h i s w e could only work with those p r o j e c t i o n s t h a t were accompanied by a written r e p o r t provid- ing c o n t e x t and background. This w a s more r e s t r i c t i n g t h a n one might h a v e e x p e c t e d and s o w e use a somewhat d i f f e r e n t sample of projections to t h e o n e d e s c r i b e d in t h e previous section. The new sample i s n e i t h e r a subset n o r a s u p e r s e t of t h e projec- tions shown above, but t h e r e i s a significant overlap. In any c a s e , w e believe t h a t n e i t h e r t h e conclusions drawn in t h i s section n o r t h e ciiscussion below i s influenced by using two d i f f e r e n t samples of oil p r i c e projections.

S h o r t c h a r a c t e r i z a t i o n s of t h e r e p o r t s w e used are included in t h e Appendix, in which t h e a b b r e v i a t i o n s used in Table 4.1 are defined. H e r e w e summarize t h e r e p o r t s ' oil p r i c e p r o j e c t i o n s f o r t h e y e a r 2000 and judgmentally evaluate t h e i r d e g r e e of independence, dividing them into t h r e e c a t e g o r i e s , i. e . , N ( f o r "no"), M ( f o r "maybe"), and Y ( f o r "yes"). .We classified as "N" t h o s e projections in which i t i s explicitly s t a t e d t h a t they o r i e n t e d t h e i r projection toward o t h e r s ; as

"Mu

those wnere t h e projection i s c h a r a c t e r i z e d e i t h e r as " e x p e r t opinion" o r as a n assump- tion t h a t i s not aiscussed f u r t h e r ; and as "Y" where t h e projection w a s r e p o r t e d as t h e result of t h e application of formal tools. Obviously, w e d o not think t h a t t h e s e are p a r t i c u l a r l y s t r i c t c r i t e r i a f o r t h e determination of independence, b u t w e think t h a t t h e y s e r v e as an a d e q u a t e working tool. If t h e r e i s a systematic bias in t h e s e evaluations t h e n i t i s a s h i f t t o t h e "independentJ' side. In p a r t i c u l a r , w e d o not

think t h a t Odell's arguments [3] concerning t h e " l a t t e r day pessimism" (implying a dependence of ail nigh oil p r i c e projections on a joint s o u r c e ) c a n b e dismissed.

!

N a m e (IEW Name) Method Projection Independence ^I

CEC Chase

Chevron (CAL) Conoco (CON) DOE (DOE) Eden (CERG) EIU

EMF

ETA-M (EM) GRI (GRI) IEA (IEA) IET Deam

Odell (CIES) World Bank (WBK)

Assump tion I t e r a t i o n Exp. Opinion Exp. Opinion Exp. Opinion Trend Extrapol.

Qualitative Analytical Assumption Assump tion Assumption Assumption D i r e c t D i r e c t Take-Over

Table 4.1. Oil p r i c e projections f o r t h e y e a r 2000 (in 1980 US $) and a judgmental evaluation of t h e i r independence.

Notes f o r Table 4.1:

a Authors' quantification of a qualitative projection.

R e f e r e n c e case only.

C Estimate f o r 1995.

-

Where oniy r e l a t i v e i n c r e a s e s were given, an 1980 oil p r i c e of $34/bbl w a s used as a basis f o r t h e calculation of t h e projected number.

-

F o r a definition of t h e a b b r e v i a t i o n s of t h e studies see t h e Appendix.

-

IEW names are given in p a r e n t h e s e s where applicable.

-

The e n t r i e s in t h e column 'lndependence" gives o u r rough judgmental evalua- tion of t h e independence of t h e projections. Y stands f o r yes, N f o r no, and M f o r maybe.

i t i s interesting t o n o t e t h a t t h e r a n g e of f u t u r e oil p r i c e s c o v e r e d by t h e f o u r projections t h a t were c h a r a c t e r i z e d as "independent" r e a c h e s from less than half t h e c u r r e n t p r i c e level (Odell) t o well beyond twice t h e c u r r e n t level (EMF) t h u s marking t h e e x t r e m e points of t h e o v e r a l l r a n g e .

The judgmental c h a r a c t e r of t h i s evaluation and t h e more detailed discussion of t h e r e s u l t s beiow notwithstanding, w e a r g u e t h a t t h e s p a r s e n e s s of t h e 'YY"s is a n important r e s u l t b e c a u s e , e v e n if o n e were willing to count all "M"s as independent ( r a t h e r t h a n t h e o t h e r way round), i t i s worth noting t h a t t h e a u t h o r s d o not make g r e a t e f f o r t s to discuss t h e d e g r e e of independence of t h e i r oil p r i c e projections.

*

R e a a e r s may formulate t h e i r own judgment, b u t w e a r g u e t h a t i t would b e optimistic to assume t h a t t h e f r a c t i o n of independent p r o j e c t i o n s i s h i g h e r t h a n one-half a n d t h e possibility of i t being as small as one-fourth is quite definite.

I t is c l e a r t h a t independence cannot b e unambiguously measured in o u r s u b j e c t matter, b u t at l e a s t our p r o x i e s are observable. Unfortunately, t h e s e p r o x i e s d o not s e p a r a t e t h e cases c l e a r l y . Take, e. g., t h e distinction between "result of t h e application of formal tools" a n d "assumption". The only r e a l d i f f e r e n c e between t h e two is t h a t in t h e f o r m e r case t h e assumptions h a v e a n i n d i r e c t e f f e c t on t h e r e s u l t s w h e r e a s t h e y l e a d d i r e c t l y to i t in t h e latter case. This i s i l l u s t r a t e d by t h e World.

Oil r e p o r t of t h e E n e r g y Modeling Forum. T h e r e t h e p r o j e c t e d oil p r i c e s are in m o s t cases t h e r e s u l t of t h e application of p r i c e r e a c t i o n functions (which u s e capa- city utilization at time

t

a s o n e of t h e determinants of p e r c e n t c h a n g e from

t

to

t + l )

which, in t u r n , contain assumptions a b o u t t h e s p e e d of adjustment.

The p r o j e c t i o n s labeled as " e x p e r t opinion" were p u t i n t o t h e middle c a t e g o r y mainly b e c a u s e t h e i r origin i s usually so vague t h a t t h e y could b e anything from compietely dependent to completely indepenaent. Their common f e a t u r e i s t h a t they d o not lend themselves easily to comparative analyses, as t h e methodologies used to d e r i v e t h e s e p r o j e c t i o n s and t h e assumptions adopted are not d e s c r i b e d in enough d e t a i l to permit a n approximate r e p e t i t i o n of t h e p r o c e s s t h a t led to t h e r e s u l t s ,

*

9 e US Anti-Trust Law p r e s c r i b e s t h a t t h e U S oil companiest estimates b e indepen- d e n t of e a c h o t h e r .

t h e r e b y identifying which causes led t o which effects.

Although t h e World Oil study is r e p r e s e n t e d as only one e n t r y in o u r table t h e underlying r e s u l t s are numerous. The EMF e n t r y in Table 4.1 summarizes more than 100 r e s u l t s of different model runs. Quite obviousiy, this reflects s e v e r a l a r e a s of uncertainty, both with r e s p e c t t o parameters t h a t are thought t o influence t h e f u t u r e oil p r i c e and t o t h e magnitude of t h e effects caused by t h e s e parameters.

The study clearly distinguishes between t h e two and 'quantifies them separately. The total r a n g e of all results, expressed in 1980 U S dollars (the original t a b l e uses 1981 dollars), i s 30-375. Compared with t h e IEW r e s u l t s illustrated in Figure 3.1 t h e EMF study shows some 20 values h i g h e r than _the IEW highest, but none t h a t is lower than t h e lowest IEW projection. In p a r t i c u l a r , not even t h e "optimistic" EMF scenario shows a vaiue comparable, say, t o Odell's projections. In this connection i t is interesting to note t h a t t h e r a n g e of EMF'S "optimistic" oil p r i c e s falls completely within t h e r a n g e of t h e "reference" cases. (However, t h e r e s u l t s of those two models t h a t yielded t h e lowest r e f e r e n c e projections are not r e p o r t e d in t h e sum- m a r y of t h e optimistic scenario.) A possible expianation f o r this r a t h e r high bound f o r optimism could lie in t h e parameters f o r t h e p r i c e reaction functions t h a t set limits to downwarci adjustments. Clearly, if t h e s e parameters a r e set v e r y tightly t h e i r p r i c e reducing e f f e c t i s easily offset by o t h e r variables (such as trends), thus causing t h e models t o p r o j e c t p r i c e increases even in times of underutilized capa- city.

5

DISCUSSION

From t h e discussion in t h e previous section w e conclude t h a t i t would b e highly speculative t o assume t h a t a l a r g e sample of oil p r i c e projections r e p r e s e n t s t h e p r o b a b l e distribution of f u t u r e oil p r i c e s . The interdependence of t h e single pro- jections is simply too high o r , at l e a s t , t h e i r independence i s not demonstrable. We have mentioned Odell's argument [3] t h a t most projections a r e , indeed, dependent on e a c h o t h e r with t h e e f f e c t , e x p r e s s e d in s t a t i s t i c a l language, t h a t t h e i r a v e r a g e i s t o o high. B e t h i s as i t may, t h e influence of s t a t i s t i c a l dependence on t h e variance i s much c l e a r e r , i. e., in t h e c a s e of dependence t h e sample v a r i a n c e i s usually reduced. In o u r s u b j e c t m a t t e r t h i s implies t h a t t h e "actual" distribution of independent oil p r i c e f o r e c a s t s would c o v e r a n even wider r a n g e t h a n t h e a l r e a d y wide span of t h e p r o j e c t i o n s p r e s e n t e d h e r e . One sound conclusion t h a t c a n b e drawn from all t h i s i s t h a t i t d o e s not make much s e n s e t o think of a unique value ( o r even a narrow r a n g e ) when working with uncertain p r o s p e c t s , such as f u t u r e oil p r i c e s .

A s a g e n e r a l r e m a r k . w e n o t e t h a t , d e s p i t e t h e convenience of using terms and concepts of probability t h e o r y f o r some purposes, i t would b e inadmissible t o u s e a set of projections as a r e p r e s e n t a t i o n of a probability function in a more r i g o r o u s way. Apart from t h e problem of dependence t h e r e is t h e problem t h a t t h e premises of probability t h e o r y d o not apply in a n obvious way t o f o r e c a s t s and projections.

This h a s been recognized by psychologists who have t h e r e f o r e introduced t h e con- c e p t of "judgmental probability". This concept may work as a tool f o r individual decision making, but w e think t h a t t h e low quaiity of individual probability judgment observed by psychologists ( s e e , e. g., [4] f o r a number of illustrations), should b e a warning against readiiy using a "collective-judgmental probability" as if it were as

well defined a s , s a y , Brownian motion. Refraining from doing s o will also help t o avoid futile discussions as t o whether a f o r e c a s t w a s r i g h t u n d e r t h e circumstances and t h e real-world e v e n t s took a low-probability c o u r s e o r whether t h e a c t u a l out- come w a s a reasonably likely outcome of a d i f f e r e n t model.

Having discussed s o f a r mainly t h e drawbacks, t h e r e a d e r may wonder whether w e see any usefulness in making a comparative study of oil p r i c e projections. W e c e r t a i n l y do, and b y playing down t h e importance of r i g o r o u s tools w e emphasize t h e r o l e of judgment, which i s g r e a t e r t h a n many r e p o r t s lead t h e i r r e a d e r s t o believe.

And s i n c e judgment i s inherently subjective w e think t h a t oil p r i c e (and many o t h e r ) f o r e c a s t s ought t o b e formulated in a way t h a t leaves room f o r t h e judgment.of t h e u s e r s of t h e s e f o r e c a s t s . Moreover, where t h e r e i s any i n t e r a c t i o n between a n a n a l y s t and a decision maker, i t seems n a t u r a l f o r t h e latter to b e at t h e t o p of t h e

"judgmental hierarchy". (In t h e n e x t section w e d e s c r i b e a scheme in which t h i s proposal i s i n c o r p o r a t e d . ) This implies t h a t both t h e a n a l y s t and t h e decision maker h a v e (in g e n e r a l d i f f e r e n t ) judgmental probability distributions. The r e a s o n why i t i s t h e decision maker whose judgment h a s t o guide t h e analysis (maybe more s o t h a n t h e analysis guiding t h e decision maker) lies in t h e f a c t t h a t t h e decision maker is

/

(politicaily) responsible f o r h i s decision, which means t h a t i t is h e who h a s t o c a r y t h e burden of explaining decisions and t h e i r consequences; and even if t h e impossi- ble were, in f a c t , possible and one couid formalize all t h e s e a s p e c t s of decision maic- ing and solve t h e problem analytically i t seems h a r d t o imagine t h a t t h e decision makers would enjoy t h e idea of being essentially r e p l a c e d by computer models.

Thus, w e see t h e principal usefulness of projections in t h e i r potential t o edu- c a t e t h e judgment of t h o s e who use them. Unfortunately, w e h a v e often observed t h a t a r e p o r t does not fully exploit t h i s potential. T h e r e c a n b e many r e a s o n s f o r

t h i s , but a fundamental and r e c u r r i n g o n e is a n imbalance t h a t overemphasizes t h e r i g o r o u s p a r t of a n analysis a t t h e e x p e n s e of a discussion of t h e many instances where judgment h a s played a r o l e . I t would c e r t a i n l y i n c r e a s e t h e usefulness of r e p o r t s if t h e y d e s c r i b e d t h e p u r p o s e f o r which a n oil p r i c e p r o j e c t i o n w a s made (thus permitting, at l e a s t , a guess as to t h e kind of judgment t h a t w a s made) and if a statement of t h e r e s u l t s included at least some r e f e r e n c e t o t h e basic assumptions and t h e i r c a u s a l connection with t h e r e s u l t s .

6 DECISION

MAKING

UNDER UNCERTAtNTY

Thus f a r w e h a v e t r i e d to look at a collection of oil p r i c e p r o j e c t i o n s in a way t h a t r e s o l v e s whatever initial confusion may o c c u r in r e s p o n s e t o a widely s c a t t e r e d set of point projections. But w e think t h a t t h i s confusion will b e more permanent if mereiy a n answer to a simple n u m e e c a l question i s sought. This i s b e c a u s e t h e intrinsic u n c e r t a i n t i e s of t h e problem r e n d e r n e i t h e r t h e question n o r any single answer a p p r o p r i a t e . And even if o n e settles f o r a n answer consisting of a (reason- ably narrow) r a n g e of oil p r i c e s , i t i s h a r d t o believe t h a t a s a t i s f a c t o r y answer could b e obtained. W e a r g u e t h a t t h e question a b o u t f u t u r e oil p r i c e s makes s e n s e only if a p a r t i c u l a r answer i s evaluated in terms of i t s consequences f o r a decision problem. H e r e w e r e t u r n to o u r statement of t h e p r e v i o u s section t h a t i t should b e t h e decision maker whose judgment is t h e ultimate c r i t e r i o n , and we p r e s e n t now a framework t h a t contains a formal problem d e s c r i p t i o n of decision making u n d e r u n c e r t a i n t y and a c e n t r a l r o l e f o r a set of diverging projections. Accordingly, t h e problem is:

optimize F(D,S)

where: F is a n multidimensional function; i t s elements are "consequences" o r "out- comes:'

D i s a v e c t o r of (mutually exclusive) decisions

S i s a v e c t o r of (mutually exclusive) states-of-the-world

In words: The problem i s to d e p i c t a decision ( d i ) t h a t will lead t o a n "optimal" set of outcomes tF(di, s l ) ,

...,

F(di , s, )

1.

(In p r a c t i c e , t h e term "optimal" should b e r e p l a c e d by t h e more p r e c i s e "judgmentally optimal" t o indicate t h a t judgmental probabilities are combined with a judgmental trade-off between t h e individual out- comes

-

and t o d e t e r analysts from attempting t o solve t h e decision problem analyti- cally .) Since F i s itself a v e c t o r , t h e problem i s t o compare t h e matrices Ifl(S,D) j,

...

Ifk(S,D)] of consequences and states-of-the-world t h a t are indexed by t h e deci- sions considered. (A typicai c r i t e r i o n applied t o t h i s kind of probiem i s a n

"insurance" s t r a t e g y aiming a t a minimization of maximum damage o r "regret".)

Tackling t h e problem d e s c r i b e d by t h i s paradigm t h e r e f o r e involves t h e follow- ing steps:

1. Selection of t h e decisions t o b e considered.

2. Selection of t h e states-of-the-world t o b e considered.

3. Selection of t h e consequences t o b e considered.

4. Construction of a mapping (model) F(D 3 ) .

S t e p 1 falls within t h e domain of t h e decision makers. And as much as studies a r e sometimes called academic when t h e y somehow neglect t h e problem of remaining consistent with t h e real world. i t must b e equally said t h a t decision makers often neglect t o supply analysts with t h e decisions at s t a k e . (Wildavsky and Tenenbaum's book [ 5 ] on t h e oil and g a s r e s e r v e estimates of t h e US d e s c r i b e s a n impressive c a s e in point.) Many r e p o r t s d o r e f l e c t t h i s lack of " r e f e r e n c e decisions", b u t this is not always p e r c e i v e d as a g r a v e deficiency and i s sometimes compensated f o r by t h e

formulation of hypothetical decision a l t e r n a t i v e s . However, t h e overestimation of t h e power of analytical tools maizes t h e a b s e n c e of concreLeiy formuiatea decisions a p p e a r l e s s serious.

S t e p 2, t h e seiection of a r e p r e s e n t a t i v e set of states-of-the-world, i s t h e s t a g e in which a collection of projections, such as those discussed in this p a p e r , c a n b e of significant use. Moreover, t h e wide r a n g e c o v e r e d by such a collection becomes a quite n a t u r a l f e a t u r e , r e f l e c t i n g t h e i n h e r e n t uncertainty of t h e problem. In o u r paradigm, t h i s s t e p i s a joint e f f o r t of decision maker and analyst, probably engag- ing t h e l a t t e r more t h a n t h e former.

S t e p 3, t h e selection of a r e p r e s e n t a t i v e set of consequences, i s again a joint task of decision maker a n d analyst, t h i s time probably engaging t h e f o r m e r more t h a n t h e l a t t e r .

S t e p 4 , t h e construction of a model t h a t i n c o r p o r a t e s t h e r e s u l t s of t h e previ- ous t h r e e s t e p s , i s t h e n a t u r a l domain of t h e analyst. However, t h i s aomain ought t o b e much more invaded by decision makers (mainly through t h e i r involvement in t h e basic s t e p s ) t h a n i s usual. What t h e participation of t h e decision maker in t h e modeling p a r t amounts t o i s a joint determination of the'moael size. Choosing t h e b e s t size of a model r e q u i r e s a trade-off between t h e c l a r i t y of t h e modeling p r o c e s s (which f a v o r s smaller models) and t h e amount of information contained in t h e model output (which, taking quantity as a c r i t e r i o n , f a v o r s l a r g e r models). This trade-off i s by no means obvious t o resolve. However, w e think t h a t in cases where t h e i n t e r a c t i o n between modelers and decision makers i s weak, i t i s a l l t o o often resolved with a bias toward l a r g e r models. The paradigm described h e r e i s con- s i s t e n t with t h e s t r a t e g y "as s m a l l as possible" f o r t h e determination of t h e a p p r o p r i a t e model size. By t h i s w e mean t h a t (at l e a s t t h e f i r s t ) selection of model

size should yield t h e smallest model t h a t gives any meaningful answer t o t h e problem a t hand.

The activities and t h e r e s u l t s of all s t e p s a r e , of c o u r s e , intertwined with all o t h e r s t e p s , making t h e whole p r o c e s s a r e p e t i t i v e p r o c e d u r e .

7 CONCLUSIONS

In this r e p o r t we h a v e summarized t h e oil p r i c e projections of a number of r e p o r t s and we have t r i e d t o summarize and reconcile t h e possible r e a s o n s f o r t h e wiae r a n g e spannea by t h e s e projections. Eventually, we have come to recognize t h e potential usefulness of such a v a r i e t y of r e s u l t s which had not been s o obvious at t h e outset. This usefuiness becomes explicit if t h e spectrum of d i f f e r e n t oil p r i c e projections i s considered in t h e c o n t e x t of decision making under uncertainty. How- e v e r , t h e a u t h o r s of oil p r i c e projections would h a v e t o provide more information about t h e underlying assumptions and objectives if t h e i r r e p o r t s are t o b e of max- imum usefulness f o r t h i s purpose. This c a n b e done by distributing t h e emphasis of a study more evenly between scientific r i g o r and real-world uncertainty. If model r e s u l t s are qualified by a c h a r a c t e r i z a t i o n of t h e uncertainty surrounding them and if t h e y a r e explained in terms of t h L underlying assumptions, t h e n u s e r s of t h e r e s u l t s , in p a r t i c u l a r decision makers, c a n compare t h e s e assumptions with t h e i r own, and t h e n estimate what d i f f e r e n c e in t h e r e s u l t t h e y would .make. If a u t h o r s wanted t o go even f u r t h e r , t h e y could a l s o make a n attempt t o explain why differing r e s u l t s , obtained by o t h e r s , are d i f f e r e n t from t h e i r own findings. This would signi- ficantly i n c r e a s e t h e usability of a r e p o r t f o r t h e soiution of a probiem d e s c r i b e d by o u r paradigm. Although this p u r p o s e i s not necessariiy what a u t h o r s have in

mind, w e think nevertheless that our conclusions a r e worthy of some deliberation by authors of forthcoming r e p o r t s on energy studies.

APPENDIX

This appendix contains descriptions of the studies reviewed for the discussion in Section 4 of this paper in a unified format. It also contains the abbreviations of the studies by which they a r e referred

to

in the main text.

STUDY NAJllEs

Energy Scenarios Up to ulaa EUR 20)

ABBREXATION:

CEC

REFERENCE:

Informal presentation by Chr. Waeterloos (DG XVII, CEC, Brussels) at t h e International Atomic Energy Agency, Vienna, November 1982 (61.

APPROACH:

Scenario writing.

(a) Methodology: Model of final energy demand in physical terms (MEDEE-3) and a linear programming supply model (EFOM 12C).

(b) Base Year: 1980.

(c) Assumptions: Three scenarios: ' T r e e Competition", 'international Cooperation", and "European Common Market".

(d) Results: Not yet available in final form.

MAIN OBJECTIVE:

Review of energy policy development in t h e Community and i t s member states.

SPATIAL AND TEMPORAL COVER-

European Community, 1980-2000.

PAEZT OF ENERGY SYSTEM CONSIDERED:

Primary to final energy; connection with economy.

PRICE PROJECTIONS:

Oil p r i c e s in 2000 between $30 and $33/bbl (1981 prices).

COMXENTS:

This review i s based on a r e p o r t of a study in its design phase.

STUDY

NAME:

The E n e r g y Outlook T h r o u g h 2000, a study conducted by t h e Energy Economics Division.

ABBREVIATION: Chase

REFERENCE: The Chase Manhattan Bank, N.A., March 1983 [ 7 ] .

APPROACH: Three sets if oil p r i c e f o r e c a s t s were developed, i. e., high, low, and best estimate.

(a) Methodology: Oil p r i c e , oil demand, petroleum industry, and OPEC financial p r e s s u r e models are linked t o energy demand and coal demand models, which are primary tools f o r t h e i t e r a t i v e long-term forecasts.

(b) Base Year: 1980/82.

(c) A s s u m p t i o n s : A model set i s used in a n i t e r a t i v e mode s t a r t i n g with a n oil p r i c e assumption. After iterations natural gas and coal p r i c e s c a n b e d e t e r - mined on t h e basis of c r u d e oil prices. Total energy consumption depends on GDP projections via energy price/GDP elasticities, which are estimated f o r t h e base y e a r 1980.

(d) R e s u l t s : Provides detailed f o r e c a s t s of t h e economic growth and energy consumption (based on analysis of supply and demand s o u r c e ) under t h r e e dif- f e r e n t scenarios of f u t u r e oil prices.

B U N

OBJECTIVE: To analyze major issues affecting t h e outlook f o r OPEC oil p r i c e s as t h e focal point of t h e study, which examines t h e outlook f o r t h e supply, demand, and p r i c e s of energy in t h e market economies.

SPATIAL

AND

TE3iPOBCLL COYER From 1980-2000. The world, divided into 42 regions.

PART OF ENERGY

SYSTEM

CONSIDERED: Whole energy system s t a r t i n g with pri- mary energy and resources going t o secondary energy sources and fuel demand.

PRICE PROJECTIONS:

World Crude Oil P r i c e Forecast (1981 US%/bbl)

Year Low

1980 (actual)

-

1985 24.35

1990 31.00

2000 40.00

Best Estimate 34.06 31.60 35.00 43.00

High

-

32.25 40.00 46.00

COKMEXTS: This i s a typical independent derivation of oil p r i c e projections as described in t h e main text. Moreover, t h e derivation of t h e s e projections w a s a c e n t r a l reason f o r undertaking t h e study.

STUDY NAME:

World E n e r g y Outlook, June 1983

AEBEEVIATION:

Chevron (CAI,)

REFERENCE:

S t a n d a r d Oil Company of California (CHEVRON)

[a].

APPROACH:

Appears t o b e b a s e d on e x p e r t opinion a n d likely t r e n d s , b u t t h e r e i s no r e f e r e n c e t o formal m o d e l s t h a t have been used in t h e study.

(a) Methodology: Based on r e c e n t t r e n d s and events. The most likely f u t u r e developments are evaluated using t h e information on production capacities, etc.

(b) Base Year: 1982.

(c) Assumptions: Substantial economic growth throughout t h e world (between 3 and 5% p e r y e a r ) without excessive e n e r g y demand increases.

(d) Results: World e n e r g y consumption in t h e y e a r 2000, a c c o r d i n g t o e n e r g y s o u r c e a n d e x p e c t e d oil p r i c e s . Also world demand f o r refining.

MAIN OBJXCTIYE:

To outline t h e e n e r g y a n d especially oil industry's p r o s p e c t s up to t h e y e a r 2000.

SPATIBL

^BND

TEMPORAL COVER-

The m a r k e t economies with s p e c i a l emphasis on t h e US. . The temporal s c o p e i s divided into short-term p r o s p e c t s (up t o 1985) a n d long-term t r e n d s (up t o 2000).

PART OF ENERGY SYSTEM CONSIDEEED:

Total e n e r g y consumption and conse- quent demands a n d production of various e n e r g y s o u r c e s , with emphasis on oil supply, refining c a p a c i t y , s y n t h e t i c fuels production, and c r u d e oil p r i c e s .

PRICE PROJECTIONS:

Crude oil p r i c e s u n d e r l i t t l e upward p r e s s u r e until demand

r i s e s in t h e mid-1990s. OPEC supplies n e a r l y half until 2000. Thus, oil p r i c e s w i l l remain f l a t in t h e 1980s and will r i s e slowly in t h e 1990s r e a c h i n g a r a n g e of $35-50/bbl (1983 dollars). Gas a n d c o a l will b e p r i c e d accordingly t o b e competitive with equivalent oil products.

COHMENTS:

The format of t h i s publication is c h a r a c t e r i s t i c f o r t h o s e r e p o r t s t h a t are labeled " e x p e r t opinion" in t h e main t e x t .

STUDY

NAME:

World Energy Outlook Through 2000 A B B ~ T I O N : Conoco (CON)

REFEEENCE: CONOCO, Stamford, USA, April 1983 [9).

APPROACH: Trend extrapolation to produce one forecast of f u t u r e energy deveiop- ments.

(a) Methodology: Undocumented econometric models of t h e relations between oil p r i c e , demand, and GDP. Judgment apparently plays a considerable role.

(b) Base Year: 1981/82.

(c) Assumptions: N o explicit assumptions are reported. Since an econometric model i s used t h e number of assumptions (not considering those in methodology-related fields, like t h e form of t h e equations for which t h e param- eters are estimated) is small.

(d) Results: Projections of primary energy demand f o r all market economies together and t h e US separately.

MAIN

OBJECTIVE: The conclusions r e p o r t e d are policy implications f o r t h e US.

Presumably, o t h e r objectives were behind t h e study as w e l l .

SPATIAL

AND

TEMPORAL COYER Market economies, 1980-2000, conclusions f o r t h e US.

PART

OF EKeEGY SYSTEM CONSIDERED: A l l primary energy.

PRICE PROJECTIONS: Qualitative; constant or even decreasing real oil p r i c e s f o r s e v e r a l y e a r s , slight real i n c r e a s e t h e r e a f t e r .

COXHENTS: Another example of t h e "expert opinion1'-type of r e p o r t s .

STUDY NAME:

S 8 2 AnnuaL E n e r g y OILtlook w i t h Rejections to S90

ABBREVIATION:

DOE (DOE)

REFERENCE:

US Department of Energymnergy Information Administration, Wash- ington, DC, April 1983, DOE/EIA-0383 (82) (101.

APPROACH:

Projection of energy production, consumption, and p r i c e in t h e US and on international energy markets.

(a) Methodology: Explicit projections and analysis of t h e domestic and interna- tional energy markets a r e presented through 1990; they a r e apparently based on t r e n d analysis and e x p e r t opinion.

(b) Base Year: 1980/81.

(c) A s s u m p t i o n s : The world oil p r i c e will depend on changes in t h e oil market (i.e., supply and demand); o t h e r energy p r i c e s are apparently linked to t h e oil price.

(d) R e s u l t s : Three oil p r i c e projections, t h e middle one being described as

"most realistic", t h e lower and u p p e r one as safety margins. Based on t h e mid- dle projection, prim- energy and oil balances, and economic growth rates are given.

MAIN OBJECTIVE:

N o a p p a r e n t single objective; DOE publishes i t s projections as a service. In general, this r e p o r t investigates possible energy f u t u r e s f o r t h e US in t h e context of all market economies as p a r t (Volume 3) of t h e AnnuaL Report to Congress.

SPATIAL AND TEMPORAL COVER-

Time frame: p r e s e n t to 1990/2000; The energy prospects of t h e US and t h e market economies as a whole are covered.

PART OF ENERGY SYSTEM CONSIDEaED:

O i l production, p r i c e development, pri- mary energy demand, and consumption.

PRICE PROJECTIONS:

World Oil P r i c e s in 1982 $/bbl

Low Middle High

1980 39.32 39.32 39.32

1982 33.59 33.59 33.59

1985 21.00 25.00 34.00

1990 28.00 37.00 48.00

COMliENTS:

A hypothetical oil disruption s c e n a r i o i s also analyzed in t h e r e p o r t . The calculated consequences on oil supply and p r i c e are compared with t h e most probable, middle p r i c e , and supply alternative. The major p a r t of t h e r e p o r t deals with US domestic prospects. The methodology and t h e general approach are not described in much detail.

STUDY NAME: Energy Projections to the Year 2000 ILBBEZEMATION: 'DOE (DOE)

REFERENCE: US Department of Energy/Division of Analytical Services, Washing- ton, DC, August 1982, DOE/DE-0029/1

[Ill.

APPROACH: Market approach given OPEC's future pricing behavior.

(a) Methodology: Three econometric models are used: oil market simulation, OECD energy demand model, and non-OPEC demand model.

(b) Ba~se Year: 1981.

(c) Assumptions: P r i c e s remain constant in nominal dollars in 1982 and thus grow slightly slower than inflation.

(d) Results: Economic recovery i s assured a f t e r 1982. Provided a variety of scenarios in which oil p r i c e s and economic growth are varied o v e r a wide range.

MAIN

OBJECTIVE: (With r e s p e c t

to

non-US prospects.) World oil market scenarios try t o r e f l e c t uncertainty, from a US vantage point, regarding world oil price, total primary energy consumption, and oil consumption in particular.

SPATIAL

AND

TEMPORAL COVER- World, with special emphasis on OPEC behavior (US, o t h e r OECD, OPEC, rest of market economies, CPE). Historical: 1980, 1981; projected: 1985, 1990, 1995, 2000. .

PART OF ENERGY SYSTE3I CONSEDERED: Primary energy including oil, coal, gas, nuclear, renewables/other, with special emphasis on the world oil price.

PRICE PROJECTIONS:

Three Basic P r i c e Scenarios (in 1981 $/bbl) 1980 1981 1985 1990 1995 2000

Low 37.0 37.0 27.5 31.5 41.0 51.0

p r i c e s

Mid-range 37.0 37.0 32.5 42.5 53.5 62.0 p r i c e s

High 37.0 37.0 37.0 57.0 71.0 74.0

prices

COMMENTS: The assumptions are clearly documented. However, t h e methodology is not described

to

t h e d e g r e e of detail t h a t enables t h e r e a d e r

to

a p p r e c i a t e t h e linking between assumptions and results. I t a p p e a r s t h a t t h e p r i c e s are determined by t h e assumed OPEC behavior in t h e oil market simulation model.

STUDY NAME: World Energy Outlook to 2020 ABBREVLATION: Eden (CERG )

REFERENCE: Richard Eden et aL., Energy Research Group, Department of Physics, Cavendish Laboratory, University of Cambridge, Cambridge CB3

OHE,

U.K., June 1983 [12].

APPROACH: Trend projections; scenario writing.

(a) MethodoLogy: "Supply-demand integration"

-

iterative balancing of demand and supply projections, including consistency checks and feedback.

(b) Barse Year: 1980, 1983 (not the same f o r all variables).

(e) Assumptions: Main scenario, economic growth: 2.7% p e r annwn (1980- 2000). 2.4% p e r annwn (2000-2020).

(d) Results: Dominating role of oil t o continue through 2020; investments in new energy forms crucial. Procedural result: four consistent scenarios. Main scenario variable: GNP growth patterns.

MAIN

OB~CTZYE: To investigate t h e investment problems arising from a transition away from oil.

SPATIAL AND TEMPORAL COVER Market economies, disaggregated into nine regions; 1980-2020.

PART.

OF

ENERGY

SYSTEM

CONSIDERED: Primary energy,. emphasis on oil;

demand analysis disaggregated into economic sectors.

PRICE PROJECTIONS: Projected oil price in the year 2000: $40-60/bbl (1980 dol- lars).

COMMENTS: Assumptions stay deliberately near t h e consensus of energy analysts, apparently f o r t h e purpose of exploring "common ground". The procedure leading to the reported results do not appear to be repeatable f o r readers.

STUDY

NAME: P r i z de Revtent des Energies de Substitution: Elements de Stra- tegie pour u n Group Petrolier (Cost Prices f i r S u b s t i t u t i o n Energy: S t r a - tegy Elements for a n Oil Company).

ABBREXATION:

IFP

BEFERENCE:

A. Brion, Seminaire i.f.p., Nice (France), March 1981 [13].

APPROACH:

Analysis and estimation of cost data f o r different energy chains.

(a) Methodology: D a t a collection and return-on-investment calculations.

(6) Base Year: 1980.

(c) Assumptiohs: 1 2 X p e r

annurn

r e t u r n on invested capital f o r nonelectric, 9 X f o r e l e c t r i c power plants.

(d) Results: Investments ought

to

at least double if t h e stability of the non- OPEC energy production situation is to b e achieved.

IUXN OBJECTIVE:

To establish a basis f o r decisions on strategic investments by an oil company (TOTAL).

SPATIAL AND TEMPORAL COYEE:

With r e g a r d

to

t h e origins: global, elsewhere:

France; t h e immediate future.

PART OF ENERGY SYSTEM CONSIDERED:

Primary energy (oil, gas, coal, nuclear).

PRICE PROJECTIONS:

Derivation of CIF costs of various fuels. To estimate t h e potential profitability of t h e i r production, t h e a v e r a g e annual growth rate of t h e international oil p r i c e i s assumed to b e 3.5%.

COMMENTS:

Not directly a study on t h e future oil prices which, however, play a crucial r o l e in application of t h e results. Also, t h e prospective costs of oil competitors have an influence on f u t u r e oil prices.

STUDY

NAXJZ: OPEC a n d the World Oil Outlook ABBREVIATION: EIU

REFERENCE: The Economist Intelligence Unit, February 1983, Special Report No.

140, by B. Mossavar-Rahmani and F. Fesharaki [I].

APPROACH: Informal scenario about t h e nature of demand f o r OPEC oil in relation to global economic growth.

(a) Methodology: Assessment of t h e market "rules" by a former member of OPEC ministerial conferences.

(b) Base Year: 1981.

(c) Assumptions: None in t h e usual sense of t h e word. A hypothesis i s formed on t h e basis of observations.

(d) Results: The same f o r c e s t h a t drove down demand f o r OPEC oil in t h e e a r l y 1980s will probably d r i v e i t back up o v e r t h e next t h r e e y e a r s because OPEC i s t h e world's "swing producer" of c r u d e oil, which multiplies any percentage of change in global oil consumption into a much higher percentage change of OPEC's oil production.

HAIN OBJECTIVE: To analyze short- to mediurn-term developments of t h e world oil market.

SPATIAL ANTJ TEMPORAL COVER- World demand f o r oil and OPEC production, scenario f o r 1985-1990.

PART OF

ENEEGY SYSTEM

CONSIDERED: OPEC production capacity and world demand f o r OPEC oil.

PRICE PROJECTIONS: Only qualitative estimates are given, with t h e conclusion t h a t t h e volatile mixture of oil and politics will lead again to a disruption of supplies and higher p r i c e s (and f u r t h e r oscillations).

COMMENTS: No quantitative forecasts are given. However, t h e m e r e description of t h e so-called "OPEC multiplier" amounts to a projection of f u r t h e r oscilla- tions of t h e f u t u r e oil price.