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Gas-Market Forecasts: Betting on Bad Numbers

Why predictions from the Energy Information Administration may contain systematic errors.

Fortnightly Magazine - July 2007

forecast evaluation…[but] this type of evaluation ignores potentially persistent biases in the forecasting model.”

The analysis reported here suggests that considerable caution should be exercised when using EIA forecasts relating to the future price, supply, and consumption of NG. Similar caution should be exercised when using NEMS to assess the broader economic impacts of energy policy initiatives, e.g., carbon cap-and-trade programs.

Climate-change proposals currently before Congress 3 depend heavily on predictions of the response of natural-gas supply and prices to carbon-permit prices. The actual capability of the NG supply network both here and abroad will be a critical factor in how economies adjust to such climate-change policies. Overestimating the supply capabilities of this network (as EIA has done over the past decade) could lead to underestimating the costs of carbon regulations.

 

References:

1. American Association of Petroleum Geologists, “Natural Gas Supply Concerns,” Tulsa, Published 2000 – 2007, gpa@aapg.org.

2. Auffhammer, M. “The Rationality of EIA Forecasts under Symmetric and Asymmetric Loss,” Resource and Energy Economics, Volume 21, 102-121.

3. Bingaman, Jeff, U.S. Senate (Dem., N.N.): e.g., “Biofuels for Energy Security and Transportation Act of 2007,” “Carbon Capture and Sequestration Act of 2007,” “Energy Efficiency Promotion Act of 2007,” “Energy Savings Act of 2007,” United States Energy Storage Competitiveness Act of 2007,” S. 1321, introduced May 7, 2007.

4. Bezdek, Roger and Robert Wendling, “A Half Century of Long Range Energy Forecasts”, Journal of Fusion Energy, Volume 21, pp. 155-172, December 2002.

5. Bolinger, M. and R. Wiser (2005) “Comparison of AEL 2006 Natural Gas Price Forecast to NYMEX Futures Prices,” Lawrence Berkeley National Laboratory, LBNL.59233.

6. Considine, T.J. and D.F. Larson (2006) “The environment as a factor of production,” Journal of Environmental Economics and Management, 52, 3, 645-662.

7. Considine, T.J. (2000) “The impacts of weather variations on energy demand and carbon emissions,” Resource and Energy Economics 22, 4, 295-312.

8. Energy Information Administration, Annual Energy Outlook (AEO), U.S. Department of Energy, Washington, D.C., The AEO’s for each year from 1998–2006 were utilized, Tables 13 and 14.

9. Energy Information Administration, Annual Energy Outlook, 2005, U.S. Department of Energy, Washington, D.C., 2005, p.4.

10. Energy Information Administration (2007), Energy Market and Economic Impacts of a Proposal to Reduce Greenhouse Gas Intensity with a Cap and Trade System, U.S., Department of Energy, Washington, D.C., 2005 (January).

11. Energy Information Administration, Short Term Energy Outlook, U.S. Department of Energy, Washington, D.C., The Short Term Outlooks are issued monthly, Table 8a, 1998- 2006.

12. Ghouri, Salman, “North American Natural Gas Demand—Outlook 2020,” OPEC Review, Volume 28, pp. 1-26, March, 2004.

13. Maddala, G.S. (1977) Econometrics (New York: McGraw Hill).

14. Theil, H. (1966) Applied Economic Forecasting (New York: Rand McNally & Co.).

15. National Energy Board, “Natural Gas for Power Generation,” June 2006, Calgary, Canada.

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