The New Gas Wisdom

Deck: 

Unconventional gas sources put a ceiling on future prices.

Fortnightly Magazine - December 2008
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In the energy sector, price forecasts are generally every bit as good at predicting the recent past as they are spectacularly bad at predicting the future. This is especially true in the case of natural gas in the United States. Over the past several years, the industry consensus on the outlook for natural gas swung from one extreme to the other, and then back again. Forecasters of all types—from government, to Wall Street, to the gas and power industries—exhibited the classic bias of placing excessive weight on recent history. Forecasters into the mid 1980s continued to project a return to the higher prices of the late 1970s, resulting in consistently overestimated price forecasts. By the next decade, the opposite tendency was in evidence, with the actually realized lower gas prices projected indefinitely into the future. Predictably, this led to some substantial underestimates of prices, as well as some rather shrill contrarian warnings of extremely high prices and domestic shortages to come. Neither was correct. Finally, over the past few years, industry and forecaster views apparently capitulated to the recent years’ high gas prices, and started projecting higher prices into the future, similar to the forecasts from two decades ago. Each forecast era shared similar traits—historical bias, static analysis and a limited fact base. Any which way it’s cut, price forecasts, particularly market forwards, have been widely unreliable in predicting gas prices (see Figure 1).

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