Sunday, January 18, 2015

U.S. Department of Energy: Our forecasts aren't really forecasts (or are they?)

Put this in the category of things that can't be true, but that are nevertheless affirmed with a straight face: The U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, does not issue forecasts, at least not long run forecasts.

So says Howard Gruenspecht, deputy administrator of the EIA, in a letter to Nature, the respected science journal. Gruenspecht was responding to recent coverage of an alleged EIA forecast which paints a rosy picture of U.S. domestic oil and natural gas production through 2040, a view challenged by the article in question.

Here is the bureaucratese from the letter: "Contrary to the presentation in the Nature article, EIA does not characterize any of its long run projection scenarios as a forecast." Long run projection scenarios....huh. What could those actually be if not forecasts? And, why is the deputy administrator making such a big deal of this? We'll come back to the second question later.

There has been little notice concerning the flap over coverage of the EIA's recent nonforecast and the divergence of that set of "projections" from another much more pessimistic forecast issued by the Bureau of Economic Geology at the University of Texas at Austin. To cut to the chase, Nature stands by its story; and, I see no reason why it shouldn't.

Perhaps the most important piece of information to come out of this kerfuffle is the insistence by the EIA that it doesn't issue forecasts. Imagine my surprise! I have been perusing the EIA's statistics on an almost weekly basis for years, and I have occasionally offered critiques of what I was sure were forecasts--lengthy complicated documents with color graphics and tables and elaborate justifications for energy production numbers far into the future. What's more, everyone else called these documents forecasts, too.

How could I have made such a mistake? As it turns out, I didn't. The words "forecast," "forecasts" and "forecasting" appear 49 times by my count in the EIA's most recent nonforecast, its Annual Energy Outlook 2014 with projections to 2040. Those instances include this laudable gem: "By law, EIA’s data, analyses, and forecasts are independent of approval by any other officer or employee of the United States Government." One of the most frequent occurrences is as part of the web address of the report: www.eia.gov/forecasts/aeo. Yes, the "aeo" in the address refers to "Annual Energy Outlook." Click on the link and see the nonforecast forecast for yourself.

Now, why am I making such a big deal of this? And, why is Howard Gruenspecht, the EIA's deputy administrator, making such a big deal of this?

I'm making a big deal of this because practically the entire world of policymakers, of business and governmental leaders, takes the EIA's nonforecasts very seriously. These leaders make critical policy and business decisions based on the "projections" in the nonforecasts. The leaders often use the agency's so-called reference case as if it were a statement of fact verified by specially-trained EIA time travelers who visit the future at the end dates for the EIA's projections and then return to present-day Washington, D.C. with numbers for the agency's forecasts.

For the EIA to deny that its projections are forecasts is sheer nonsense, especially when the agency categorizes them on the web as forecasts. For the agency to pretend that others do not see its projections as forecasts is utterly disingenuous. The agency's work is routinely used by departments across the federal government as a justification for various policy actions.

What that means is that if the EIA is wrong in its forecasts, then a lot of government and business decisions will be wrong. As it turns out, the EIA has been wrong so often in the past--and not by a little--that it now routinely reviews its forecasts in an effort to improve them. I applaud the agency for this effort. And, I suppose one could say that those who use EIA forecasts as a basis for their decision-making ought to do a little research on the agency's track record. If ever there was a field in which to invoke the phrase "caveat emptor" or "buyer beware," the realm of forecasting is such a place.

Art Berman, a petroleum geologist and consultant, points out one very important emerging policy based on the EIA's rosy forecast for U.S. shale natural gas production. The U.S. Environmental Protection Agency is, in part, basing its greenhouse gas emissions policies--which are leading to the retirement of many coal-fired electric generating plants--on the EIA's projection of growing domestic natural gas production through 2040. That gas will presumably fuel less climate-damaging natural gas-fired generating plants that will replace the retired coal-fired ones. But what if the assumption of growing gas supplies through 2040 is wrong?

Whether or not you think it's a good idea to shut down coal-fired power plants, most people still believe that the power currently supplied by those plants will be available in the future at reasonable prices. If the EIA is wrong, that benign scenario may not unfold.

And, of course, there's more. The Federal Energy Regulatory Commission is busy approving liquefied natural gas (LNG) export terminals, believing that America will be facing a growing surplus of natural gas, all based on--you guessed it--the EIA's most recent forecasts.

The effect of a forecast that is overly optimistic in this case is two-fold. LNG export terminals may be built that will lose money for investors. That will be their tough luck. They should do their homework before investing. But, some export terminals may succeed because they lock in 20-year or 30-year supply contracts with importers, for example, China and Japan. That means that at least some U.S.-produced natural gas would be shipped overseas, regardless of whether the United States has sufficient natural gas for its own needs. (The worst case scenario has the United States IMPORTING expensive LNG to offset LNG contractually obligated for EXPORT overseas.)

The losers in such scenarios will be natural gas consumers in the United States--businesses that use natural gas as feedstock for chemicals and for process heat and homeowners who heat their homes with gas. Both groups will have to pay prices closer to the much higher world price as they compete with overseas importers for the same domestic gas supply.

And, those who contracted to take the gas--typically under cost plus arrangements--will end up with natural gas that may be much more expensive than they could have gotten elsewhere should America fail to produce a significant surplus that keeps its domestic natural gas price low. In short, there may not be enough to go around, at least not at the EIA's projected prices, below $5 per MMBtu through 2024 and under $6 through 2029.

Now, the EIA does put a sort of warning at the beginning of its projections/forecasts. But a much more thoroughgoing disclaimer about production of oil and natural gas from deep shale deposits--deposits that have been driving practically all the growth in U.S. production--is buried in the agency's "Oil and Gas Supply Module," a section of a larger document on methodology. Here's the rather dense language:

Estimates of technically recoverable tight/shale crude oil and natural gas resources are particularly uncertain and change over time as new information is gained through drilling, production, and technology experimentation. Over the last decade, as more tight/shale formations have gone into production, the estimate of technically recoverable tight oil and shale gas resources has increased. However, these increases in technically recoverable resources embody many assumptions that might not prove to be true over the long term and over the entire tight/shale formation. For example, these resource estimates assume that crude oil and natural gas production rates achieved in a limited portion of the formation are representative of the entire formation, even though neighboring well production rates can vary by as much as a factor of three within the same play. Moreover, the tight/shale formation can vary significantly across the petroleum basin with respect to depth, thickness, porosity, carbon content, pore pressure, clay content, thermal maturity, and water content. Additionally, technological improvements and innovations may allow development of crude oil and natural gas resources that have not been identified yet, and thus are not included in the Reference case.

Many of the issues cited above have been highlighted by skeptics of the shale boom, and the evidence to date suggests that all of us should be skeptical of both government and industry pronouncements of plenty. If such language were included at the beginning of an EIA projection/forecast, it might confuse the uninitiated. But, it might also alarm them. They might think they need to do a lot more research and thinking before leaping headlong into projects that require everything to work out perfectly in America's natural gas fields.

Now, back to the deputy administrator of the EIA. Gruenspecht might be saying that users of the EIA's forecasts should take them with a grain of salt. With that sentiment, I strongly agree. All forecasts are problematic, and their accuracy deteriorates rapidly the longer out into the future they go. But, long-term forecasts are, in truth, virtually worthless unless they are used merely as a way to characterize future risks rather than banish them. We should be focusing not on the median projection but on the RANGE. The range will tell us much more about the nature of the risks we face, but only if the forecast has been honestly and diligently prepared.

Gruenspecht might also be acknowledging what he cannot actually say. Forecasts or projections or whatever you want to call them are inherently political. They are made with an eye to pleasing whoever pays for them, in this case, the U.S. Congress.

It would be very difficult for the EIA to speak plainly and tell Congress--now filled with representatives who've been thoroughly propagandized by the U.S. oil and gas industry and, in some cases, heavily subsidized in their campaigns both directly and indirectly by the industry--that the shale boom isn't all that it's been advertised to be and, that large uncertainties suggest that the country should not place all of its eggs in the oil and natural gas basket.

And, while the EIA officially eschews policy pronouncements, the agency's top administrator, Adam Sieminski, said the following about the oil and gas industry in a briefing last year: "We want to be able to tell, in a sense, the industry story. This is a huge success story in many ways for the companies and the nation, and having that kind of lag in such a rapidly moving area just simply isn’t allowing that full story to be told." The quote was included in a Hearst News Service story for the Houston Chronicle about the lag time in the reporting of domestic oil and natural gas production data to the EIA.

Sieminski's statement is pretty close to policy advice, and it accurately reflects the tenor of the EIA's forecasts and their implications for policy. With the EIA's bias on display, now more than ever it's time to live by the warning "caveat emptor."

Unlike a product that can be replaced by a manufacturer should it prove defective, the EIA's forecasts come with no warranty. Any damage inflicted by policy, business and personal mistakes made following these forecasts can't be undone. My EIA time travelers are, of course, merely mythical and won't be able go back in time to tell everyone to revise their decisions.

Thus, the admitted uncertainties in the EIA's forecasts, the agency's forecasting record and what we know about the unreliability of long-term forecasts in general, all suggest that we exercise much more caution and much less blind faith. It's a sentiment I'm guessing many people at the agency might secretly agree with--which makes it all the more puzzling when officials there become incensed at those who actually do take their nonforecast forecasts with a grain of salt as did the author of the offending piece in Nature.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

2 comments:

Art Myatt said...

He says the EIA's projections of future energy supply are not forecasts for the same reason that the NYPD says a cop forcing someone to the ground by putting his arm around their neck is not using a chokehold. It's the same reason waterboarding and stress positions are not allowed to be defined as torture. Fees collected by the government are not taxes.

Eric Blair, writing as George Orwell, identified the reasons in his 1946 essay, "Politics and the English Language." Here is what I take to be the heart of that essay: "In our time, political speech and writing are largely the defense of the indefensible." That was true in 1946, and it is still true nearly 70 years later.

In the case of indefensible EIA forecasts, it is not difficult to see the ways in which its forecasts are shaped to support policies that the administration in charge of the EIA wants supported. Of course, a forecast created as an argument for a policy does not work if the reader of the forecast understands the purpose.

Art Myatt

Luís de Sousa said...

A brilliant article that every policymaker in the world should read.

This episode brings out in the open the role the US government has had in creating the "shale hype". It were not only companies lying to investors on the potential of these resources.

Now there is a 200+ G$ debt bubble about to explode, on which lies an unknown amount of leverage. A petroleum industry "bail-out" is looking ever more likely and everyone should know who caused it.