The Art and Science of Energy Forecasting
- Thomas G. Burns (Chevron Corp.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- September 1984
- Document Type
- Journal Paper
- 1,437 - 1,442
- 1984. Society of Petroleum Engineers
- 5.6.9 Production Forecasting, 1.6.9 Coring, Fishing, 4.1.5 Processing Equipment, 7.4.3 Market analysis /supply and demand forecasting/pricing, 4.3.4 Scale
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Distinguished Author Series articles are general, descriptiverepresentations that summarize the state of the art in an area of technology bydescribing recent developments for readers who are not specialists in thetopics discussed. Written by individuals recognized as experts in the area,these articles provide key references to more definitive work and presentspecific details only to illustrate the technology. Purpose: to informthe general readership of recent advances in various areas of petroleumengineering.
In the 1970's, energy forecasting moved into the limelight. Market forces,which had evolved during extended industry growth, combined with politicalevents to trigger two disruptions to the normal flows of petroleum. These "oilshocks" raised the awareness of politicians and the general public to thesignificant role of energy supply in the modem economy.
Suddenly, energy-particularly oil-was everyone's business. Almost everyonehad a complaint and a prescription. "Experts" appeared as if by magic, eachprescription. "Experts" appeared as if by magic, each suggesting a differentpath out of the wilderness.
At the core of the uncertainty were some basic economic and forecastingproblems. Are we really running out of oil? Do oil and energy obey the laws ofsupply and demand? Is energy demand price elastic? Can a cartel really work forlong? Is it possible to understand all of the ramifications of a particularpolicy? Can history be used to help predict the future? policy? Can history beused to help predict the future? As the answers evolve, we begin to understandhow much still remains to be learned about energy forecasting.
There is a large body of literature about forecasting theory and forecastingtechniques, of which the References provide only a small sample. But ratherthan survey the repertoire of econometric techniques including linearprogramming, multiple regression, Box-Jenkins techniques, input-output models,cross impact analysis, and the Delphi approach, this paper focuses onphilosophical problems posed by any attempt to forecast the future.
At the outset, note the distinction between two classes of futureoccurrences: events and trends. Events, which cannot be known before theyhappen, include things like storms, earthquakes, and assassinations. Even thespecific outcome of a process (for example, which person will be electedpresident in 1988) is an event that cannot be foretold.
On the other hand, trends lend themselves to analysis and, thus, can beforecast within the constraints of assumptions about those events and trendswhich are external to the analysis. Examples include sales of products,long-term weather patterns, and political and social trends. Although it isimpossible to predict who will be elected president in 1988, it is possible toanalyze and forecast the trends which may lead to the predominance of aparticular party or philosophy. party or philosophy. Trend forecasting mustalso be distinguished from path forecasting. Here the distinction is usuallyone of path forecasting. Here the distinction is usually one of the timehorizon involved. The inertia of any system tends to keep it in motion along aparticular trend even though the specific path may be quite irregular andvolatile. The trend can be forecasted; the path is unpredictable.
Most forecasts are of trends and attempt to define the broad movements thatwill later be called "history." An example of a trend forecast is shown in Fig.1. (All figures provided by Chevron Corporation Economics Department.) Thetrend assumes that real oil prices will increase at a defined rate until theyare high enough to stimulate substantial quantities of synthetics. On any givendate, however, the market price of oil is likely to deviate because ofprevailing price of oil is likely to deviate because of prevailing marketconditions. Although the path will generally follow the trend, it will besubject to temporary deviations and excursions. The challenge is to determinewhether a particular price move indicates a trend or whether it is a temporaryexcursion outside the normal range of forecasting uncertainty.
Beware the Ides of March -William Shakespeare History of Forecasting
Forecasting-as opposed to fortune-telling-was largely a creation of theIndustrial Revolution.
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