Sunday, March 01, 2015

Taking a short break--no post this week

I'm taking a short break this week and next and expect to post again on Sunday, March 15.

Sunday, February 22, 2015

What is Saudi Arabia not telling us about its oil future?

It is popular these days to speculate about why Saudi Arabia cajoled its OPEC allies into maintaining oil production in the face of flagging world demand. As the price the world pays for oil and oil products has plummeted, the price OPEC members are paying in terms of lower revenues is high, even unbearable for those who didn't save up for just such a rainy day.

Was the real reason for the decision to maintain production the desire to undermine rising U.S. tight oil production--which has now proven embarrassingly vulnerable to low prices after years of triumphalist talk from the industry about America's "energy renaissance"? Were the Saudis also thinking of crippling Canada's high-cost tar sands production? Was it Sunni Saudi Arabia's wish to undermine its chief adversary in the region, Shiite Iran? Was the Saudi kingdom doing Washington's bidding by weakening Russia, a country that relies so heavily on its oil export revenue?

The Saudis say explicitly that they believe non-OPEC producers must now balance world oil supply by cutting back production rather than relying on OPEC--meaning mostly Saudi Arabia--to do so. And, those cutbacks in the form of drastically reduced investment are already taking place in the United States, Canada and around the world as low prices are forcing drillers to scale back their drilling plans dramatically. It is not well understood, however, that almost all of the growth in world oil production since 2005 has come from high-cost deposits in the United States and Canada which has made the two countries easy and tempting targets for the Saudis' low-price strategy.

Recently, investment manager Jeremy Grantham opined in Barron's that Saudi Arabia has probably made the wrong decision. He explains as follows:

[T]he Saudis could probably have absorbed all U.S. fracking increases in output (from today’s four million barrels a day to seven or eight) and never have been worse off than producing half of their current production for twice the current price … not a bad deal. Only if U.S. fracking reserves are cheaper to produce and much larger than generally thought would the Saudis be right. It is a possibility, but I believe it is not probable.

First of all, he vastly overestimates the ability of the United States to increase its RATE of production, though he correctly assesses the production cost and longevity (or lack thereof) of U.S. tight oil reserves. Even the ever-optimistic U.S. Energy Information Administration believes that U.S. oil production will plateau in 2019 (not far above where it is now) and start to decline after 2020.

But, my concern is with Grantham's assertion that the Saudis could have let U.S. drillers simply drill away while OPEC countries--meaning again, mostly Saudi Arabia--reduce their production without being worse off financially than they are now. U.S. tight oil production would presumably play itself out by 2020 or so and then start to decline allowing OPEC to recapture market share and raise prices again.

But there is one possibility which Grantham is blind to, one mentioned to me by a friend. It's a big what-if. But then pretty much everything is a what-if when it comes to the secretive Saudis.

What if the Saudis are acting now to undermine U.S. and Canadian oil production because they realize that Saudi production will soon reach a peak, level out for several years and then start to decline in no more than, say, a decade? What if the Saudis fear that energy efficiency, fuel substitution (say, toward natural gas), and mandated greenhouse gas emission reductions will inevitably diminish their oil revenues beyond the next decade? What if this coming decade will therefore be the best time to maximize Saudi revenues per barrel? It would then make sense for the Saudis to cripple North American production now with, say, a year of low prices which should be enough to make investors skittish for many years thereafter. Then, the Saudis can capitalize on higher prices during the next nine years as the kingdom experiences its peak flows and before energy use reduction strategies threaten oil revenues.

(This assumes that they are right about the reluctance of investors to return to the tight oil fields and tar sands after having been walloped by the current low prices, something that would slow or prevent further growth in U.S. and Canadian oil production. If investment returns readily with any price increase, it is possible we could see wildly fluctuating prices due to short boom/bust cycles in the U.S. and Canadian oil industry, something I regard as possible but unlikely. This is because I expect many if not most of the current tight oil leases to pass into the hands of the major international oil companies as a result of bankruptcies of and distressed sales by the independent tight oil players in the coming year to 18 months. Those majors will take a more measured and patient approach to the development of those leases.)

Now, of course, no one knows what the Saudis know about their own oil reserves or anticipated flow rates. Saudi Aramco, the Saudi national oil company which controls all oil development and production in the country, is 100 percent owned by the government and therefore is not obliged to release information to the public nor submit to an outside independent audit. But the Saudis have already publicly stated that the world cannot count on them for more than 12.5 million barrels per day (mbpd). The country currently pumps about 9.7 mbpd of which it exports about 6.9 mbpd.

If the Saudis are acting now to cripple U.S. and Canadian production for the reasons my friend suggests, it means world oil supplies are going to be much more problematic after 2020 than many people suppose. It implies that at some point in the next 10 years OPEC will cease to be able (rather than cease to be willing) to balance world oil supplies. And, it suggests that no one else will be ready to act in that role when the time comes.

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.

Sunday, February 15, 2015

William Catton's warning

William Catton Jr., author of the seminal volume about our human destiny, Overshoot: The Ecological Basis of Revolutionary Change, died last month at age 88.

Catton believed that industrial civilization has sown the seeds of its own demise and that humanity's seeming dominance of the biosphere is only a prelude to decline. His work foreshadowed later works such as Joseph Tainter's The Collapse of Complex Societies, Richard Heinberg's The Party's Over: Oil, War and the Fate of Industrial Societies, and Jared Diamond's Collapse: How Societies Choose to Fail or Survive.

In Overshoot Catton wrote: "We must learn to relate personally to what may be called 'the ecological facts of life.' We must see that those facts are affecting our lives far more importantly and permanently than the events that make the headlines."

He published those words in 1980, and now, it seems, at least some of those facts have made their way into the headlines in the form of climate change, soil erosion, fisheries collapse, species extinction, constrained supplies of energy and other critical resources, and myriad other problems that are now all too obvious.

But, even today, few people see the world as Catton did. Few realize how serious these problems are and how their consequences are unfolding right before us. Few understand what he called "the tragic story of human success," tragic because that success as it is currently defined cannot be maintained and must necessarily unwind into decline owing to the laws of physics and the realities of biology. We can adjust to these realities or they will adjust us to them.

Perhaps the single keenest insight Catton had is that humans have become detritovores, organisms that live off the dead remains of other organisms. By this he meant the human dependence on fossil fuels which are the ancient dead remains of organisms transformed into oil, natural gas and coal.

It is the fate of detritovore populations to expand and contract with their supply of detritus. He likened modern humans to algae feeding on the rich surplus of nutrients from dead organic matter swept into a pond by spring rains and often multiplying so as to cover the entire pond with a green carpet. By summer, with the rush of spring nutrients depleted--nutrients which are like the one-time infusion of fossil fuels into human society--the algae population crashes, leaving mostly open water and sometimes just an uneven ribbon along the edge of the pond. It is a boom-bust population cycle well-known to biologists.

In 1980 it seemed as if this cycle might be mitigated by wise policy and serious, but achievable adjustments in the human way of life. By 2009 when Catton published his other book, Bottleneck: Humanity's Impending Impasse, he felt that the time for major mitigation of the inevitable bust portion of the population cycle had passed.

So, why even write another book? Catton explained in the last paragraph of Bottleneck:

I hope by the time [my great-grandsons] become great-grandfathers themselves, their generation will be so conspicuously more enlightened than mine was and our forebears were that the world population of bottleneck survivors will have evolved social systems better able to be circumspect in the use of their planet and its vulnerable biosphere. If readers of this book come to share similar hopes, and contribute to instilling them in their descendants, my reasons for writing will have been justified.

This is a humble ambition compared to the cautious hope that flowed from Overshoot in 1980. And, it is important to note Catton's emphasis on social systems for he was trained as a sociologist. He believed that despite our considerable technical prowess, our social system simply cannot contemplate making the drastic changes necessary to mitigate the downslope.

Perhaps the most important thing to note about Catton is that he did not blame anyone for the human predicament. To him that predicament is the natural outcome of evolutionary processes and the powers given to humans through those processes. That predicament is no more a product of conscious thought and intention than is the beating of our own hearts.

When I met and chatted with him for the one and only time in 2006, he was mildly jocular in the same way that his writing is, and he was upbeat in his attitude toward daily life, however disturbing the future may seem.

That was probably the product of a life spent in deep and patient study of the world around him, a world that yielded some its most hidden and important secrets to him. And, he had the satisfaction of having published those secrets so that they would not be secrets any more.

Overshoot may stand as the central text of the 20th century about the ecological fate of humankind. The book represents a missed opportunity in that so few people were able to hear what Catton had to say in 1980, and so few want to hear it now--even as the headlines are filled with the very precursors of the bottleneck he laments in his last major piece of writing.

(To see my review of Bottleneck, click here.)

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.

Sunday, February 08, 2015

Alternate opinions: The world's energy information duopoly comes to an end

Recent developments are beginning to undermine the supremacy of the world's long-running energy information duopoly and its perennially optimistic narrative. Policymakers, investors and the public should take heed.

Until now most energy price and supply forecasts and analyses were based predominately on information from the globe's two leading energy information agencies: the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, and the International Energy Agency (IEA), a consortium of 29 countries originally formed in response to the 1973-74 Arab oil embargo to provide better information on world energy supplies to its members.

Both agencies provide forecasts that are publicly available and widely covered in the media. What's not apparent is how dependent private forecasts issued by the energy industry and financial firms are on the work done by these agencies.

These agencies are able to bring to bear substantial financial resources and large dedicated staffs of statisticians, economists and other specialists focused solely on gathering and analyzing energy data across the world. Few organizations--except perhaps the major international oil companies--are able to muster such resources to monitor world energy. And, the major international oil companies make little of their analysis public. For policymakers and the public, the EIA and IEA have been the go-to sources for presumed-to-be objective energy information.

What's changed is the willingness of private donors to fund independent energy supply research on a scale not previously undertaken outside of government and industry control. The implication is that the world needs more diversity than the two current institutional opinions and the cryptic, self-serving pronouncements of the industry.

Two recent studies illustrate the point. And, they're not good news for the oil and gas industry. First, there is the study by the Bureau of Economic Geology (BEG) at the University of Texas at Austin. On the surface the bureau may seem too embedded in the heart of oil country. But, the money for its recent study on the future of U.S. shale natural gas came from the Alfred P. Sloan Foundation and NOT from the industry. The whole purpose has been to provide an independent, unbiased assessment of the future of shale natural gas in the United States.

The conclusions of that research--which I mentioned in a previous piece--are far more pessimistic about the future of U.S. shale gas than either the EIA or the industry. Those conclusions became an embarrassment for the EIA when the difference came to light in a recent article in the science journal Nature.

The second example is a study entitled "Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom" published by the Post Carbon Institute. (Full disclosure: I worked as a paid consultant to publicize this report. But, the fact that the funders provided money specifically for this purpose means they are serious not only about the research, but also about getting this alternative view out to the public and policymakers.)

"Drilling Deeper" aligns quite well with the findings of the BEG on U.S. shale natural gas. But, it goes beyond gas to analyze the future of U.S. tight oil derived from deep shale deposits. In doing so "Drilling Deeper" not only utilizes EIA data, but also data from one of the leading data providers to the oil and gas industry, Drillinginfo. That information costs money, and funders are now willing to provide that money.

All of this has put the EIA on the defensive. The Paris-based IEA, however, has not been directly challenged yet since the two studies mentioned above focus on U.S. oil and natural gas. Still, the growth in worldwide oil production since 2005 has been due almost completely to rising production in two countries: the United States and Canada--and that has huge implications for any forecast done by either agency, especially if the assumptions about future oil and gas production growth in those countries are overblown.

Both the EIA and the IEA have generally released similar worldwide forecasts for energy in the past. The IEA has in recent years, however, taken a more activist tack since its charter allows it to talk about climate change as a danger. And, the agency has warned about the lack of investment in energy of all kinds because of the recent drop in oil prices.

The IEA was the first to declare that conventional oil--that is, easy-to-get, low-sulfur, liquid crude--peaked in 2006. The world is now increasingly living on expensive, hard-to-get unconventional oil under deep ocean waters, in the Arctic and from deposits that aren't even liquid such as the Canadian tar sands. The IEA still claims, however, that given the proper investment, these unconventional sources can meet rising oil demand for at least another two decades.

The ever so slowly growing divergence between the EIA and IEA and the advent of well-funded independent original research suggest that the day of looking solely to the two governmental energy entities for energy information are over. Both failed to predict constraints on oil production in the last decade and a half, and both now continue--despite their seeming differences--to assume a business-as-usual future when it comes to energy, if not climate change. This is despite the growing evidence and chorus of experts calling such complacency into question.

Now, those experts are beginning to garner enough financial resources to create in-depth independent, data-driven analyses and disseminate them to a broad audience--one that no longer has to take either the EIA or the IEA at its word.

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.

Sunday, February 01, 2015

Commodities crash: Bad news for the world economy, but is anyone listening?

Reading the general run of financial headlines might lead one to believe that price declines in those commodities which are highly sensitive to economic conditions such as iron ore, copper, oil, natural gas, coal, and lumber are good on their face.

Obviously, the declines aren't good for those who sell these commodities. But, those of us who buy these commodities in the form of cars, houses, utility bills and other products and services ought to be helping the world economy as we buy more stuff with the freed up income.

As true as that may be, these commodity price declines also signal something else: exceptional weakness in the world economy. It is no secret that economic growth in Europe has been stalled for some time and is now receding. The European Union's confrontation with Russia over the Ukraine conflict and the resulting tit-for-tat economic sanctions levied by both sides are only worsening the economic climate.

Russia has been hit by the double whammy of oil price declines and sanctions which are probably sending the country into recession. And, now the new anti-austerity government in Greece seems to be pushing Europe headlong into another Euro crisis as worries about Greek debt default spread.

Chinese economic growth appears to be faltering. And, that seems to be one of the direct causes of the broad-based commodities price decline. A fast growing China has previously created enormous demand for basic commodities needed to build out its infrastructure--commodities such as copper, iron ore and the petroleum products needed to run all the vehicles and machines essential to that build-out. Chinese demand for basic commodities has also increased as China's expanding wealth has allowed many more people there to own private automobiles and to enjoy other fruits of a spreading consumer society.

Economic distress for China seems to come when its hypercaffeinated annual growth rate falls below 7 percent where it seems to be heading now. Official Chinese statistics have long been suspect, so growth may already be below 7 percent. Lower growth makes it difficult for the country to provide work for all those who are leaving the countryside and streaming into the cities as China industrializes.

Commodity-exporting nations such as Canada, Brazil and Australia have taken a big hit on declining Chinese and world demand. But, their bourses seem surprisingly buoyant given the extent of the damage.

The commodity price declines aren't just confined to the industrial and energy commodities mentioned above. Food commodities have been swooning as well recently. Of course, food prices swing based on farm yields which have no necessary relation to the economy at a particular time. What is especially telling about the decline in the prices of foodstuffs is how broad-based it is.

Price declines affected wheat, corn, soybeans, and oats in part due to record harvests. Prices for cocoa declined due to rising harvests and falling demand. But, not every food commodity is experiencing increased harvests. Sugar production has actually declined in the last growing cycle. Yet, sugar prices fell. At the margin, it seems, people are buying less of what are essentially discretionary food commodities such as cocoa and sugar. Does that seem right if consumer buying power is being buoyed by cheaper industrial and energy commodities?

Stock and bond markets across the world are being levitated by central banks which have telegraphed to investors that the banks will react to practically any weakness in stocks or bonds. Of course, central banks don't much concern themselves with the prices of commodities because they cannot control them directly in the way they manipulate money and credit. That's why commodity prices right now are a much better barometer of the global economy than the world's stock markets.

One could say that the stock markets of the world disagree with the global commodity markets about the direction of the world economy. One could also say that the world's bond markets agree with the commodity markets. Low bond yields typically mean that investors expect inflation and economic growth to be low or even negative. High inflation and/or economic growth tend to cause investors to demand higher yields as credit availability tightens and as concern about inflation eroding bond returns rises.

It is especially telling that in the United States, where the U.S. Federal Reserve Bank ceased its government bond buying program last year (known as quantitative easing), that long-term government bonds returned almost 39 percent, much better than the U.S. stock market which registered a 12 percent gain in the S&P 500 index. With waning support from the U.S. central bank, government bonds were supposed to decline (and yields go up). Just the opposite happened--big time!

And as 2015 began, the consensus was that U.S. (and Canadian) interest rates would rise and thus bond prices would decline. Instead, long-dated U.S. governments--which are very sensitive to interest rate changes--spurted upward another 12 percent in January alone as yields plunged to record lows. This was in perfect concert with the continuing commodity rout suggesting that investors in these markets expect low or no economic growth in the year ahead.

Practically the entire investor class across the world believes that central banks now guarantee stock prices, and that the stock market therefore is a sure thing. Commodities and bonds, however, are telling a contrarian story. The obvious questions are: If central banks are omnipotent, then why didn't they prevent stock market crashes in 2001 and 2008? If it's different this time, what exactly will central banks do to prevent another crash? Can they really effectively lower interest rates which are already at zero in much of the world (and below zero in a few instances)? If central bank policy is so powerful, why haven't six years of the lowest interest rates in memory--and in the case of Great Britain since the beginning of central banking there in 1694--resulted in booming growth across the world?

Last week analyst Doug Noland of Credit Bubble Bulletin fame, summarized the situation this way:

To this point, mounting risks – financial, economic, geopolitical and the like – have been viewed as guaranteeing only greater injections of central bank liquidity.

The assumption has been that if markets falter, central bank liquidity can and will always hurl them higher than before. It seems there is no crisis too big that ever greater liquidity injections cannot solve it. That assumption is already being tested this year, and there are likely to be many more tests coming.

The rather precipitous, alarming and lockstep trends in bond yields and commodity prices in the last year suggest that we are likely to get some clarifying answers in 2015 to the questions listed above.

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.

Sunday, January 25, 2015

The most important thing to understand about the coming oil production cutbacks

What the current oil price slump means for world oil supply is starting to emerge. "Layoffs," "cutbacks," "delays," and "cancellations" are words one sees in headlines concerning the oil industry every day. That can only mean one thing in the long run: less supply later on than would otherwise have been the case.

But perhaps the most important thing you need to understand about the coming oil production cutbacks is where they are going to come from, namely Canada and the United States.

Why is this important? For one very simple reason. Without growth in production from these two countries, world oil production (crude oil plus lease condensate which is the definition of oil) from the first quarter of 2005 through the third quarter of 2014 would have declined 513,000 barrels per day. That's right, declined. Including Canada and the United States, oil production rose just under 4 million barrels per day.

That means substantial cutbacks in the development of new oil production in Canada and the United States could lead to flat or falling worldwide oil production.

But, why will any oil production cutbacks come primarily from Canada and the United States? For another very simple reason. Post-2005 oil production growth in these countries came from high-cost deposits in Canada's tar sands and in America's tight oil plays. New production from these high-cost resources simply isn't profitable to develop in most locations at current prices.

Of course, there are various figures floating around about what price level will allow new production to proceed profitably in these deposits. Some of those figures closely match current oil prices. But, we should look at what the oil companies are doing, not what they are saying. And, what they are doing is cutting back and cutting back drastically. Recent U.S. rig counts dropped the most since 1991, and rigs are being withdrawn from the very areas that were responsible for the tight oil boom.

Earlier in January Canada's largest oil company and a major oil producer in the tar sands, Suncor Energy Inc., announced layoffs, a cut in its capital budget and delays in new projects. Others are doing the same.

If the low prices continue, even more of the previously anticipated new production from these deposits will be delayed while production continues to shrink in the rest of the world. The twin North American engines for growth in the world's oil supply would stall.

If the world economy goes into a long-term slowdown or recession, then oil demand will ease further. That would mean lower prices would stick around for a while. But eventually, when growth accelerates, the pressure on constrained supplies may become acute and prices could spike.

By then, much of the workforce and machinery needed to increase production will be idle. But, probably more important, lenders and investors will be reluctant to risk money on tight oil and tar sands projects that only brought them grief the last time around. In all likelihood lack of capital will be the primary hurdle for Canadian and American operators when they attempt once again to ramp up production.

Even if oil prices recover soon to levels that would normally reassure lenders and investors, the growth in new production of U.S. tight oil and Canadian tar sands oil may only return to the hypercaffeinated rates of last summer several years from now after the memory of the recent financial carnage has faded.

Each day that oil prices stay low heightens the risk that the world will soon experience flat or falling worldwide oil production--something the oil supply optimists said simply couldn't happen with these new oil resources now available to us.

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.

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.