Oil think twice! - The Government's latest oil price forecast

LibDig This!

Today, Oil reached $135 per barrel and the 24hour TV media began covering in earnest the probability that oil will reach $200 at some point during the next year.

The Guardian reported that the Government have been widely urged to 'take action'.

Yet there is much worse news brewing for the Government.

Look at this answer in Parliament back in February by Transport Minister Tom Harris:

Graham Stringer: To ask the Secretary of State for Transport what price of oil has been used by her Department when making forecasts of congestion on the road network; and if she will make a statement. [190456]

Mr. Tom Harris [holding answer 29 February 2008]: The Department for Transport uses oil price projections from the Department for Business, Enterprise and Regulatory Reform (BERR) to produce a fuel price forecast. This is then used in the Department’s National Transport Model (NTM) for forecasting congestion on the road network. Their latest projections are for oil (in 2006 prices) to fall gradually to $50 by 2015 before then rising to $52.5 in 2020 (approximately $75 in nominal prices).

BERR also produce a high and low projection around this central price which we have also used in our forecasts. These are for prices of $25 and $80 (about $115 nominal) in 2020. The Department forecasts congestion in different scenarios including ones where high prices are assumed. This is to check the robustness of estimates were high oil prices, such as those observed currently in crude oil markets, to continue.

BERR are currently revising their oil price projections in light of a consultation on them that has recently ended. We will use this revised information to determine new traffic and congestion forecasts.

Critical importance

This is absolutely crucial. Its not just a case of potential action on 'price at the pump' that can't have been accounted for in the (increasingly) stretched budget this year. So much policy is based upon predictions on the price of oil - hence the question being to the transport minister. Road building, air travel, food import prices etc.

This is a written answer in the Commons earlier this week on Tuesday 20 May:

Lord Berkeley asked Her Majesty's Government:

What estimates of the price of oil have been used by the Department for Transport in drawing up rail and road policies. [HL3552]

Lord Bassam of Brighton: The Department for Transport uses oil-price projections calculated by the Department for Business, Enterprise and Regulatory Reform (BERR) in its transport modelling.

As BERR point out on their website in the section on 'most recent predictions':

'These revised assumptions will be used in the analysis underpinning the Carbon Budgets and Renewable Energy Strategy Consultation'

If all that isn't sufficient to startle, this Government answer confirms the importance of the department's forecasts. Last week Lord Bach said for the Government that:

"The BERR fossil fuel price assumptions are disseminated throughout Whitehall and, where relevant, are used in other government department's analytical work."

Consistently wrong

I wish the answer by Mr. Harris above was a freak, but it is just the tip of the iceberg.

BERR's predictive mechanisms give three broad predictive ballparks: 'low', 'medium' and 'high'. In a paper last put out this month BERR revised their erstwhile predictions. Their high prediction put oil at 85$/bbl by 2010, and 90$/bbl by 2015. Their low value placed it at 65$/bbl by 2010! Do they actually expect the value to drop by over a half its current value so soon?

Others like the Liberal Democrat Norman Baker MP have picked up the scent too. Only two days ago on Tuesday Energy Minister Malcolm Wicks answered his question of whether BERR is aware of predictions by EU and G8 countries. Mr. Wicks replied that

"the Department does not hold information on the oil price assumptions and predictions made by the other EU and G8 countries."

Both Lord Bach and Mr. Wicks stressed that the Government had consulted on its forecast until 2020. What follows is the result of this consultation (updated predictions document page 2). I don't know whether you are laughing or crying by this point but if you can't take any more look away now:

"The majority of comments in response to the Call for Evidence, referred to above, expressed the need to revise the prices upwards [...], and to include a further scenario (in addition to the three used previously) to explore a scenario of high-high prices."

Are they really so pig-headed that they must create a new category rather than revise their own. Don't they see how ridiculous their position is?

It gets worse. Their previous prediction was as follows, (and please don't pass out)

'The low prices scenario assumes a level oil price of 25$ per bbl throughout the projection period (2010 – 2020), a central scenario assumes $57/bbl in 2010, $50/bbl in 2015 and $52.5/bbl in 2020 and in the high price scenario where oil is $70/bbl in 2010 increasing to $80/bbl by 2020.' [page 4]

As is born out by the figures, the release dates and in the Tom Harris answer above, THIS is what Government policy 'throughout Whitehall' has been based on UNTIL NOW!

True or false?

Is there a chance they are right? What could make their somewhat wild predictions come true?

An increase in supply? OPEC is resolutely against the idea. Non-OPEC production has fallen steadily year-on-year, and exploration forecasts aren't that positive.

If global economy, particularly the rapidly growing economies cut consumption rapidly? There are arguments that India may slow consumption if their Government cuts subsidies (this is far from certain in the near future for political reasons). More broadly it is hard to see such a huge drop in demand.

Finally, if there is enormous economic contraction worldwide this could happen... what is our Government's forecast here? It must be more drastic than they let on!

There are many big 'ifs'. It is worrying that they are big ifs because a lot rests on how much the Government believe oil may cost. I think its fair to say their price ballpark seems severely skewed, even when we consider their comically titled 'high-high' category.

Are their heads in the sand? For how long can this go on? What will be the repercussions for the public purse and the economy if they are wrong?

We must be informed on what basis the Government's assessments of the oil price over the next twelve years made.


Addition: Since I wrote this, Malcolm Wicks appeared on BBC Newsnight. Gavin Esler asked him whether he had predictions of oil prices, he said the Government couldn't predict the future and made no predictions. Sadly Gavin Esler didn't pick up on the inaccuracy of this statement so I thought I should point it out.