Infamous Oil Forecasts that Failed & What Makes a More Solid Forecast

Even before Colonel Edwin Drake confirmed a way to drill for crude oil in 1859, pundits were already active in predicting the future of oil. Some called it "Drake's Folly" and forecast that drilling was not the way to reach oh well.

Drake's Folly
Skeptics called America's first drilled oil well "Drake's Folly" and insisted that drilling was no way to reach . . . Oh well.

But oil prices are what draw the primary predictions nowadays, even though $100 per barrel oil is really nothing new. During the Civil War, for instance, the price of oil soared to about $115 per barrel when adjusted for inflation in 2010 dollars. In fact, until an extended period after World War II through about 1970, oil prices were anything but stable and were often above levels seen in the 1980s and 1990's even without inflation taken into account.

Historical Oil Prices in Today's Dollars
In real terms, or adjusted for inflation, oil prices hit the equivalent of $100 per barrel or more in 1861 and again in 1980.

This underscores how poorly oil prices tracked inflation in modern history and the importance of technology in keeping pace with supply, regardless of price. In fact, according to the Society of Petroleum Engineers (SPE,) during the extended periods of low prices after the price crash of 1986, a number of technological advances occurred that lowered finding and lifting costs. These included the polycrystalline carbon drill bit and the expanded use of horizontal drilling.

In terms of price predictions, one of the biggest errors occurred only a few years ago, when forecasters during the summer of 2008 were predicting that oil prices would remain at levels of $150 or higher for the foreseeable future. Then came the global financial meltdown and took oil prices along with it, with an oil price plunge to the $30's by the following winter ooops!

A similar prediction occurred during the 1980's. Following the supply panics of the late 1970's, many were predicting that oil would reach $100 per barrel in nominal, or pre-inflation terms, by or before mid-decade. However, no such thing happened. Consumers, in part, had responded by purchasing much smaller cars than in the past and prices ultimately cratered by mid-decade, into the single digits for some crude grades.

"Beware all forecasts that do not have a strong basis in quantifiable supply/demand trends.

The problem with these particular forecasts was that some were predicated on wishful thinking, primarily by traders, not sound market fundamentals. Beware all forecasts that do not have a strong basis in quantifiable supply/demand trends. Just because renewed tensions have erupted in the Middle East, for instance, does not mean that oil prices are destined to fly up. Some of what is touted as "forecasts" in news bulletins is really the hype of traders hoping to make headlines that will push prices up on the commodity futures markets. Such hype may work briefly, but invariably, when there's nothing backing a prediction, prices will drop back in short order.


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Michael Burpee | Jul. 23, 2011
94.5% of the futures contracts are traded by professional traders and 5.5% are traded by industry. As long as cheap money is around, traders will borrow and speculate. Therefore, predicting the future price is an outcome is dependent on monetary policy and not on supply to demand trends. The next two weeks will provide the political direction in the US and Europe so all of this may be a waste of time.

Jim Kennedy | Jul. 23, 2011
Evolving technology will always tend to confound predictions. In the 19th century studies on the trends of growth of horse powered transport would have predicted that everyone would have soon been wading through a sea of manure!!

John Harrington | Jul. 23, 2011
Good common sense!

Frank Horgos | Jul. 22, 2011
The best advice I received upon getting my PNGE degree from Penn State and joining Conoco back in 1956 was to forget everything my college professors told me about oil and gas operations because they were going to teach me what I really needed to know! My fifty years domestic and international exploration, production, banking and consulting background have proven the wisdom of that advice. Anyone following past world supply/demand predictions of the IEA and EIA would also have to agree that anything academics have to say about oil and gas future happenings should be taken with a grain of salt!!

Robin | Jul. 22, 2011
The 150 dollar a barrel was mainly the result of speculation by traders not the shortage of oil.

PC Williams | Jul. 20, 2011
It amazes me that after over 150 years, we and the "economists" still do not understand the elasticity and the volatility of energy prices. At times, it seems that they all use "a straight edge" to make their market/price/supply forecasts. I cant do any better so I need to keep my criticism to a minimum. However, the real problem, are those who that bet on these forecast, rather then doing a risk analysis of them, just as they would do for a new field estimated recoverable reserves forecast. As far as project economics go, the only relevant price, is the current price. Use of anything else is speculation. If a project is not economical at the current price, then it is not economical. PC Williams

Bob Beegle | Jul. 20, 2011
Another factor that continues to cause small fluctuations in the price of oil that has nothing to do with actual supply and demand trends is the strength or weakness in the dollar itself.

ken fawell | Jul. 20, 2011
I think the price of oil as a commodity is a poor guide to demand, as like many commodities it is impossible to know the effect of speculation on price and speculation can lead to dramatic price fluctuations. In many cases speculation is the underlying cause of bubbles, think real estate in the US, maybe gold? Real demand from oil users, both industrial and domestic, depends entirely on the general economic situation, so if this heads south speculators will unwind their positions at the click of a mouse with dramatic effect. What would be interesting is if an average lifting price, say for Brent or WTL, was quoted alongside the price per barrel or a measure of consumer demand.

David Anthony | Jul. 20, 2011
Its inevitable that oil prices will rise over time as demand outstrips the supply of easily recoverable oil. Emerging economies in Asia will will ensure that increased demand will put further pressure on supply. Add into this equation the fact that Saudi Arabia will no longer be able to increase output as its giant oilfields are in steady decline. The third factor to consider is that new discoveries are few and far between and mainly in offshore fields, therefore the cost of bringing those fields into production is much higher. Cheap oil is history unless there is major global depression and we all end up walking everywhere. Having worked in the oil/gas industries (Saudia-1979-1984 and again in 2008) I have witnessed first hand the dynamics of the industries efforts in bring supplies into production. The other factor to take into account is the increasing cost of the raw materials require by the industry to construct production facilities....these are increasing rapidly and supplies are also diminishing. No matter which way we look at it oil prices will rise.

Mark | Jul. 19, 2011
Good start, and an entertaining article! How do you factor into the matter currency exchange rates and speculators who are rolling contracts. Such drivers have no basis in supply/demand forecasts. I enjoyed the read, thank you!


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