The Oil Drum: Europe | UK Government Oil Price Forecast

UK Government Oil Price Forecast

Posted by Chris Vernon on July 16, 2006 - 11:16am in The Oil Drum: Europe

John Hemming MP has recently tabled a written question asking the Chancellor of the Exchequer what oil price his Department predicts for each of the next 10 years.

As is usual the straight forward question didn't result in a column of ten numbers plus the appropriate uncertainties or caveats for use. The get-out seems to be based on semantics since the treasury doesn't actually make its own predictions but works with an average of independent forecasts. It was clear that the information Hemming was actually after was what prices they use internally... However the response did provide an interesting document on the assumptions used by the treasury.

I have often wondered what assumptions are fed into the Government's forecasts. In the past I have been critical of the forecast growth in aviation. The 2003 aviation white paper predicted that from 2002 levels, passenger numbers would double by 2020 and freight tonnage double by 2010. This was based on the following assumptions:

UK GDP growth over the next 25 years will average 2.25%
Air fares will decrease at 1% in real terms for the next 25 years
Aviation fuel prices will stabilise at $25 a barrel in 2000 prices

Anyway, the document provided is titled Audit of Assumptions for the 2005 Pre-Budget Report and is available here (pdf). On oil price forecasting it seems to suggest that there is a systemic failing in the way five year oil price assumptions are generated. I say systemic failing since it appears the system could not have allowed the rapid ramp up in prices we've seen over the last few years to be used internally by the treasury, even if every independent forecaster in the land had predicted it a few years ago.

The method is:

The oil price will be based on the average of independent forecasts for one year ahead. If the average of independent forecasts shows a fall in the oil price, that price in real terms will be used for the remainder of the five year forecast period. If the average of independent forecasts for one year ahead shows a rise, then the previous convention that oil prices would be close to their current levels in nominal dollar terms over the coming year, and remain flat in real terms thereafter, will be adopted.

If I understand it correctly even if the best information available suggested oil prices were going to double over the next five years, all that the treasury would assume over those five years would be one year's price increase then the price would remain flat in real terms for the following four years. In this hypothetical situation it would mean planning decisions for five years time could be based on an oil price some 40% lower than the oil actually costs in five years time.

It would appear the treasury is systemically blinkered to any forecast price rises the global peaking of oil will inevitably bring. It would be nice if the adopted system at least had the capability of describing past behaviour, I don't think this system can claim that. This graph shows how things have evolved through 2002 to 2005:

Click to enlarge

UK Government Oil Price Forecast

PDF version

9 comments

Napper on July 16, 2006 - 12:52pm Permalink | Comments top

Page 203 of the energy review
fule price assumptions

oil oil
2005 $55 $55

2010 $40 $67

2015 $42 $69

2020 $45 $72

low high

do not look very likly to me, it makes one
wonder how they hope to get there policies
wright.

LevinK on July 17, 2006 - 7:26pm Permalink | Parent | Comments top

This "oil-price forecast" must be the gloomiest thing I've encountered recently.

Consider how out-of-touch with reality you should be to make such predictions. Forget that, just consider that they don't have different scenarious for the future, just some very narrow price ranges. And now consider that these are the same people we rely on to create the policy guiding us to a post-oil future and the picture starts looking really grim.

Eco Wolf on July 17, 2006 - 7:15am Permalink | Comments top

I have looked at the NYMEX crude oil futures

http://futures.tradingcharts.com/marketquotes/index.php3?market=CL

Month Open High Low
Dec 06 80.55 80.70 79.70
Dec 07 80.00 80.00 79.20
Dec 08 77.20 77.20 77.00
Dec 09 75.50 75.50 75.00
Dec 10 73.19 73.19 73.19
Dec 11 71.99 71.99 71.99
Dec 12 72.50 72.50 71.00

Again, hard to believe for us TOD readers.

However, if the UK Government believes in the 'Market' to solve all energy supply problems, then why don't they use Futures Market data like this?

doctorbob on July 18, 2006 - 4:34pm Permalink | Comments top

Meanwhile here:

http://news.bbc.co.uk/1/hi/uk_politics/5192424.stm

,motor fuel duty increase - meant to combat climate change as we swelter in temperatures of around 35C - has been delayed again for fear of increasing petrol costs to politically unacceptable levels.

blueglow on July 19, 2006 - 4:21am Permalink | Comments top

Good article Chris, I was wondering about the lack of joined-up thinking over the last decade.

thought my local MP should know...

Dear Alan Whitehead,
I would like to bring to you attention the following short article and discussion regarding government estimates of oil price:
http://uk.theoildrum.com/story/2006/7/16/11161/7387
It seems that the assumptions of lower oil prices made by the government and its offices are at odds with current events and future demand/supply issues, not to mention other geopolitical factors. They have been consistently wrong in the past and, unless the current model is changed, are likely to continue being wrong - with very serious repercussions.
Since these estimates are used in a wide range of planning and forecasting, especially those of transport and energy use, I suggest that this issue needs to be raised with the appropriate government figures as soon as possible.
The effects on local issues such as public transport and air transportation growth are important, but it seems the current planning for major issues including climate change, inflation and the economy, housing and even the deployment of our military forces are all directly affected by these forecasts.
I hope you find this information helpful and will act accordingly, if you require any other information about these issues please do not hesitate to contact me or the author of the article.
Yours sincerely,
...

Do you or any of the Oil Drum UK team have regular contact with members of parliament, or better still, the government? It seems they need a bit of pestering, but if a relationship could be built perhaps we can quicken the pace of debate on these issues.

Napper on July 19, 2006 - 2:12pm Permalink | Parent | Comments top

I think it is a very good idea for all of us
to inform our MP so that they can not claim
to have no knowledge of peak oil, and one or
two of them might even come out in support
publicly

Chris Vernon on July 21, 2006 - 12:41pm Permalink | Parent | Comments top

We have a good relationship with John Hemming who is supportive of work promoting peak oil. He has recently pulled together some more notes on oil, gas and energy. See the Wednesday, July 19, 2006 post on his blog here: http://johnhemming.blogspot.com/

MUDLOGGER on July 19, 2006 - 6:59am Permalink | Comments top

Oh dear...

European Briefing From Times Online.

Europe's suppliers could decide to just save their energy
BY CARL MORTISHED

WHAT if they leave the oil and gas in the ground? That unwelcome prospect emerged as the world's leaders tiptoed round President Putin last weekend, like postmen negotiating their way past an irritable alsatian.
Efforts to coax the Kremlin into ratifying the Energy Charter, a commitment to free energy markets, are losing momentum. Mr Putin berated the West on Sunday for demanding access to Russian export pipelines while offering no better access to Europe's makets in exchange. He sees no energy crisis; oil revenues are bursting the Kremlin's coffers. Why open the door to multinationals and flood Europe with more fuel?

While Mr Putin barked, the G8 leaders failed to notice the sound of a door shutting in Algeria, the second-largest importer of gas into Europe. President Bouteflika is reversing a liberal reform of Algeria's oil and gas laws and is giving Sonatrach, the state energy company, a commanding role in oil and gas development as Algeria's Gazprom and Rosneft rolled into one. Adding to the pain, foreign energy investors will be subject to a windfall tax.
Another domino is falling in the wave of oil nationalism that has swept Latin America. From now on, Sonatrach must own a majority share of any oil or gas development, rather than the 20 to 30 per cent under previous rules intended to encourage investors. On the surface, it resembles the anti-gringo nationalism of Venezuela and Bolivia, but behind Algeria's inward shift is a more sober calculation.
The Algerian Energy Minister spoke of conservation of resources "for the benefit of future generations".

Full article here

http://business.timesonline.co.uk/article/0,,8210-2275959,00.html