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Report Contents Report#:EIA/DOE-0607(99)
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by Energy Prices and Economic Growth Moving Average Analysis of Forecasts Appendix: Example of 5-Year Moving Average Analysis
Introduction This paper presents an analysis of the forecast record of the Annual Energy Outlook (AEO). It compares the projections for major energy variables from the reference case for each of the AEOs published from April 1983 through December 1998 with actual data.3 The purpose of the analysis is to provide a measure of the accuracy of the forecasts; however, prediction of future energy markets is not the primary reason for developing and maintaining the models that the Energy Information Administration (EIA) uses to produce the AEO. Because the EIA models are developed primarily as tools for policy analysis, a key assumption of the forecasts is that current laws and regulations will remain in effect throughout the forecast horizon. This assumption, while necessary to provide a baseline against which changes in policy can be evaluated, also virtually guarantees that the forecasts will be in error, as laws and regulations pertinent to energy markets change considerably over the years. The National Energy Modeling System (NEMS)—the current EIA model used to produce the midterm projections in the AEO—and the predecessor models were designed to enforce a discipline on the process of energy market analysis by providing a comprehensive set of assumptions that are consistent with our understanding of the factors that affect energy markets—for example, technological innovation, energy service demand growth, and energy resources. The models are modified each year to ensure their relevance to evolving energy issues and to update baseline data, parameters, and assumptions with the most recent historical data. NEMS, first used for the Annual Energy Outlook 1994 (AEO94),Issues in Midterm Analysis and Forecasting 1999 - Annual Energy Outlook forecast Evaluation4 was specifically designed for a high level of technological detail and flexibility to address a wide range of policy options. These models are frequently used in studies conducted for the U.S. Congress, the Department of Energy, and other Government agencies to analyze the impacts of changes in energy policies, regulations, and other major assumptions on future energy supply, demand, and prices, typically using assumptions specified by the client. The most recent examples of analytical studies include an analysis of the Climate Change Technology Initiative5 and an analysis of the impacts of the Kyoto Protocol6 at the requests of the Committee on Science of the U.S. House of Representatives; an analysis of the impacts of increased diesel penetration7 for the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy; an analysis of the Electric System Public Benefits Protection Act of 19978 at the request of Senator James M. Jeffords (R-Vt), Chairman of the Senate Committee on Labor and Human Resources; a study of carbon reduction policies9 for the U.S. Department of Energy, Office of Policy and International Affairs; a study on the costs and economic impacts of oil imports10 for the U.S. General Accounting Office; an analysis for Senator Jeffords on open access regulatory changes and their impacts on the electricity industry;11 and an analysis of carbon mitigation policies12 prepared for the U.S. Environmental Protection Agency. Just in the period analyzed in this paper, many legislative actions and policies have been enacted, including the National Appliance and Energy Conservation Act of 1987, the Natural Gas Wellhead Decontrol Act of 1989, the Clean Air Act Amendments of 1990 (CAAA90), the ozone transport rule, the Energy Policy Act of 1992, the repeal of the Power Plant and Industrial Fuel Use Act of 1978 (FUA), the North American Free Trade Agreement, the Omnibus Budget Reconciliation Act of 1993, the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, the Tax Payer Relief Act of 1997, the Climate Change Action Plan developed by the Clinton Administration in 1993 to achieve stabilization of greenhouse gas emissions, various orders issued by the Federal Energy Regulatory Commission (FERC), and various State initiatives for the restructuring of electricity markets. Examples of FERC orders include Order 636, which restructured interstate natural gas pipeline companies and required the separation of sales and transportation functions, and Orders 888 and 889, which provided open access to interstate electricity transmission lines. These actions have had significant impacts on energy supply, demand, and prices, but because of the assumption on current laws and regulations, the impacts were not incorporated in the AEO projections until their enactment or effective dates. In several cases, EIA’s models have been used to evaluate some of the potential impacts of these changes in laws and regulations before they were enacted, thus fulfilling EIA’s designated role in policy analysis. For example, EIA provided comprehensive analysis to the House Energy and Commerce Committee concerning the impacts of the CAAA90 on the coal and electricity industries. In other cases, the models have been used to analyze policies that were eventually rejected; a prime example is the British thermal unit (Btu) tax proposed in early 1993. Both of these uses of the models illustrate the importance of maintaining a modeling capability apart from the forecasting function, using current laws and regulations as a baseline assumption. In addition to changes in laws and regulations, a number of other factors can cause energy markets to deviate from the longer term trends represented by the forecasts in the AEO. For example, the forecasts assume normal weather patterns; however, the weather will rarely, if ever, be normal in any given year. Although the AEO models have not generally been used for analysis of weather conditions on energy markets, temperatures that are colder or warmer than normal for sustained periods have a significant impact on energy consumption. Strikes and political incidents, such as the Iraqi invasion of Kuwait in 1990, are other unanticipated events whose impacts on energy markets are not captured in a mid- to long-term energy projection. Any of these events can cause price volatility and fluctuations in energy consumption and supply. EIA’s Short-Term Energy Outlook (STEO)13 reflects the impacts of these events and the near-term adjustments to them, and each AEO adjusts its near-term forecasts to the most recent STEO projections. By presenting quarterly projections and accounting for stock fluctuations and other short-term adjustments, the STEO is more applicable to the analysis of such events than is the AEO, which presents annual average projections. In order to analyze key uncertainties in energy markets, the AEOs have all had various side cases, usually, but not always, including high and low economic growth and high and low world oil price. An analysis of the economic growth cases can be found in the Issues in Midterm Analysis and Forecasting 1998 and the low world oil price cases in the Issues in Midterm Analysis and Forecasting 1997.14 Although the primary purpose of the models is policy analysis, many users of the AEO view the projections as forecasts. Thus, analyzing the models’ performance and the reasons for differences between the projections and history is important both for users and for those responsible for the projections. The models and assumptions used in the AEOs undergo continuous evaluation and change, in part because of changes in energy markets and in part as a result of internal assessment of the models’ performance. Natural gas markets are an example of both points. The representation of natural gas markets has been revised significantly to reflect deregulation. In addition, the fundamental assumptions about the size and potential growth of natural gas resources have been revised because evaluations of past forecasts have shown that price projections for gas were too high. This paper presents projections for each AEO from 1982 to 1999.15 The forecast horizon has expanded over the period examined in this paper; for example, the Annual Energy Outlook 1982 (AEO82)16 projections of energy markets extended only through 1990. Also, although year-by-year forecasts were produced for each AEO, many AEOs published only selected years. This evaluation includes all projected years, including unpublished projections where available. For some AEOs, projection data for the years 1991 to 1994 are not available either in the document or in data files. A set of 16 key energy variables is used in these reports to provide a comprehensive picture of the projections. The projections in this analysis were produced by the models in use at the time. Before 1994, the Intermediate Future Forecasting System was the primary model for midterm projections; however, this evaluation is not meant to assess a specific model but rather to assess the forecasts and the underlying assumptions that shape the results. An evaluation of models is not the purpose of this paper, but we do learn from the forecast evaluations how closely our projections track historical values, and the reviews provide a basis for consideration of changes in the model. NEMS—a longer run model—was first used for the 1994 forecasts, and historical data for comparison are available only for five short-term years. In this case, the best effort is to compare the NEMS results with forecasts from other organizations, as is done in each AEO. Table 1 provides a summary of the average absolute forecast errors17 for each of the major variables included in this analysis.18 The average absolute forecast error is computed as the mean, or average, of all the absolute values of the percentage errors, expressed as percentage differences from actual, shown for each AEO, for each year in the forecast, for a given variable. The values in the table are taken from three previous annual evaluations published in Issues in Midterm Analysis and Forecasting (Issues), and from this paper. As Table 1 indicates, the forecasts of consumption, production, and economic variables have generally been the most accurate; net import projections have been less accurate; and the price projections19 have been the least accurate when evaluated on the basis of average absolute percent errors. Year-to-year changes in percent error reflect the addition of new years over time. Most of the percent errors are generally improving over time, with the exception of coal consumption and net coal exports, which seem to reflect the surge in coal consumption by generators in 1996, 1997, and 1998. For the current Issues, found in the last column, each of the consumption, production, and economic variables has been projected with an average absolute percent error of 5.6 percent or less. For both total energy consumption and total electricity sales, the most accurately projected variables during this period, the average absolute percent error is 1.7 percent. Average absolute percent errors for net imports range from 8.8 percent for petroleum to 24.5 percent for coal. For prices, forecasting has proven to be a much greater challenge. Average absolute percent errors for the world oil price, the price of coal to electric utilities, and the average natural gas wellhead price range from 35.9 to 70.2 percent over the period, with natural gas wellhead prices proving to have the highest error of the variables evaluated. Average electricity price projections, however, fared better, with an 11.1-percent average absolute percent error. The following sections discuss the underlying results in some detail; however, it is clear that quantities are more amenable to the forecasting methods used in the AEO than are prices; that the errors in forecasting prices have not, in general, affected the accuracy of projected quantities; and that natural gas has tended to have the highest average forecast error within most categories—consumption, production, and prices. Some of the major factors leading to inaccurate forecasts include the assumption in the earlier AEOs that the Organization of Petroleum Exporting Countries (OPEC) cartel would maintain the market power and cohesiveness to set world oil prices; the decline of oil production in the former Soviet Union; underestimates of the impact of technology improvements on the production and prices of oil, natural gas, and coal; the impacts of changes in laws and regulations on natural gas prices; the treatment of fuel supply contract provisions for natural gas and coal as fixed and binding; and other events that have caused the actual trends to differ from projected long-term trends, as discussed above. Total energy consumption forecasts have shown a generally good track record for most of the AEO publications.20 The overall average absolute percent error for the period examined here is 1.7 percent (Table 2), with the largest errors occurring in forecasts for the year 1996 (3.0 percent), and the smallest errors in forecasts for 1991 (0.9 percent). In terms of the AEO publications, the Annual Energy Outlook 198621 (AEO86) had the largest absolute and average absolute percent errors for total energy consumption, at 3.2 quadrillion Btu and 3.5 percent, respectively. There was a significant underestimate of energy consumption for most of the projected years in AEO86, in part due to the high fossil fuel prices projected for the publication, which was completed prior to the 1986 collapse in oil prices and published early in 1987. After AEO86, there was general improvement in the forecast record, as EIA’s experience with lower priced energy markets expanded. It is worth noting, however, that the overall average absolute percent errors for oil price forecasts in AEO86 were better than in the preceding AEOs. Price forecasts for some years in AEO86 were also better than in some subsequent AEOs; for example, some of the subsequent AEOs projected world oil prices that were too low for the years 1989 and 1990, and the Annual Energy Outlook 1991 (AEO91)22 projected much higher prices for 1991 through 1998. One of the aspects of modeling energy consumption that is important in the evaluation of the forecasts is the effect of regulations such as appliance and automobile efficiency standards. When such standards are incorporated, some decisions that would otherwise be made by the interaction of supply and demand factors are in fact set by fiat, helping to reduce some of the uncertainty associated with the forecasts and reducing at least one source of forecast error. Total petroleum consumption forecasts have an average absolute percent error of 2.8 percent during the period covered in this evaluation (Table 3). The least accurate forecast year was 1988, for which the AEOs averaged about 0.75 million barrels per day lower than the actual consumption of 17.3 million barrels per day. For 1988, the forecasts of the world oil price were also consistently too high, as noted later, with an average absolute percent error of 80.9 percent, the highest error for any year other than 1986, 1995, and 1998. As described in the section on world oil prices, the early AEO world oil price projections were influenced by the notion that OPEC could curtail production sufficiently to hold prices up throughout the forecast horizon. This led to extremely high forecasts for 1995 in the early AEOs, like the Annual Energy Outlook 1983 (AEO83)23 and the Annual Energy Outlook 1984 (AEO84),24 and to the high 1998 forecast compared to the actual price. In addition, the forecasts of economic growth for 1988 tended to be too low in most of the AEO publications, which would also lead to an underestimate of demand. AEO82, the earliest publication considered in this analysis,25 and AEO86 had the highest average absolute percent errors for petroleum consumption at 5.3 and 6.1 percent, respectively. Projections of petroleum consumption were underestimated for all years in AEO86, which was the last AEO completed before the oil price collapse. The projections for the years 1985 through 1987 in AEO82 were above actual demand; however, the errors for 1988 through 1990 were much smaller and in the opposite direction. The AEO82 forecast for the year 1985 had the highest percent error of all the petroleum forecasts evaluated. Residential and commercial consumption was projected to be more than 0.4 million barrels per day higher in 1985 than it actually was, and consumption of petroleum for electricity generation was projected to be more than 1.8 million barrels per day higher in 1985, more than triple the actual value. Both numbers were reduced in AEO83 and were considerably more accurate. Although the AEO82 total petroleum consumption projection for 1990 was equal to the historical value at 16.99 million barrels per day, the sectoral projections were not accurate. Residential and commercial demand was projected to be about 0.6 million barrels per day higher, industrial 1.0 million barrels per day higher, transportation 2.5 million barrels per day lower, and electricity generation 1.2 million barrels per day higher than actual. Between AEO82 and AEO83, the role of natural gas had been reevaluated, giving it a larger role in the residential and commercial sectors and, in particular, in the electricity sector. The projections for oil demand in these sectors declined between AEO82 and AEO83, and those for natural gas demand increased. Following AEO82, the projections of residential and commercial oil consumption remained rather close to the actual values, although the slight downturn in 1990 was missed. A general characterization of the forecasts is a tendency to underestimate energy consumption for several years after AEO84. At that time, there was an assumption that residential and commercial customers would purchase the most energy-efficient technologies, an assumption that led to overly optimistic expectations of efficiency improvements. The Annual Energy Outlook 1985 (AEO85)26 shows this impact in the residential and commercial sectors. In the early forecasts, industrial consumption of oil was overestimated, partially reflecting somewhat optimistic assumptions about the growth of energy-intensive industries but also due to an underestimation of the potential growth of natural gas in an era of high gas prices. Later projections were somewhat underestimated due to assumptions of higher efficiency gains. Through many of the forecasts, transportation consumption was significantly underestimated. The projected world oil prices were too high; and, in reaction to the higher prices, estimated vehicle efficiency improvements were too high and vehicle miles traveled too low, leading to transportation demand forecasts that were up to 2.5 million barrels per day too low in AEO82 and frequently up to 1 million barrels per day too low in the next several AEOs. These forecasts improved significantly in the Annual Energy Outlook 1987 (AEO87),27 which contained the first set of projections after the oil price collapse in 1986. The average absolute percent error for natural gas consumption forecasts for this period is 5.6 percent (Table 4). Projections for 1995 had the highest average absolute percent error at 9.2 percent. For 1995, all the AEOs underestimated consumption by anywhere from 1 to 22 percent, primarily due to high natural gas price projections. For many of the statistics presented in this paper, 1995 through 1998 show some of the highest percent errors, because these years have many of the oldest projections, which were made 10 to 12 years earlier. Particularly in the natural gas industry, there were significant changes in energy markets throughout the 1980s. Natural gas price forecasts were very high, as discussed later, and were important causes for the underestimation of consumption in many years in the analysis period, as prices were overstated considerably in comparison with the actual prices. The FUA also contributed to low estimates of gas consumption by industrial customers. In reaction to a perceived scarcity of natural gas, the FUA legislation attempted to restrict gas use by large electric utility and industrial customers. Because of the number of exemptions granted to electric utilities, however, the FUA had little impact on the forecasts of gas consumption by utilities, except in AEO82. The legislation did have some restraining influence on industrial gas consumption forecasts until its repeal in 1987. With the exceptions of the projections for 1985 through 1988 made in AEO83 through AEO85, natural gas consumption was generally underestimated, concurrent with high price projections. Where consumption was overestimated, the tendency to conservation and the impact of higher prices on demand were not fully captured, even though prices were generally overestimated as well. Before 1995, 1986 was the year with the highest average absolute percent error, at 7.0 percent. Except for AEO82, all the errors for 1986 were overestimates. Although natural gas price projections for 1986 were high, oil price projections were also high, and fuel switching from oil to gas was projected. Among the AEOs, overall average absolute percent errors ranged from 1.9 to 9.9 percent, excepting the Annual Energy Outlook 1999 (AEO99),28 which included a single estimate of the most recent historical year, with a 0.3-percent error. AEO86 and AEO87 had the highest average absolute percent errors, mainly because of underestimates of natural gas use in the industrial sector, although projections for the residential and commercial sectors were also low in the later years. Projections in the 1980s underestimated natural gas consumption for most years, particularly the later years in the horizon, with high price forecasts contributing to the errors. Consumption forecasts improved considerably starting with the Annual Energy Outlook 1990 (AEO90),29 with average absolute percent errors of 4.5 percent or less. Natural gas price forecasts improved starting with AEO91, with average absolute percent errors no more than 22.2 percent. The forecasts for coal consumption have been stable and displayed fairly low average errors, largely due to the good record in forecasting electricity sales, for which coal is a major fuel. The average absolute percent error for coal consumption is 3.2 percent (Table 5). As has generally been the case, forecasts for the years 1995 through 1998 tend to have the highest errors, averaging 4.4, 5.0, 5.5, and 4.9 percent, respectively. There was a strong tendency to overestimate in the earlier AEOs, particularly AEO84, whose forecast for 1995 was 15.4 percent over actual consumption. Factors contributing to the overestimate included a 5.6-percent overestimate for electricity sales, an estimate of efficiency that was about 5 percent too low for coal-fired generating units, and a share for coal in generation that did not account for the eventual greater role of natural gas, particularly among nonutility electricity producers. The shares of coal and natural gas in the industrial sector were similarly affected, with high natural gas price forecasts and an overly optimistic view of the future of metallurgical coal in steelmaking being the primary factors. Until the later AEOs, AEO84 had the highest average absolute percent error for coal consumption at 5.4 percent, because of the high 1995 projection. Following an increase in natural gas prices in 1996 and 1997, coupled with declining coal prices, there was a drop in gas consumption by electricity generators and a notable surge in coal consumption by generators in 1996 and 1997, which caused some of the larger errors for those years in most AEOs. Consequently, the Annual Energy Outlook 1996 (AEO96)30 and Annual Energy Outlook 1997 (AEO97)31 have average absolute percent errors of 5.9 and 5.5, respectively. Electricity sales have an average absolute percent error of 1.8 over the period studied (Table 6); 1998 is the year with the highest average absolute percent error of 2.7 percent. Electricity sales for all years were overestimated in AEO82, and, with the exception of AEO87, AEO85 through AEO90 tended to underestimate the earlier years and overestimate the later years. In earlier AEOs, overestimates tended to occur because of strong growth in electricity demand in the industrial sector resulting from high projections of oil and gas prices and strong growth in consumption in the sector in general. This growth projection was moderated in later forecasts, which incorporated energy efficiency gains and structural shifts in the industrial sector to less energy-intensive industries. In the forecasts since AEO91, electricity sales have been underestimated in most years, primarily as a result of optimistic estimates of efficiency improvements, coupled with continued growth in new uses for electricity, such as new electronic devices (e.g., home security systems, personal computers, and battery chargers) that was not captured in the projections until AEO97. In addition, electricity price forecasts have tended to be overstated in most years, largely due to the influence of overstated natural gas and coal prices to electricity producers, as discussed later. In terms of the AEO publications, until AEO94 the highest average absolute percent error was that of AEO82, at 2.7 percent, as the models used in that AEO continued to anticipate electricity growth at a pace near that of economic growth, a ratio that has actually been reduced considerably until AEO94. The error in electricity sales was more than halved in AEO83. Crude oil production forecasts have an overall average absolute percent error of 4.5 percent over the period evaluated (Table 7). The largest error for any year was 1989, with an average absolute percent error of 7.8 percent and all AEOs overestimating actual production for that year. Because domestic oil production is assumed to be determined by prices rather than demand, an important input to production forecasts is the world oil price, which has also been overestimated for most years, particularly in the AEO82 through AEO85 projections. For 1989, the first four AEOs had significantly high world oil price projections, leading to high production forecasts. Following AEO85, EIA’s price forecasts were either very close to, or significantly under, the actual 1989 price, with a consequent improvement in production projections. Each of the AEOs has had average absolute percent errors for crude oil production of 7.2 percent or lower, with the exception of AEO83, which had an average absolute percent error of 10.2 percent. AEO83 overestimated crude oil production for all years after 1985, with particularly large errors for 1989, 1990, and 1995, the latter of which was 23.6 percent, primarily because of high price forecasts. Following the oil price collapse of 1986, there were more underestimations than overestimates of crude oil production. As price projections have been reduced over time, the forecasts have captured the impacts of technological improvements in the oil industry, preventing the production forecasts from falling as precipitously as the price projections. The 1998 value in AEO99 was inaccurate due to the crude oil price collapse as described in that section. The overall average absolute percent error for natural gas production forecasts is 4.7 percent (Table 8), lower than the 5.6-percent average absolute percent error for natural gas consumption forecasts. Unlike crude oil, most demand for natural gas is met by domestic production; thus, natural gas production tends to follow the projections for consumption. Forecasts for 1994 display the highest average absolute percent error, at 6.8 percent, followed by 1995 at 6.5 percent. The highest error for 1995, and for all the production forecasts, occurred in AEO83, the first AEO to project 1995 production. Despite a very high price forecast, the AEO83 production projection was about 20 percent below the 1995 actual production, reflecting the low demand projection. AEO82 underestimated gas production in all years and had an 11.7-percent average absolute percent error, followed by AEO87 at 7.7 percent; for all the other AEOs the average error rate has been 6.8 percent (for AEO86) or less. The errors in production forecasts have resulted primarily from the low consumption forecasts, due to high price forecasts. In general, the AEOs have understated production, with the exception of the years prior to 1990 in AEO84 and AEO85, and most of the errors have been similar to those for the forecasts of natural gas consumption. The difficulty of predicting technological improvement in the industry—and, consequently, of predicting the amount of gas that would be available at a given price—led to the high price and low production forecasts in the earlier AEOs. Following the gas shortages of the late 1970s and the low resource estimates by most geologists, the conventional wisdom of the early to mid-1980s was that natural gas was a scarce resource. This perception changed as the impact of price controls that had curtailed production began to diminish. Also, beginning in the mid-1980s, a number of technological advances, such as directional drilling, 3-D seismic imaging, and slim-hole drilling, lowered the cost of gas exploration and production and expanded the estimates of the resource base. Beginning with AEO90, the forecasts of both production and price improved. Similar to coal consumption, coal production forecasts have an overall average absolute percent error of 3.6 percent (Table 9). Like those for natural gas, the forecasts for coal production have generally followed the consumption forecasts, with electricity sales being the dominant factor. However, an additional input is the level of coal exports, which also affects coal production significantly. Where coal production has been overestimated, a large part of the reason has been an overstating of the level of coal exports, especially for the years 1993 through 1998, as discussed below. Table 9. Coal Production: AEO Forecasts, Actual Values, and Absolute and Percent Errors,1985 to 1998 The highest average absolute percent error for coal production is 9.7 percent for 1993, when there was a strike by coal miners that sharply curtailed production. All AEOs produced before the strike show high forecast errors for 1993. The second highest average absolute percent error is for 1995, at 5.7 percent. The forecasts for 1995 in AEO83 through AEO86 range from 8.0 to 18.2 percent above the actual 1995 level, although later forecasts show errors of 5 percent or less. This reflects the overestimation of coal consumption, particularly in AEO83 and AEO84, and the higher-than-realized coal export forecasts in AEO83 through AEO86 (see below). The forecasts for other years average much closer to the actual values, with average absolute percent errors ranging from 1.3 to 3.8 percent. The AEO publications display little variation in their overall average errors, with the Annual Energy Outlook 1995 (AEO95)32 showing the highest average absolute percent error of 5.2 percent, mainly because of its severe underestimates for 1996 through 1998, which was due to the surge in coal consumption by electricity generation for those years. While the United States is a major importer of petroleum, it also imports natural gas, although in much smaller quantities. Coal is the only fuel for which the United States is a net exporter. Because domestic production of petroleum is insufficient to meet demand, imports make up the difference between demand and supply.33 The average absolute percent error for net petroleum imports over the period studied was 8.8 percent (Table 10). The forecast year with the highest average absolute percent error proved to be 1985, for which the AEOs averaged a 28.1-percent error; subsequent years showed considerable improvement. In general, there was a tendency to underestimate imports for the mid-1980s, because of underestimates of consumption and overestimates of production. Except for AEO83 and AEO85, this tendency was generally reversed in projections of the 1990s, with significant overestimates of net petroleum imports for many years in AEO84 through AEO95. Although in some AEOs this corresponded to overestimates of consumption and/or underestimates of production, it was also exacerbated by the contribution of inaccurate forecasts for other sources of supply, such as natural gas liquids and processing gain, the treatment of stocks, and assumptions about the pace of acquisition of crude oil for the Strategic Petroleum Reserve. By publication, the AEOs for 1982 through 1985, 1987, 1989, and 1994 proved to have the highest average absolute percent errors for forecasts of net petroleum imports. AEO82 strongly overestimated imports for 1985 through 1987; however, its forecasts for the subsequent years were markedly better. Because high estimates of oil prices led to high production forecasts, AEO83, AEO84, and AEO85 strongly underestimated imports in many years, as did AEO86 for the late 1980s. Later reports tended to overestimate imports due to underestimates of production. Net natural gas imports play a small, but increasingly important role in meeting natural gas demand, largely due to the growth of natural gas imports from Canada, which have risen steadily from 4 percent of natural gas supply in 1984 to more than 13 percent in 1998. The overall average absolute percent error for the period covered in this study is 16.0 percent, with the largest average absolute percent error for the year 1986 at 49.2 percent (Table 11). All the forecasts for 1986 were overstated, with errors as high as 72.7 percent (AEO82). There was a substantial oil price collapse in 1986, and petroleum imports displaced other energy sources, such as Canadian gas, for much of the Nation’s consumption needs, especially in the industrial and electricity generation sectors. Forecasts for 1987 were overstated in the first four AEOs, but AEO86 and AEO87 reversed the pattern with underestimates. AEO85 also showed high overestimates through 1992 and underestimates for later years. Most AEOs tended to underestimate imports, with errors as high as 54.2 percent for 1995 in AEO83. The major determining factors of natural gas imports have been the economics of natural gas trade with Canada, the assumptions of pipeline capacity from Canada, the assessment of liquefied natural gas imports from Algeria, and prospects for trade with Mexico and Japan. The tendency was for net gas imports to be overstated for the first four AEOs, except for the 1989, 1990, and 1993 through 1995 forecasts. Since the AEO86 forecast, there has been a greater tendency to underestimate gas imports. Since the Annual Energy Outlook 1993 (AEO93),34 the projections have been much closer to the actual values, with average absolute percent errors of 5.8 percent or less, although the AEO99 projection for 1998 reflects an historical update. The absolute percent errors in projections for net coal exports have averaged 24.5 percent over the period of this study (Table 12). The forecast year 1994 had the highest average absolute percent error at 48.1 percent, followed by 1998 at 40.8 percent. All the AEOs except AEO95 overstated 1994 coal exports by anywhere from about 30 percent to 77 percent. For AEO84 through AEO94, coal exports were generally underestimated through 1992 and overestimated in later years. Except for 1998, AEO95 and AEO96 generally underestimated exports by a range of 8 percent to 19 percent. AEO82 overestimated future coal exports with an average absolute percent error of 37.5 percent, due largely to the assumption that U.S. coal exports would garner an ever-increasing share of world coal trade, which was also expected to grow in reaction to high world oil prices. AEO83, in contrast, had a much more realistic view of future coal exports and, with the exception of 1995, had much smaller errors. AEO83, AEO90, and AEO95 through AEO99 were the closest of all the AEOs with respect to projected coal exports. Projections for 1993 through 1998 in AEO91 through AEO94 were far too high, in part because of the 1993 coal miners’ strike that reduced this country’s competitive position in world coal markets. In addition, world coal trade has not grown as much as previously assumed, because European consumers have turned increasingly to natural gas for industry and power generation, and environmental concerns have led some countries to reduce coal consumption as a means of reducing carbon emissions. AEO95 and AEO96 appear to be overcompensating for this trend. AEO99 partially reflects historical data for 1998. |
