Why You Shouldn't Read Energy Outlooks

Every year the leading multinational energy companies and government energy agencies release their projections for world production and consumption. Every year the media scrambles to create headlines from the most brazen predictions. Every year the awful predictions from previous years fade from memory.

Every year I cringe.

There is perhaps nothing more useless in investing than super-long-term predictions. Do we really need to know what the world's energy consumption will be in 2040? Markets are so complex and pose so many unknowns that the only certainty is uncertainty. Unfortunately, that hasn't stopped the annual prediction parade from occurring every January. You're lucky: I have read this year's energy outlooks from ExxonMobil (NYSE: XOM  ) and BP (NYSE: BP  ) so you don't have to.

No Nostradamus
Here are a few nuggets from BP's energy outlook to 2030 (link opens PDF) and Exxon's energy outlook to 2040.

  • According to BP's outlook: "Liquid products derived from natural gas and coal will only account for an additional 1 million barrels per day (mmbd) of production." With cheap natural gas prices in key worldwide markets there is a renewed focus on cracker technologies. This prediction could be way off in just a few years.
  • From BP's report: "India remains on a lower path of energy intensity; by 2030 it consumes only about half the energy that China consumes today, at a similar income per capita level as in China today."
  • From BP's report: "Natural gas and electric vehicles (4% and 1%, respectively, in 2030) are constrained by limited policy support combined with a general lack of infrastructure in all but a handful of markets." Ironically, these numbers are flipped in Exxon's report.
  • BP states that CO2 emissions will be "well above recommended levels," while Exxon simply states "CO2 emissions plateau." Yet both claim CO2 emissions will reach 40 billion metric tons annually by 2030.
  • Energy intensity predictions can make or (most likely) break projections. For instance, BP states that delays in new Middle East oil subsidy reductions could add an additional 3 million barrels per day to world demand. That would offset all of America's growth from shale oil and throw off several other projections.

Oh, and these are the revisions from BP's outlook last year, which are buried in the appendix:

 

Difference From Previous Year

Nuclear Output

(95) mtoe

Biofuels Supply

(50) mtoe

Renewables in Power

55 mtoe

India Energy Demand

145 mtoe

North American Oil and Gas Supply

145 mtoe

Source: BP Energy Outlook 2012. Note: 1 mtoe = mega metric ton of oil equivalent, or 42 million GJ, 488 million GW hours.

Granted, these can be small quantities when billions or trillions of metric tons of oil equivalent are shown in figures. But when figures are adjusted and readjusted every year these differences can really start to add up. Since we don't have a crystal ball (like BP and Exxon) and can't know for sure which predictions will fall short, let's turn to some laughers from years past to illustrate the folly of energy outlooks.

$25 oil anyone?
In December 2001 the Department of Energy and the Energy Information Administration released the "Annual Energy Outlook 2002: With Projections to 2020" (link opens PDF). The report didn't make it close to 2020, as many of its bold claims have already been proven wrong. Here are just a few:

  • After dropping sharply in 2002, natural gas was projected to "recover to $3.26 per thousand cubic feet by 2020 and grow at 2% per year." The prediction is backed up with: "Although projected natural gas demand in 2020 is 1.0 trillion cubic feet lower than was projected in AEO2001, the price is expected to be higher due to a less optimistic assessment of natural gas reserves discovered by exploratory drilling." Oops.
  • "Higher projected oil demand in 2020 pushes prices to a whopping $24.68 per barrel." Remember, this was completely in line with oil under $30 per barrel at the turn on the century.
  • "Projected U.S. crude oil production declines at an average annual rate of 0.2 percent from 2000 to 2020, to 5.6 million barrels per day." The report claims that energy imports will be our saving grace. Little did they know that exports would outpace imports starting in 2010.
  • Under the most optimistic scenario considered, renewable energy was only projected to grow to 9 quadrillion BTUs by 2020. Last year the United States produced 8.125 quadrillion BTUs from renewables and is currently on pace to easily eclipse 10 quadrillion BTUs in the next few years.

Foolish bottom line
There will continue to be headlines touting the awesome projected dominance – and perceived failures – of energy sources. My advice: Don't listen to companies or agencies trying to outsmart themselves. No one saw the potential of America's shale oil and gas reserves as recently as 2002. Or technological breakthroughs that pushed wind power to 3% of our total electricity generation capacity virtually overnight.

If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.


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