150115 Oil price forecasts
  • Are crystal balls returnable? If you ever want to exercise your cynicism muscles, it’s worth pedalling through the oil price forecasts that the Government collects in one handy document each month. Six months ago, the average forecast for the average oil price in 2015 was $106 a barrel. Even just last month, the average was $80. Yet Brent crude is currently trading at less than $50 dollars a barrel, with little expectation that it will rise any time soon. Those earlier forecasts could end up looking pretty stupid.
  • This matters for everyone… But perhaps the forecasters should be excused, as the only predictable thing about oil prices is their unpredictability. The recent decline came almost out of nowhere to become one of most significant stories in town. On the happy side of the ledger, it is already reducing what we pay for petrol and for energising our homes. On the sadder side, it will impinge on the public finances and is costing people their jobs. Just today, BP is expected to shed 3,500 workers from its North Sea operations.
  • …but it matters in a special way for Scotland. During last year’s referumble, Alex Salmond relied on forecasts that had oil costing $110 a barrel for the foreseeable. Since the referendum, the UK Government has rejoiced in pointing out the difference – and, more importantly, the £billions in lost tax revenue – between that and the reality. This may seem like a moot point now that No has won, but with the SNP agitating for another referendum it could actually be important. The UK as a whole can cope with such an unsteady source of cash, but could an independent Scotland?
  • And it’s not just prices that are uncertain. How much oil and gas is actually left at the bottom of the North Sea? Enough to last a few decades yet, but it’s hard to be more specific than that. Naturally, last year, the SNP used the highest estimate they could find; which was a reference to “24 billion [barrels of oil equivalent] potential” in a report commissioned by the Government. But the author of that report, Sir Ian Wood, has since come out angrily against that figure, and reckons it’s likely to be closer to 16 billion. It’s almost as though this resource is hidden underground – and no-one really knows anything for sure.
  • So, never rely on the forecasts, huh? Exactly. Looking into the future, and making guesses and assumptions about it, is a necessary part of this pretend science called economics. But when it comes to actually governing, politicians should legislate for the worst.