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Annual
Energy Outlook
Forecast Evaluation
by Esmeralda
Sanchez
The Office of Integrated Analysis and Forecasting has been providing
an evaluation of the forecasts in the Annual Energy Outlook (AEO)
annually since 1996. Each year, the forecast evaluation expands on that
of the prior year by adding the most recent AEO and the most
recent historical year of data. However, the underlying reasons for deviations
between the projections and realized history tend to be the same from
one evaluation to the next. The most significant conclusions are:
- Over the last two decades, there have been many significant changes
in laws, policies, and regulations that could not have been anticipated
and were not assumed in the projections prior to their implementation.
Many of these actions have had significant impacts on energy supply,
demand, and prices; however, the impacts were not incorporated in the
AEO projections until their enactment or effective dates in
accordance with EIA's requirement to remain policy neutral and include
only current laws and regulations in the AEO reference
case projections.
- Energy prices (including petroleum, natural gas, coal, and electricity)
have been far more difficult to predict than consumption, production,
and net imports. Typically the rate of increase in energy prices has
been overestimated rather than underestimated. More rapid technological
improvements, the erosion of the market power of the Organization of
Petroleum Exporting Countries starting in the mid-1980s, excess productive
capacity, and market competitiveness are all factors that led to lower
energy prices than projected. In the 1980s and 1990s, productivity and
technology improvements and the effects of gradual deregulation and
changes in industry structure more than offset the factors that tended
to result in higher energy prices, such as resource depletion and growing
energy demand. However, the tendency to overestimate energy prices may
be reversing. In more recent years, better adherence by the oil-producing
countries to production agreements (crude oil), more rapid depletion
(crude oil and natural gas), or unexpected consequences of deregulation
plans (electricity) have led to generally higher prices than expected
only a few years ago.
- The level of future electricity sales have been consistently underestimated
in all years in each of the AEOs published between 1991 and
2002. The underestimation averages less than 3 percent, which is a relatively
small error in a long-term forecast. It implies that the fuels consumed
to generate electricity (e.g., coal, oil, natural gas) are also being
underestimated. There have been many changes in the structure and growing
sources of uncertainty in the electric industry and markets over the
last decade that may help to explain this underestimation. This includes
deregulation of electric generation, the ubiquity of computer equipment
and consumer electronics, and growth in internet use and the expansion
of the information technology sector during the economic boom of the
1990s. Another important factor potentially contributing to the underestimation
of electricity consumption is the series of unpredictable weather patterns
that has affected much of the country over the past decade.
- Natural gas generally has been the fuel with the least accurate forecasts
in consumption, production, and prices. Natural gas was the most recent
fossil fuel to be affected by regulatory reforms following the strong
regulation of energy markets in the 1970s and early 1980s. As regulatory
reforms were implemented, the behavior of natural gas in competitive
markets was especially difficult to predict. Natural gas market trends
have been unstable in the past 25 years, which increased the difficulty
of determining future levels for market prices and volumes. Furthermore,
in past projections the natural gas market outlook was strongly influenced
by the assumed world oil price, which was subject to its own error;
by natural gas resource estimates, which steadily rose; and by technology
improvement expectations, which proved conservative.
- External factors such as severe weather, economic cycles, and strikes
have also had an impact on energy markets; however, these events cannot
be anticipated in the mid- to long-term period and are not captured
in the models underlying the AEO projections.
- Technological improvements in both the production and use of energy
have had a significant impact on the price, supply, and consumption
of energy. For the most part, earlier AEOs assumed much slower
technology development than actually occurred, accounting for some of
the deviation between the forecasts and history. This influence was
identified, in part, by the forecast evaluation exercise. Beginning
with the Annual Energy Outlook 1994, the projections in the
AEO were produced using the National Energy Modeling System
(NEMS). Because NEMS was designed with methodologies to represent technology
in a more detailed fashion, there has been an improvement in the capability
to represent technological change throughout energy markets. Additional
studies on technological improvement have led to more realistic assumptions
in the more recent projections, along with modeling innovations, such
as the incorporation of learning-by-doing, in which experience gained
with new generation technologies and advanced end-use technologies is
assumed to lead to cost reductions in the model. These enhancements
have significantly improved the projection capability within NEMS.
The last column of Table
1 provides a summary of the average absolute forecast errors for each
of the major variables for AEO 1982 through AEO 2002.
The calculation of the forecast error is shown in more detail in Tables
2 through 18. The average absolute forecast error is computed as the
simple mean, or average, of all the absolute values of the percent errors,
expressed as the percentage difference between the Reference Case projection
and actual historic value, shown for each AEO, for each year
in the forecast, for a given variable. The historical data is typically
taken from the AER. However, because the AER was not available for use
in the comparison for this year, the 2001 data were taken from the Monthly
Energy Review, July 2002.
Table 1 also shows the forecast error from the previous evaluations.
As indicated in Table 1, the forecasts of consumption, carbon dioxide
emissions, production, and gross domestic product have generally been
the most accurate, and the forecasts of prices the least accurate. The
percent errors change from one year's evaluation to the next as an additional
year of data and projections is added. The percent errors may also change
due to data revisions in the Annual Energy Review (AER) and the
Monthly Energy Review (MER), which is the source of the historical values
used for this comparison.
Relative to the evaluation last year, net coal exports and gross domestic
product have higher errors, and world oil prices, natural gas wellhead
prices, coal prices to electric utilities, and average electricity prices
have lower errors. For the most part, the percent errors remain similar
or improves over time; however, the average error for net coal exports
has increased significantly. The average absolute percent error increases
because of the very high forecast errors in the earlier AEOs
that did not foresee the precipitous decline in coal exports experienced
since the mid 1990s due to an expectation about the competitiveness of
U.S. coal supplies on world markets. An additional large percent error
is added to the average calculation each year as another forecast year
is picked up from the earlier AEOs. The earlier AEO
forecasts have a disproportionate weight in the calculation (more observations)
that acts to push up the average absolute error. In this year's evaluation,
the forecasts from the earlier AEOs for coal exports in 2001
were added to the calculation. In some years, the coal export forecasts
are up to four times the actual level achieved in 2001. The newer AEOs
reflect the drop in coal exports and project export totals that are closer
to the actual data, but this is not sufficient to offset the impact of
the large error in the early AEOs. In the more recent AEOs,
the forecasts of coal exports, however, are still optimistic relative
to actual experience.
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