Senators Feinstein, Snowe and others Urge Energy Department to Update and Improve Analysis Model Used to Forecast Oil Prices
- Annual forecasts regularly fail to reflect the reality of oil prices -
Jul 23 2008
Washington, DC – A bipartisan group of senators, including U.S. Senators Dianne Feinstein (D-Calif.), Olympia Snowe (R-Maine), Byron Dorgan (D-N.D.), Richard Durbin (D-Ill.) and Robert Menendez (D-N.J.), today called on the Department of Energy to update and improve the analysis model used to forecast oil prices.
The senators today wrote to Guy Caruso, Administrator of the Energy Information Administration, in response to inaccurate and conflicting price forecasts from the EIA’s National Energy Modeling System.
Following is the letter sent by the senators today to EIA Administrator Caruso:
July 22, 2008
Mr. Guy Caruso
Energy Information Administration
1000 Independence Ave., SW
Washington, DC 20585
Dear Mr. Caruso:
We write to express our concern about the inaccuracy of the Energy Information Administration’s (EIA) gasoline and oil price projections in its Annual Energy Outlook (AEO). We request that EIA conduct a thorough review of its National Energy Modeling System to identify the causes of recent failures and steps necessary to improve projection accuracy.
As you know, every AEO since 2005 has forecast that gasoline prices have peaked and will soon enter a steady decline. AEO 2005 predicted that retail gasoline prices would average only $1.57 per gallon this year. AEO 2008, published in June, projects that gasoline prices will drop precipitously every year from now to 2016. Next year, AEO 2008 projects that American consumers will pay only $2.75 per gallon, 33 percent less than they pay today. EIA data shows that American gasoline prices have never dropped 33 percent in a single year.
Furthermore, EIA’s own analyses seem to contradict each other. Less than two weeks after publishing AEO 2008, EIA published its Short Term Energy Outlook, which projected that gasoline will remain over $4 per gallon until the fourth quarter of 2009.
As the Federal government’s leading energy statistics agency, EIA’s forecasts guide government decisions and policies. For instance, the National Highway Traffic Safety Administration (NHTSA) uses the AEO to set Corporate Average Fuel Economy (CAFE) standards at the maximum feasible level. According to NHTSA, fuel prices are a primary determinant of the overall social benefit that will result from improving fuel economy.
In April 2008, NHTSA proposed the first fleetwide fuel economy standard increases in decades, as required by the Ten-in-Ten Fuel Economy Act. In setting its standards, NHTSA relied on the AEO 2008 Revised Early Release estimate that gasoline will be $2.26 per gallon in 2016 and $2.51 per gallon in 2030 – far below what consumers are paying at the pump today. NHTSA’s sensitivity analysis demonstrates that had it assumed more realistic prices of $3.13 per gallon in 2016 and $3.74 per gallon in 2030, it would be cost effective to set fleetwide fuel economy standards above 35 miles per gallon in 2015. Unfortunately, EIA’s final AEO 2008, published in June, forecasts that the price of gasoline will be $2.19 in 2016 and $2.45 in 2030, even lower than the estimates previously used by NHTSA.
We request that EIA conduct a thorough review of its National Energy Modeling System – led by a qualified outside expert – to recommend steps to improve EIA projections. Specifically, we ask that review to answer the following questions:
- The National Energy Modeling System, which focuses on supply and demand instead of futures market activity, predicts that oil prices have peaked and should soon fall, but the price of oil continues to rise. Does this suggest that oil prices are being set by forces beyond the laws of supply and demand and that the model should factor in futures market activity?
- What steps has EIA taken to update its projection model to more accurately forecast future prices in the wake of consistently inaccurate price projections?
- Why do Annual Energy Outlook projections and Short Term Energy Outlook forecasts contradict each other?
- What factors and data sets should be added to EIA price projection models to better reflect actually market conditions, such as geopolitical risk, energy market speculation, and prices in the futures market?
Following the completion of this review, we request that EIA publish a supplement to the AEO 2008 reflecting the recommendations. We also ask that you review the AEO 2008 and answer the following questions.
- It appears that EIA reduced its projected future gasoline price estimates during 2008 while consumer prices skyrocketed. Please review how EIA could reduce its price forecasts at a time when prices were rising.
- Is the 33 percent drop in oil prices forecast between now and 2009 a realistic projection in your opinion? If so, please explain what events EIA expects to occur in the next 12 months that will cause the largest drop in the price of gasoline on record.
- None of the AEO 2008 scenarios predict that gasoline prices will be above current prices at any future date. The AEO 2008 “high price” scenario projects that the average annual price of gasoline will not exceed $3.52 before 2030. Please explain why EIA does not believe current prices are sustainable under any scenarios.
As policy makers, we rely on EIA to provide sound analysis with which to develop our national energy policy. We look forward to hearing from you how EIA reconciles the current record energy prices with such dramatically lower forecasts for future oil and gas prices.
Dianne Feinstein, United States Senator
Olympia Snowe, United States Senator
Byron Dorgan, United States Senator
Richard Durbin, United States Senator
Robert Menendez, United States Senator