What have Treasury and the Reserve Bank been up to?
Nothing apparently. Jeanette asked Michael Cullen in the house today if he had any faith in the economic projections that Treasury does on his behalf. She then pointed to their last seven economic forecasts and their predictions for the price of oil going forward. Here is the graph of their predictions:
One can only describe Treasury’s efforts as flaccid in the face of the
firm trend in rising crude oil prices!
As you can see from the pink line, in May 2004, they said we would have a $26 per barrel oil price today. In May 2005 (Teal), they said today’s price would be $51 per barrel. In May of this year (Blue), they said we’d be at $56 right now. You get the point. (By the way, BEFU stands for Budget Economic & Fiscal Update and HYEFU stands for Half Yearly Economic & Fiscal Update, which comes out in December each year.)
Right now oil is averaging $95 per barrel.
Jeanette then turned her attention to the Reserve Bank’s forecasts. Same story. Eight consecutive Monetary Policy Statements with ridiculously persistent predictions of falling oil prices:
Isn’t it time the government forecasters actually made an effort to understand the underlying reasons why their forecasts are so wrong? This frog thinks so.
November 13th, 2007 at 4:05 pm
If Jeanette would like to accurately pick the future price of oil, or any commodity for that matter, on eight separate dates in the future, then I’m sure Wall Street will be calling…
November 13th, 2007 at 4:32 pm
Hey PEL, I think she was talking about the trends, not any particular number per se. I think the point was that they keep getting the trend wrong. Over and over. Flaccid. How quaint frog!
November 13th, 2007 at 4:36 pm
But the implied alternative appears to be an insistence that economic projections be accurate.
So here’s a challenge: what will the price of oil be in November 2010?
November 13th, 2007 at 4:56 pm
They don’t have to be spot-on, but a general agreement on the direction of the trend would be nice! This insistence that rising oil prices are an anomaly rather than a long-term change leads to short-sighted and dangerous assumptions when applied to transport planning.
For instance, the models used by Regional Councils when deciding on the cost-benefit analysis of road and rail projects almost always purport to show that major public transport funding won’t have any significant impact on congestion or emissions. That’s partly because the models have a built-in assumption of long-term petrol price stability, so that the availability of better public transport won’t lead to anyone shifting away from cars. However, the price rises of 2006 led to a 10% increase in public transport ridership in Wellington, which was more than the networks can handle, because passenger growth is already constrained more by capacity than demand.
If prices keep going up, more and more people are going to wish that they had an alternative to driving everywhere. But if the models are based on the same sort of persistent assumptions that Treasury and the RB are using, we’ll never get around to building the right infrastructure for the future.
November 13th, 2007 at 5:37 pm
PEL
The answer is HIGHER.
“To the moon Alice!”
The consistency of the error indicates that they do not learn from their mistakes. Have never admitted a mistake, if I don’t miss my guess and have yet to examine their historical bias.
Which is to say, they are not dwellers in the real world and don’t get taken to task for their mistakes.
Who profits from those mistakes? I know not.
Someone must. They are too consistent.
RANDOM GUESSES AROUND THE EXISTING PRICE WOULD HAVE PICKED HIGHER AT LEAST HALF THE TIME!!!
BJ
November 13th, 2007 at 5:45 pm
The issue is that in each case the price forecast has been said to be down in the near future, and then continue down. Given that the real trend is upwards, the core question is what data was there to suggest that the price would significantly drop in the future.
As it’s a rhetorical question I’ll answer it myself, with “none”.
Of course, it may be that we seriously underestimate these forecasters, and they knew that the price would continue to rise, but they were sure that demand destruction would occur when oil products were simply too expensive, and thus prices were going to come down once the trigger point was reached, and economies crashed. They were trying to predict recession, and thats not too easy a thing to do.
Recession is still going to happen. We just don’t know what the magic number it will be when oil is “too expensive”. A brief google found many articles predicting recession if oil rose above $40, dated from 2004. Clearly $80 oil (which is where I think we really are now) is not too expensive. When will oil be simply “too expensive”: $100? $120? $150? $200? More?
One thing I’m fairly sure of, we’re somewhere near the peak rate of production, so there is not much more growth in demand that can be tolerated before demand really does exceed supply. We might make 90m/day, but I don’t think 100 is possible. Then it’ll get real interesting…
November 13th, 2007 at 6:42 pm
The only way we’ll know for sure when global oil production peak has occurred is when we have a couple of years of data in the rear view mirror. It looks like last year was our biggest ever for global oil production, and 2007 has been no larger…
November 13th, 2007 at 7:30 pm
Never mind, the good news is that OPEC have announced they will be raising production as they can see the damage high priced oil will do to the world economy.
November 13th, 2007 at 7:57 pm
For those who don’t get BJ’s reference, I don’t think it directly relates to Lewis Carrol / Charles Dodgson or various adaptations of his works (much as I still love Jefferson Airplane’s ‘White Rabbit’).
I suspect it is to this:
http://www.apta.com/documents/record_to_moon.pdf.
“To the moon, Alice. That’s how high you can stack gas cans filled with the fuel Americans saved by riding public transportation a record 10.1 billion times last year – the highest ridership in 49 years. Saving 1.4 billion gallons of gasoline annually is not just good news, it’s good public policy.
By supporting increased investment and incentives for public transportation, you’re helping create an energy-independent America of the future.”
November 13th, 2007 at 9:23 pm
># big bro Says:
>November 13th, 2007 at 7:30 pm
>Never mind, the good news is that OPEC have announced they will be raising >production as they can see the damage high priced oil will do to the world >economy.
OPEC have been saying that for years, and they don’t seem to be able to do it. It looks from the statistics as if OPEC have actually been producing oil at full capacity since 2003.
November 13th, 2007 at 9:52 pm
Tomsk, The main reason for the assertion that major public transport funding won’t have any significant impact on congestion is because they are referring to peak congestion. There are three short/medium term tactics used by drivers to accomodate peak congestion, known as triple divergence.
1. travel at a different time
2. travel on a different route
3. use an alternative mode of transport
Longer term strategies involve relocating homes or businesses to less congested areas.
When peak congestion is reduced by improving either roads or public transport drivers respond to the reduced travel times in exactly the opposite way, known as triple convergence. Hence peak travel times quickly return to there previous levels. Obviously peak periods won’t last as long, won’t involve as much of the road network and therefore have a negative effect on public transport use outside of the peak period. This concept of triple divergence was discovered when the planners of San Francisco’s BART investigated the reasons why replacing the city’s freeway program with a rapid transit program in 1958 had failed to deliver different results from the freeway programs implemented in Los Angeles and Detroit. BART also failed to contain urban sprawl because the city commissioners did not have the power to alter land use zoning around BART stations. Silicon Valley is one consequence of this. A satelite city built on prime horticultural land.
http://www.anthonydowns.com/congestiontostay.htm
The urban sprawl of the second half of the 20th century is as much a consequence of government home ownership policies and the introduction of single use zoning. Studies of the construction and destruction of urban freeways and bridges have proved that most of the induced traffic is due to associated land use changes. This negates the main economic argument in favor of new roads and railways. The new transport infrastructure doesn’t create new economic activity, it merely reallocates existing or proposed activity. This was first identified during the railway boom in Victorian England and again with 20th century motorways and bypasses.
http://www.preservenet.com/freeways/FreewaysTear.html
The objective evidence proves that increased investment in public transport does not reduce congestion and does not reduce maintain costs funded by motorists or ratepayers. However the temptation to use these arguments only exists because the funding for PT comes from revenue from roads users and using myths to sell ideas is nothing new.
Road user subsidies of public transport are a carbon tax and should be openly admitted as such. After all, only AGW denialists would have any objection to this. Or perhaps this would set a bad precedent for future carbon taxes, ie the revenue be spent on mitigation strategies.
November 13th, 2007 at 10:23 pm
Tomsk, GoogleBooks has a preview of Still Stuck in Traffic: Coping with Peak-Hour Traffic Congestion By Anthony Downs
The section dealing with triple convergence and expended road or PT is here
http://books.google.com/books?id=ckLcxEb5tM8C&pg=PA86&dq=triple+conver gence&sig=0qyppUv9C4wqoCnFbrJMXjZ9y2c#PPP1,M1
November 14th, 2007 at 9:34 am
In defence of poor old Treasury (and no I don’t work for them), there are a lot of people that stand to make a LOT of money by accurately predicting the future price trends of oil, and have failed to do so (at least in the short term). I think it’s unlikely that there is some grand conspiracy to deliberately pick wrong estimates (which would imply that little ol’ Treasury can predict better than anyone else in the world, and then deliberately uses different predictions). More likely its just bloody hard.
I do agree with the people who have suggested it’s worthwhile investigating why the predictions are so off, and although I don’t have any particular knowledge of it, given the money involved in accurate predictions I would suspect this is going on.
I don’t think its fair to pick on Treasury and RB (who I also don’t work for) in particular for making inaccurate predictions, when everyone else is doing the same.
November 14th, 2007 at 10:15 am
I said:
>OPEC have been saying [that they will be raising production as they can see the damage high priced oil will do to the world economy] for years, and they don’t seem to be able to do it. It looks from the statistics as if OPEC have actually been producing oil at full capacity since 2003.
I wonder if that’s why treasury keep getting it wrong - they keep believing OPEC when it says it’s going to be able to raise production to get the price down.
Of course it’s impossible to predict oil prices completely accurately, But treasery keep predicting they’re going to go down, and Jeanette keeps predicting they’re going to go up. And treasury keeps getting proven wrong and Jeanette keeps getting proven right. Treasury’s stats are more precise than Jeanette’s, but surely it’s better to be approximately right than precisely wrong.
Of course Jeanette’s not working this out herself. I imagine she’s working from predicitons from groups like the ISPO (International Society for the study of Peak Oil). If their predictions keep being broadly more accurate than Treasury’s, then we should give them more creedence than Treasury’s projections in planning for the future.
November 14th, 2007 at 10:30 am
Well, Bro, OPEC ought to get their finger out then and increase production. I’m sure they can, a bit, but I think that theres more bullsh*t and bravado than real production capacity in OPECville. A number of OPEC countries aren’t actually meeting their production quotas, and haven’t for some time, and as noted by kahikatea above, OPEC have sabre-rattled about increasing production on a number of occasions and failed to do so. The days when OPEC manipulated the tap that controlled oil prices are now distant memories. Thats not to say they wont be in that position again, if they really have the depth of reserves they say they have, by which time middle east oil will be the only game in town. Well, in the world.
And of course, theres non-OPEC oil. No lesser a force than Exxon reckon that non-OPEC production will plateau around 2010, so it would be really convenient if OPEC could ramp up production whilst non-OPEC starts to decline.
We can live in hope… There are those who say that “living in hope” actually means “burying ones head in the sand”.
November 14th, 2007 at 12:44 pm
Interesting to see that question number one for today is a follow up on this. Perhaps someone has been making some very accurate predictions after all.
November 14th, 2007 at 8:24 pm
BeShakey, It all comes down to the underlying assumptions. Assume that the constraints are all in the transport and processing parts of the supply chain and you can expect to attain an equilibrium between supply and demand within the short term. Assume the constraint is the unwillingness of the supplier nations to sacrifice their economic futures to the short term greed of the west or that the constraint is peak oil and you will expect the average price and amount price variability to both increase over the years.
The latter assumption is the one that is proving to be correct. In fact a simple 6 polynomial trend projection from a 1999-2003 base will get very close to what has actually happened to the price since then. Although, notably, the northern autumn seasonal peaks are now becoming so extreme that they are making this simple method unreliable for projecting future annual average prices. It’s almost as though speculators are trying to bid the price to an all time record just for the thrill of seeing the old record fall.
November 22nd, 2007 at 10:02 pm
PEL
The bizarre things is the way the RBNZ and Treasury have been constantly saying that oil prices have peaked and will now decline: which is the same thing as saying that Wall St is overpricing oil (those oil futures these guys buy and sell, they’re buying and selling predictions of the future price of oil).
The RBNZ and Treasury economists aren’t just betting against the greens, they’re betting against the markets as well. That’s just wierd.
November 22nd, 2007 at 10:44 pm
Global Recession coming.
It will impact the prices of commodities , including oil, but…
On the other end of THIS recession though, when the old style economics demands that we grow, the oil still won’t be there.
The price and availability will have moved into another dimension.
In case you didn’t notice, Monday’s Wall Street Journal, that radical leftist rag, headlined peak-oil. They’re fudging a bit about being stupidly wrong, but they’ve capitulated. It’s here to stay.
BJ
November 22nd, 2007 at 11:01 pm
I liked how all the peak oil activists and theorists reacted to being called “fringe” by the WSJ, e.g.
http://www.energybulletin.net/37382.html
http://www.futurepundit.com/archives/004804.html
of course they also had lots of technical response as well
http://www.energybulletin.net/37438.html
November 24th, 2007 at 5:41 am
BJ & Trevor, You may recall discussing this statement from a University of Canterbury press release. “To run the Orbiter bus at 100% capacity, as it runs now, we would need a huge dam or a considerable part of the Canterbury Plains would need to be covered with solar panels.”
I finally found the actual study and it is very relevant to the WSJ’s road to Damascus moment.
‘Energy Risk to Activity Systems as a Function of Urban Form’
http://www.landtransport.govt.nz/research/reports/311.pdf
“6.1 Main findings
The most important finding of this research is that energy shortage/crisis risks can be quantified, assessed and considered as part of urban and transportation planning decisions. Based on a future energy supply assessment and the study of travel patterns and urban forms, we developed a method to estimate the nature and magnitude of risks
posed to urban activities in an event of limited or constrained access to energy. The implementation of this method as a software package (RECATS) allows planners and decision makers to assess future scenarios of urban development forms, land use, transport and energy efficiency policies in order to minimise future risks.
6.2 Main limitations
The main limitation of our study is that very limited data on travel behaviour in the event of an energy or oil shortage/crisis is available.
This limits the extent to which land use and travel demand modelling
can be used to forecast changes in behaviour and activities in a shortage/crisis event. As shown in the literature review, just recently a few research efforts have highlighted the need for research into travel behaviour in energy constrained events. They have also pointed out that very little data/information has been collected during recent disruption events. Therefore, this research has used Christchurch’s available data sets, which are not based on any empirical evidence of disruption events.
Nevertheless, the research team’s assessment is that data limitations do not compromise the quality of the findings. The case study findings using RECATS could be used in a policy-making context, which does not require a great deal of sophistication to create useful information for decision makers. Hence, additional data would increase the level of reliability of the findings, but it is expected that they would not change the nature of the
findings. Nevertheless, it has to be highlighted that the risk-gap between Option C and all other options would become even larger if mitigating options, such as mode shifting, were considered.”
November 24th, 2007 at 6:15 am
I do remember.
It would appear that the person drafting the press release may have taken the “Business As Usual” morphed it into “as it is now” and then …. well we never did work out all the possible errors, but it is quite certain that this study doesn’t go over-the-top the way the PR did.
As for the WSJ, they may just be trying to get their licks in as the debate turns serious, to shape opinions THEIR way, so as to protect their demographic… Bush’s self-described base… the “haves and have mores”.
respectfully
BJ
December 8th, 2007 at 5:28 am
While Treasury usually does a pretty good job on in the nebulous arena of economic forecasting, (and somehow gets blamed by labour for not perfectly predicting things, as if forecasting was expected to be more accurate for economists than it is for meteorologists…) it’s certainly fair to say they’ve completely dropped the ball on peak oil.
I’ve often tried to argue the issue of peak oil with a family member who happens to work at treasury, but they’re simply far too skeptical about undiscovered oil reserves. The fact remains that oil will peak sometime, whether it’s now or later. The amount of reserves don’t enter into it, as there’s no cheap way to renewably produce oil, even if we wanted to.