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Error margins: forecasting energy demand

Long-term energy demand forecasts have always been as much art as science.

They involve so many elements and can encompass such a wide array of approaches that any prediction can only be taken as a general guide as to what might -- rather than what will -- happen. As Danish physicist Niels Bohr said: "Prediction is a very difficult art, especially when it involves the future". Neil Ford

Any casual observer of the oil markets will recognise that even short-term forecasts of demand for a single energy commodity are fallible.

The International Energy Agency has adjusted its global oil demand projections (see chart: Oil demand growth -- short term ) for 2011 several times during the course of this year, citing stubbornly high prices, a loss of supply from Libya, fears of war with Iran and, above all, international economic fragility. Extrapolating such variations over a long period can create huge statistical differences.

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Economic factors are also important, as increased wealth enables consumers to spend more on fuel, heating and electricity, on holidays and on consumables that require energy during the manufacturing stage.

At the lower end of the prosperity scale, increased income can make the difference between access to electricity and continued reliance on wood fuel.

The third major component is technological development. The past 250 years of human development have seen a relentless rise in demand for energy, with the pace of economic growth closely correlated with changes in demand for coal over the period 1750-1950; and then with demand for oil and gas since 1950.

Above all else, it was the development of mass iron and steel production methods that helped drive energy consumption.

However, looking ahead, technological advances could help to cut energy demand, particularly on the back of efforts to cut global warming. Demand can be eroded by energy efficiency; the introduction of more efficient methods of manufacturing; the development of new materials and any number of other factors.

Similarly, the amount of generating capacity required to ensure reliable supply may be reduced through the development of intelligent grids.

Even once total energy consumption has been predicted for future years, there is the thorny matter of which technologies will supply that energy. Again, the current debate is fuelled by concern over global warming.

It is widely considered that the consumption of oil, gas and coal will eventually decrease, at least as a proportion of the total global energy mix.

Renewables, led by wind power, are quickly becoming an important source of electricity generation, but it remains to be seen which renewable energy technology will dominate in 30 years' time.

Much depends on the merry dance between political will and economic requirements, including with regard to reducing greenhouse gas emissions.

Finally, all of the factors mentioned thus far are influenced for better or for worse by both domestic and international stability.

Again, predicting political and economic security is as much of an art as a science.

Few predicted the momentous economic crisis that has plagued the industrialised world since 2008; nor the anti-authoritarian and anti-corruption movements that have swept across North Africa and the Middle East this year.

Margin of error

Predicting any one factor among demographic change, economic growth and technological development is a massive although interesting undertaking in its own right.

A slight percentage difference in annual growth rate predictions can result in huge long-term variations.

Combining such differences from all relevant factors within a single energy demand forecast can produce colossal cumulative variations.

While economic and demographic predictions are challenging to make at best, long-term forecasts on technological development enter the realm of science fiction. Even attempts to predict a single statistical development in the energy sector can prove problematic.

The debates over the timing of peak oil and the emergence of hydrogen as a mainstream, flexible source of energy are cases in point.

As Danish physicist Niels Bohr said: "Prediction is a very difficult art, especially when it involves the future."

Nevertheless, a wide range of companies, governments and sector umbrella organisations do seek to provide long-term energy demand predictions (see Chart: Oil demand forecasting -- long term ).

During the 1980s, the IEA published energy consumption forecasts for internal use only.

Its 1982 forecast was typical, predicting that global oil consumption would reach 58-74 million b/d by 2000, which was not too far adrift of actual annual consumption in that year of 76.2 million b/d.

By 1990, most organisations, including the IEA and the US government, were using sophisticated computer modelling to predict long-term energy consumption.

The IEA used its World Energy Model, which it updated on an annual basis, as the basis of its predictions.

Again, as with most other organisations, it used crude oil price (see Chart: Assumptions for world fossil fuel prices) and GDP forecasts as the basis for its energy demand projections, while assuming a steady state scenario; that is, that there would be no changes in national government policies over the timescale of the projections.

Overall, most WEO reports and other forecasts more than ten years into the future have underestimated global energy consumption.

In common with many other reports, the 1993 WEO predicted that oil prices would rise gradually to $30 a barrel by 2010.

This obviously proved a gross underestimate, given that the $100 barrel had by then become commonplace.

The report predicted continued strong economic growth in China over the 17 years of the forecast, but failed to comprehend just how big an oil consumer China would become.

The 1994 report responded to stubborn recession in OECD countries by downgrading its GDP and oil consumption forecasts for 2000.

This was an illustration that most in-depth forecast reports over the past 20 years have paid a great deal of attention to the problems of the day, such as the recession of the early 1990s; the 1997 Asian economic crisis; and the First and Second Gulf wars.

The biggest and most obvious failing is that these reports focused too heavily on short-term economic and political developments, while paying too little attention to long-term socio-economic trends.

While near-term events have important short and medium-term significance, their long-term impact is usually overshadowed by the emergence of new factors.

For instance, the failure of analysts to predict flat oil prices in the 1990s was subsequently blamed on two main factors: technical advances in bringing new reserves on stream; and the unwillingness of producers to restrain supply in non-OPEC countries.

It seems likely that current fears, such as the likelihood of further anti-authoritarian instability in the Middle East, or of conflict over Iran's nuclear program, may weigh unduly on the minds of analysts making today's 20-year forecasts.

Next page: From predictions to scenarios

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