On any given day, you can download multiple financial forecasts of future prices for almost everything from shares in individual companies to the price of wheat, coffee or oil.
I am really interested in the expected future price of oil because my company does most of our work in the oil and gas industry.
If you read the analysts’ views on the oil price and the rationale behind their forecasts, they all sound credible. In fact, they always have, yet they have often been wrong.
Few forecasters predicted the sudden oil price swings up or down over the last few decades, and none of them predicted the collapse in price in the last few months. Today, they can all point to the reasons why it happened and show how obvious it was, so obvious that none of them foresaw it.
Therefore, I suggest that any forecast needs to be treated with some caution.
Our ability to forecast complex systems is limited. Small changes in inputs or assumptions can lead to huge variations in outputs. That’s why we can only forecast weather over a relatively short timeframe with any confidence.
When people ask me what the oil price will be at a future point in time, I resist the temptation to join the forecasters’ club. I know I’d either be wrong or lucky.
As I write this, oil price, based on Brent Crude, is about $62 per barrel. It feels low compared to prices over recent years, but is actually relatively high if you take it over a longer time period.
Lower oil prices may be tough for people in the oil industry, but are broadly a good thing for the rest of industry.
And of course, demand for energy generally rises when activity levels increase, so there are some elements of self-correction in the system. Similarly with costs of oil projects, these will reduce as demand for people, rigs, vessels and materials falls back. This, in turn, is likely to make some economically viable.
Economists tell us that the market fundamentals for oil are good. As world population and wealth increases, energy demand should also increase. But, it isn’t as simple as that.
The balance of supply and demand is important, and there are multiple unpredictable elements that affect both. Who can say where the next geopolitical crisis will occur that impacts either supply or demand?
Few predicted the impact of U.S. shale oil on the global supply-demand balance. Our ability to predict Libyan oil production has been woeful. We don’t know the impact of current conflicts in Yemen and elsewhere, and we struggle to predict how European economies will perform with all of the uncertainties around Greece, etc.
So how do you plan when a fundamental driver of activity levels is so unpredictable? For my company, it’s about having a business model that is flexible and offers relative resilience.
We try to have a diverse set of customers, a diverse geographic footprint and a diverse range of services, while maintaining a proven track record and expertise in the oil and gas industry.
We like to have a flexible cost structure, so that we can respond to variable activity levels.
We don’t get too deep into debt to keep us robust in tougher times. We are cautious and plan for a lower oil price, yet would welcome an increase.
We have been in the industry since 1972 and have seen many ups and downs since then. I predict with some confidence that there will be more ups and downs, more surprises, more crises and more unpredictability. I just can’t say exactly when.
In many ways, this makes the industry exciting and dynamic, but the impact on people is a huge concern. There are job losses in many parts of the industry, and this is never easy. When activity levels pick-up again, people will be attracted to the industry, an industry that can be rewarding and unpredictable.
I came into the industry in 1986 and have observed with interest all of the twists and turns. It has been fascinating, and that fascination has not diminished one bit.
But as for the oil price, who knows?
By Bob Keller