Abstract

The price of oil is the most important commodity price in the world, and the one subject to closest scrutiny. Yet for 15 years, oil prices have stubbornly refused to behave as predicted. The inability to forecast oil prices accurately has led to substantial amounts of unprofitable investment and created widespread skepticism about forecasting. Recent events have increased the uncertainty about the future direction of oil prices, as well as doubts surrounding forecasting and the planning process.

Arthur Andersen & Co. with Cambridge Energy Research Associates undertook a major study of how forecasts of oil prices are developed throughout the world and how they are perceived and used by decision makers in industry and government.

The study found that since modern, long term oil price forecasting began in the early 1970's consensus forecasting has been the norm – and in each case the consensus proved incorrect.

The current consensus is that oil prices will fall over the next several years to be followed by a period of rising real prices. A strong consensus now exists that oil will be more valuable in the 1990's than at present. Our research though indicates that this consensus could be overthrown by three key factors : new forces at work on energy and oil demand; oil as a commodity; geopolitics.