US energy industry getting harder to predict

The United States energy industry has become both more unpredictable and more volatile in the past decade, with a relatively high number of extreme variations from annual trends, reports a paper published online this week in Nature Energy.

Markets and policy makers rely on forecasts of energy demand, supply and prices - such as those made by the US Energy Information Administration and the International Energy Agency - to make decisions about short - and long-term energy policies and trading. The complexity of the global energy industry, however, means that although these forecasts are not expected to be 100 per cent accurate, decision makers still rely on them, especially during periods of relative stability.

To investigate the trend in these forecast errors, Ines Azevedo and colleagues first calculated the change in key energy quantities (such as oil prices) over each year between 1952 and 2015, which they term the year-on-year volatility. They found that on average these changes were highest during the most recent decade studied. To study the impact of this volatility on forecast errors they compared the US Energy Information Administration’s annual predictions - which began in 1982 - with subsequent real-world values for key quantities including fuel pricing, production and consumption. They show that projection errors have indeed risen in the past decade, as a result of the increasing volatility. This increasing volatility may highlight the need for greater adaptability in policy and trading strategies, and the findings may translate into more uncertainty around future natural gas and electricity bills, as well as petrol prices.