gas price forecasts

Price forecasts – particularly for gas – are being used to justify both public policy (including heavy subsidies to renewables in many parts of Europe) and investments in very expensive sources of supply. But when events start to show that the forecasts are wrong, both policy makers and investors can be left stranded.

There are basically three ways of approaching the challenge of forecasting. The first, favoured by non economists, is to project forward recent trends. But which trends? I once produced an oil price forecast based on the trends of the last six days, six months, six years and six decades. Not surprisingly the result was a hedgehog style set of spikes going in quite different directions. As a planning tool it was completely useless.

The second approach to forecasting, much used by those who have over-invested, or want to invest (think of High Speed 2), or want to advance a particular policy response is to reach for a forecast which fits the bill and then to construct a justification.

Both approaches have been used in gas price forecasting, with the result perhaps not surprisingly being a widening divergence between projections of ever rising prices and the reality which is that prices are clearly falling in the short term and look set to keep falling longer term.

Gas prices - data sourced from Knoema Beta
Gas Prices – data sourced from Knoema Beta

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Ed Davey, secretary of state for DECC

Ed Davey, secretary of state at DECC, outside his ministry

The UK’s Department of Energy and Climate Change is about to publish forecasts suggesting that gas prices could rise by up to 70 per cent over the next five years. This is scaremongering nonsense, and shows just how out of touch the Department is with the realities of the international energy market. Officials appear not to have consulted the industry or the traders. In reality the odds are that prices are just as likely to fall as to rise for three distinct reasons. Read more