Ben Casselman: The conventional wisdom on oil is always wrong

This is something we knew already: Oil prices fluctuate. Like all commodities, prices go up, and then they go down, and few experts know exactly why, or how far, or for how long trends will endure.

But’s Ben Casselman, who used to cover the oil patch for The Wall Street Journal, outlines (in typical well-executed FiveThirtyEight style), all the ways that people have gotten oil predictions so horribly wrong this year.

Here’s one of the many instructive passages from his piece:

It isn’t just that experts didn’t see the shale boom coming. It’s that they underestimated its impact at virtually every turn. First, they didn’t think natural gas could be produced from shale (it could). Then they thought production would fall quickly if natural gas prices dropped (they did, and it didn’t). They thought the techniques that worked for gas couldn’t be applied to oil (they could). They thought shale couldn’t reverse the overall decline in U.S. oil production (it did). And they thought rising U.S. oil production wouldn’t be enough to affect global oil prices (it was).

Now, oil prices are cratering, falling below $55 a barrel from more than $100 earlier this year. And so, the usual lineup of experts — the same ones, in many cases, who’ve been wrong so many times in the past — are offering predictions for what plunging prices will mean for the U.S. oil boom. Here’s my prediction: They’ll be wrong this time, too.

Among the many reasons why pundits’ crystal balls are so often murky: various factors go into the makeup of prices; and the economics of oil-field drilling are complicated, which is why even “break-even” declarations about when oil-shale drilling in Texas or North Dakota might become unprofitable can be off base as well.

As to the first point — all the factors that comprise the fluctuating price of oil — Cassleman writes:

In July 2008, my Journal colleague Neil King asked a wide range of energy journalists, economists and other experts to anonymously predict what the price of oil would be at the end of the year. The nearly two dozen responses ranged from $70 a barrel at the low end to $167.50 at the high end. The actual answer: $44.60.

It isn’t surprising that experts aren’t good at predicting prices. Global oil markets are a function of countless variables — geopolitics, economics, technology, geology — each with its own inherent uncertainty. And even if you get those estimates right, you never know when a war in the Middle East or an oil boom in North Dakota will suddenly turn the whole formula on its head.

But none of that stops television pundits from making confident predictions about where oil prices will head in the coming months, and then using those predictions as the basis for production forecasts. Based on their track record, you should ignore them.