The Energy Information Administration expects the unprecedented surge in U.S. oil production to continue for at least a couple of years more. But what happens after that is anyone’s guess. The EIA’s official forecast shows production plateauing for a few years before beginning a gradual decline. But in its Annual Energy Outlook, released earlier this week, the agency also publishes alternative production projections. As the chart above shows, they differ wildly.
Long-range forecasting is always subject to uncertainty. But some forecasts are more uncertain than others. The EIA’s projections for oil demand, which I highlighted in an article earlier on Friday, are far more consistent across scenarios than its projections for supply. (A quick aside: The EIA deserves kudos for its transparency both in its assumptions and how those assumptions affect its forecasts.)
Oil consumption depends on lots of variables: economic growth, demographic forces, driving habits and automobile technology, just to name a few. That makes precise forecasting hard, but it also means that no one variable makes that big of a difference. Predict fuel efficiency and driving habits correctly and you could end up with a pretty good demand forecast, even if you fail to see the (hypothetical) 2020 recession.
Supply is a different story. Production forecasts boil down to one variable: How much oil will companies figure out how to get out of the ground? And no one knows the answer.
That’s always true, but it’s especially true right now. The surge in domestic oil production has thus far been driven by a handful of oilfields in just a couple of states. Companies tout similar discoveries in Ohio, California, Mississippi and elsewhere, but there’s no guarantee all of them will work out. Meanwhile there’s a robust debate about how long Texas and North Dakota will be able to maintain their recent growth trajectory.
The result: tremendous uncertainty. If industry insiders’ most optimistic claims prove correct, the U.S. will nearly double its oil production over the next 25 years. If they’re wrong, oil production could quickly resume its long pre-boom decline. The EIA’s forecasters don’t know for sure. Nor does anyone else.