As we make our way into the new year, many analysts will be making predictions about energy markets in 2017. Chief among them is the U.S. Energy Information Administration (EIA), which just released its latest Annual Energy Outlook. The Outlook offers predictions about the future of energy prices, production and consumption in the United States. As with stock prices, interest rates and consumer spending, making predictions about the future of energy markets is fundamentally hard. In recent years, EIA has found that its own predictions of crude oil and natural gas prices differ from realized prices by 30 to 35%. Their forecast errors for renewables are sometimes even larger.

The EIA is not alone in making bad predictions. Professional oil price forecasters and futures market participants make bets about future oil and gas prices that routinely turn out to be completely wrong.   But contrary to what you might think, these forecasting errors should not be viewed as evidence that the EIA or any of these forecasters are doing a bad job, or even as mistakes at all.  Instead, they point to the key role that changing technology—and specifically supply-side technology—has played in the energy landscape in recent years. The history of forecasting errors in the U.S. natural gas market is a perfect example of this phenomenon.

First, a little background. In making predictions about both the price of natural gas and the quantity that will be produced, the EIA is telling us where they believe the supply and demand curves will cross.  By comparing EIA’s predictions about future prices and quantities to their realized levels, and interpreting those differences through the lens of microeconomics, we can partially determine whether forecasting errors are caused by unexpected shocks to supply or to demand…

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