Oil Futures
Predicting the future is hard. It's so difficult that even teams of analysts using fancy models get results like this:
This isn't back-of-the-envelope stuff. This is the US Energy Information Administration's official prediction for oil prices, circa 2007. According to the "high price" scenario, oil may reach $100 per barrel some time around 2030. But wait: oil was at $127 yesterday. So, not only was the EIA projection wrong -- it was wildly and completely wrong.
Okay, everyone makes mistakes, even energy analysts. In 2008, the EIA cleaned up its act and produced this forecast:
As you can see, in the "high price" scenario, oil will almost reach $120 per barrel around 2030. At the risk of repeating myself, oil was at $127 yesterday! So, the EIA projection is still wildly and completely wrong.
Ordinarily, this would be jolly good fun. But it's not so funny when these kind of projections are used to make decisions with big consequences. These two charts, in fact, come from the Western Climate Initiative's economic analysis, which is being conducted by consultants. (The forecasts shown in the charts are the data inputs for a model that is supposed to inform policymakers and thereby guide the design of the cap and trade program.) But the data inputs are laughably wrong.
Of course the consultants are well aware of the problem. And they're already trying to develop new forecasts to use in their modeling exercise. Plus, in their defense, the reason they planned to use EIA data was that it's probably the best available and it's considered highly credible.
In any event, the WCI consultants will probably use new and improved EIA data to update their models. That would be fine, maybe, but the EIA seems to have a hilariously persistent tic. Check out this chart via Kevin Drum:
Cap-and-Trade or Carbon Tax? Both!
Today’s Vancouver Sun gives some ink to a cluster of issues that I’ve been pondering of late: how BC’s carbon tax shift fits with Cap and Trade. I’m famously infatuated with carbon tax shifting. I’m also a zealot for auctioned Cap and Trade.
The good news is that with careful policy design, Cap and Tax can be better than either Cap or Tax. The Tax toughens the Cap, the way steel rebar strengthens concrete. The bad news is that without careful design, the two could weaken each other.
The challenge for policy makers is gaming—firms’ aptitude for subverting market rules established with good intentions. Remember how Enron and its ilk manipulated the California electricity market in 2001? The interaction of a carbon tax in British Columbia with a regionwide carbon Cap-and-Trade system in the West could open channels for such profiteering. In the worst case, gaming could both undermine and discredit the policies, risking their political survival. Fortunately, such gaming is preventable, as I’ll explain in a moment.
First, though, the upsides:
