Energy Literacy Advocates Newsroom

Ask the average American and they probably have never even heard of the Energy Information Administration (the EIA). Commissioned by Congress in the seventies, this government organization acts as the statistical bureau for the US Department of Energy. By mission EIA reports and analyses support sound policy making, efficient market development, and public understanding about energy.

Why is this important to you? Because not only are key energy policies based on EIA projections and statistics, but many businesses use the organization’s Annual Energy Outlook as a planning tool for future capital expenditure projects, for example. And anyone who has dug into the world of energy data soon finds there are few data-based sources of information to utilize for policy decisions outside the EIA. So it is safe to say (especially after 40 plus years of stagnate energy policy) that EIA numbers have been key drivers of policy discussions.

Don’t get me wrong, the EIA provides a very valuable service, but as Energy Literacy has pointed out before (read our piece critiquing the EIA here), the EIA may be reasonably good at projecting near-term (five years or less) energy prices and production, but long-range predictions exhibit a high margin of error. This should be of no surprise, as quoted from the EIA website, “Two of the more important factors influencing energy markets are economic growth and oil prices,” and “World oil prices play a key role in domestic energy supply and demand decision making and oil price assumptions are a typical starting point for energy system projections.” Clearly crafting assumptions 25 years out (the 2009 Annual Energy Report runs projections to 2030) for economic growth and oil prices is a daunting, if not impossible, task for any organization. (Note very few individuals predicted oil price spikes in the seventies or the current financial crisis).

This means that policy makers and businesses alike must be overly cautious when using future projections by the EIA for decision making, yet in the absence of other credible sources for energy projections outside of paid consultants one could argue there is nowhere else to turn.

I urge caution because when oil production plateaus and/or begins to decline (note there has not been significant increases in worldwide production since 2004) models that assume growing supplies will clearly be faulty. Those who have read the book “The Black Swan” by Nassim Taleb are familiar with the concept of a Black Swan event – one that comes along very rarely but in its severity has profound consequences once it occurs. These types of events are almost never included in models, and a restricted supply of oil is likely just such an event.

So all of us should try to wrap our heads around the paradigm shifting concept of a restricted oil supply – a difficult task for a society and economy built on the availability of cheap, abundant energy supplies. And be critical of data that makes you feel comfortable with our current energy use situation, as we will have to change our habits, it’s just a matter of when.

For more information on how the EIA projects energy data read The National Energy Modeling System: An Overview. Or read the Annual Energy Outlook 2009. Note to readers these are both a bit technical.

For more information on the peaking and plateauing of oil supplies visit ASPO-USA and/or attend their upcoming International Peak Oil Conference in Denver, CO October 11-13, 2009.

Labels: energy policy