Uncertainty

How difficult is it to forecast oil prices? Compare the prediction of Philip Verleger, as reported in Bloomberg today, with the forecasts I talked about yesterday in my post on speculation:

Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

“The economic situation is not getting better,” Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”

But as I noted yesterday, these are not the only predictions for oil prices. Many forecast higher prices in the future. As the Bloomberg reporter notes:

At the other end of the spectrum from Verleger, Goldman Sachs Group Inc. predicted in a report yesterday oil will rally to $85 a barrel by the end of the year, and recommended that clients buy futures contracts for delivery in December 2011.

Why is it so hard to predict oil prices? These two quotes demonstrate that there are deep differences on fundamentals. That is, it is very hard to predict what will happen to fundamental factors like demand and supply in one year. Then it should not surprise that prices are hard to predict.

So oil prices are pretty surely to be either $20 a barrel or $85 per barrel. That is what I call uncertainty in forecasts.