Paid To Worry: AOL Energy Week In Review

on October 14, 2011 at 2:30 PM

The energy business increasingly operates in a world of “black swans.”

In one year, earthquakes, floods, financial chaos and political deadlock all at enormous scale have rocked the energy industry. While most firms remain functioning, or even prosperous, and regulators have responded with speed, the analysts charged with finding logic in data are scrambling to figure out how to price and plan for a new future filled with “unusual” events.

AOL Energy joined the leading energy economists, strategists and analysts in Washington, DC this week at the annual summit of the US Association for Energy Economics. The conference crowd represented the groups charged with forming the basis for strategy that guides senior managers, politicians and the public in making clear-eyed choices about their energy.

Proliferating Externalities

Laid beneath hours of presentations that could delve into the seemingly obscure was a continual theme of newly-admitted uncertainty.

The “dismal science” of economics relies on using data about the past to draw conclusions that are inherently about the present and the future. Established themes about how to treat data, and conclusions about what to extrapolate, have dominated the profession and much of the energy business’ forecasts in recent years, and reliance on often outdated models has complicated planning as the industry’s fundamentals have shifted.

Energy economics is inherently political, despite the protestations that the US has a “free” energy market. The high profile drama around the collapse of solar firm Solyndra and the ongoing concerns about how it obtained government support underline the close involvement of governments in energy markets.

But the ultimate curve ball for energy markets has been the massive increase in both reserve estimates for natural gas and drilling activity to support increased US production. Ten years ago natural gas shortages were sufficiently acute that firms spent billions of dollars on planned and sometimes partially-built liquefied natural gas import terminals. Now, the flip in the US production outlook has been so pronounced that natural gas exports rather than imports look increasingly likely.

The More Things Change

The one constant in the world of energy economics and business forecasting is the unceasing hunger for more and better data. Without numbers to crunch, outlooks are mostly guesswork.

In recent decades the US government has taken a leadership role in gathering and publishing energy data that is widely credible and widely used. But budget cuts are likely to result in cancellation of some data series, Energy Information Administrator Howard Gruenspecht told Breaking Energy, leaving the industry to produce its own or go without.

A few short years ago economists were declaring the “end of history” as algorithmic analysis of the world seemed destined to simply eliminate risk altogether, but the notion that the world is predictable through statistics and quantitative forecasting now seems almost quaint.

The members of USAEE are paid to worry about our energy future. If we take recent history as a guide, they’ll have plenty to worry about, and to work on, over the coming years.