BP Energy Outlook: why the oil giant's forecasts are flawed

The BP Energy Outlook 2030 is not a statistical or scientific document, Cobb writes, but rather a political one. It is not a statement about the way the world is so much as about the way BP wishes it to be over the next 20 years, he adds. 

“Like dreams, statistics are a form of wish fulfillment,” French philosopher Jean Baudrillard once said.  Substitute “forecasts” for the word “statistics,” and you’ll have a good understanding of the public reaction to the recently released BP Energy Outlook 2030.

The psychoanalytic definition of wish fulfillment is “the satisfaction of a desire, a need, or an impulse through a dream or other exercise of the imagination.”

The oil giant’s long-term forecast—really an “exercise of the imagination”—was greeted with a sort of breathless astonishment by the media who took it for a statement of fact concerning the one thing about which we cannot know anything for certain: the future.

My first response to the coverage was: “Well, what did you expect the company to say?” This is the world’s third largest oil company. Of course, its forecast through 2030 is that the world will remain hooked on fossil fuels, particularly oil which, BP tells us, is going to be plentiful despite what those peak oil killjoys are saying. 

To admit any near-term limitation would have meant that the company’s business model wasn’t just flawed, but about to be revealed as a sinkhole for long-term investors as its main business winds down. That would have led to an immediate downward valuation in the stock price and a considerable hit to the wealth of the company’s managers due to the effect on their stock options and holdings.

Once again, I say, “Of course, they’re telling everyone they’re optimistic about oil supplies.” And yet, a look at the company’s actual situation ought to lead to a much different conclusion.

BP’s oil and natural gas production combined has declined about 15 percent since 2009. (The linked article is in French, but Google Translate does a pretty good job of rendering it intelligible for those who can’t read the language.) And, it’s not just the 2010 Gulf of Mexico oil spill that’s been plaguing the company. The oil giant’s production is declining in the North Sea, in the United States and in Africa. Even in Central Asia where BP has dominated production in Azerbaijan, it is losing production volume.

Lest you think BP is alone, read to the entire article. ExxonMobil’s conventional crude production is down 27.5 percent since 2007. French oil giant Total’s oil production (reported as crude and natural gas liquids production) declined by 18.8 percent between 2007 and 2011. Among the top four oil companies in the world only Shell seems to have sidestepped the decline for the present.

The strategy for most of the majors now is to replace their reserves with something called “barrels of oil equivalent.” In essence, this means natural gas on an energy equivalent basis. (Approximately 6,000 cubic feet of natural gas contain the same energy as a barrel of oil.) But to admit the ongoing decline in their oil production capacity and then also to admit that there is little chance of turning that trend around would be tantamount to corporate suicide—at least if the objective is to collect the largest possible quarterly bonus and stock options payoff.

But there is something else at work here, namely, the credulity of the media and of public policy makers. It would be easy to ferret out a few facts that would cast serious doubt on BP’s forecast—for example, that world oil production proper has been flat since 2005 despite record prices and record investment in new production. If the record prices and record investment of the last seven years can’t lift world oil production significantly off its current plateau and if the supposedly revolutionary technology that is being deployed can’t either, then what is going to happen between now and 2030 to change things?

So, the explanation for this credulity and the oil industry’s ability to exploit it must lie elsewhere. Here’s my attempt to explain. First, most people don’t know that long-term forecasts are almost useless except as ways to explore various scenarios. The margin of error quickly escalates just a few years out and becomes incalculably large when the forecast is stretched to decades. In fact, previous long-term oil supply forecasts from government and international agencies and from ExxonMobil have been considerably wide of the mark. All of them were too optimistic about supply and wildly low on prices. (This is another one of those facts that would be easy to check.)

And yet, because the forecasts come from official agencies and the industry itself, people believe that these experts can somehow discern the future clearly. Well, clearly they cannot. But, most people never go back to check.

Second, the stability of global society depends entirely on the continuous flow of energy and materials into that society. More particularly, we have now become addicted to uninterrupted growth in those supplies. It is simply unthinkable to most people—even ones in high places who ought to know better—that this growth could come to a halt and indeed go into reverse.

If such a reversal were sustained, the consequences would be outside our experience within that last 150 years which have seen nothing but rapid economic expansion. When something is outside one’s experience, it’s easy to classify it as simply “not possible.”

And so, our system is utterly reliant for its stability on the presumed correctness of optimistic long-term supply forecasts for finite fossil fuels, particularly oil, put out by BP and others. These fuels are the backbone of the world economy supplying more than 80 percent of our energy with oil supplying about a third of the total. We know—we are certain, in fact—that based on previous experience with oil wells, oil fields, and oil-producing countries, worldwide oil production will someday decline. And yet, even with the fabulously faulty record of long-term forecasts, we still put our fate into the hands of self-interested parties who tell us not to worry. We do this because somehow many of us cannot face a future which would require deep structural changes in our lives.

As it turns out, the BP Energy Outlook 2030 is not a statistical or scientific document, but rather a political one. It is not a statement about the way the world is so much as about the way BP wishes it to be over the next 20 years. Naturally, that includes BP continuing as one of the world’s largest and most influential corporations.

In short, the BP Energy Outlook is an exercise in wish fulfillment. The company and many who read its forecast think that if we dress up our wishes in the form of color graphs and charts, those wishes will come true—or possibly they have already come true because BP conveniently tells us so in advance.

Certainly, one of the world’s major oil companies wouldn’t mislead us on a matter as grave as the future of oil, would it?

________

P.S. For your edification here is the disclaimer on page 2 of the BP Energy Outlook 2030:

This presentation contains forward-looking statements, particularly those regarding global economic growth, population growth, energy consumption, policy support for renewable energies and sources of energy supply. Forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that will or may occur in the future. Actual outcomes may differ depending on a variety of factors, including product supply, demand and pricing; political stability; general economic conditions; legal and regulatory developments;availability of new technologies; natural disasters and adverse weather conditions; wars and acts of terrorism or sabotage; and other factors discussed elsewhere in this presentation. (emphasis added)

In other words, you shouldn’t really count on any of what you read in the forecast turning out the way BP says it will. It’s boilerplate, I know. But there is more truth to this boilerplate language than the rest of the report. Should we really be basing our energy policy on information this shaky and uncertain? The risks are wildly asymmetrical. If BP is right, then it’s business-as-usual. If they’re overly optimistic then we could be in for a period of turmoil that could destabilize the entire global economic system which will be unprepared for the consequences of a persistent decline in oil supplies. Why? Because BP and other major forecasters told us we don’t have to prepare.

P.P.S. Another astute reader of the Outlook 2030 noticed that at the end of BP’s cheery presentation, the company wrote that if its forecast comes true, we will be faced with a climate catastrophe. The forecast didn’t put it that way; but, that’s the implication of this language:

Carbon emissions from energy use continue to grow, increasing by 26% between 2011 and 2030 (1.2% p.a.). We assume continued tightening in policies to address climate change, yet emissions remain well above the required path to stabilise the concentration of greenhouse gases at the level recommended by scientists (450 ppm).

It turns out then that if the BP forecast comes true, it is actually a doomsday prophecy. Not so cheery after all.