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By Robert Rapier on Jul 19, 2007 with no responses

Predictions: Hits, Misses, and Pending

I have made a lot of predictions in my writings, and my own impression is that my track record has been pretty good. But I started wondering a few days ago if that’s because I tend to remember the accurate predictions and forget the inaccurate predictions. So, I decided to dig up all of the predictions I have made in my writings about energy. I will classify the predictions as successful, pending, or failed. If you can think of some that I have forgotten, particularly on the failed predictions, point them out and I will add them to the list.

I do tend to pepper my predictions with caveats, because I think it is important for people to understand the factors that may cause a prediction to fail. I may predict gasoline inventories to fall, but then say that high prices might arrest demand. But my prediction in that case would still be that gasoline inventories would fall.

Successful Predictions

1. Following an enthusiastic endorsement of the virtues of ethanol stocks in Financial Sense, I wrote a rebuttal in June 2006. I wrote that the underlying fundamentals of ethanol stocks were terrible, and that they reminded me of the dot-com stocks before the bubble burst. I wrote “I don’t think the underlying fundamentals warrant the valuations placed on grain ethanol producers”, and I did a case study of Pacific Ethanol. Since that time, ethanol stock values have plummeted. I wrote an update to the article in October of 2006, when most ethanol stocks had fallen by around 40%. Xethanol had fallen by 70%. More on it below.

2. In July 2006, I was interviewed by Sharesleuth reporter Christopher Carey for a story he was preparing on Xethanol. Xethanol was claiming that they would be the first company to commercialize cellulosic ethanol. I told Chris that I thought this was highly unlikely, as this is very difficult to do. I told him I thought the company was essentially a scam, which was the conclusion that he was coming to in his story. I told him “the costs of both [travel to Mars and cellulosic ethanol production] are prohibitive, and the barriers to commercialization are huge.” While not everything I told him made it into the story, after the Sharesleuth story was published, I wrote more about Xethanol on my blog. I wrote:

While I think cellulosic ethanol will eventually be commercialized, I don’t believe it is going to be by a company who just recently jumped into the game with essentially no experience, and then doesn’t invest heavily into R&D.

I also said they were “capitalizing on cellulosic ethanol hype, but … unlikely to have a commercial cellulosic ethanol plant running any time soon.” Now, I did write that I wasn’t making specific predictions on the direction of the stock (I have learned my lessons there. I once advised a friend on his investments. After outperforming the market 2 years in a row, his investments increased the 3rd year, but underperformed the market. He complained constantly about how I should have advised him differently during that 3rd year.), which has fallen from the $8 range at that time to $1.50 today. Also, the company has essentially fallen apart since that time, and it is pretty clear that they will not commercialize cellulosic ethanol. My prediction that they will go bankrupt is still pending, and I stand by it.

3. I made multiple predictions for much higher gas prices throughout the spring, based on the terrible inventory situation. That prediction obviously came true. Here is an example, where the EIA was predicting lower prices and I was predicting higher prices. A week later I did a TWIP update in which I wrote “I expect the price rise to continue.” I was correct, as prices continued to shoot up from that level.

4. With 3 inventory reports to go until the Memorial Day report came out, I wrote “I go out on a limb and say we will hit Memorial Day with record low inventory levels.” We did.

5. As a result of very strong prices, I predicted that imports would come to the rescue and relieve our low gasoline inventories. They did. Since that time, we have had some of the highest gasoline import numbers on record, and this is the only thing that has kept us out of deep trouble with gasoline supplies to this point in the summer.

6. In early March, I sounded the first warning of impending trouble with gasoline inventories in the coming weeks. In subsequent weeks, I continued to sound that warning, as gasoline inventories plunged to all time seasonal lows, causing gasoline prices to reach all time highs.

Failed Predictions

1. I predicted that California’s Prop 87 would pass, as people would see it as a way to stick it to Big Oil. The measure did not pass.

2. On April 19, 2007, I predicted that gasoline inventories would turn upward within 2 weeks. They did not. (They turned upward within 3 weeks). However, my price prediction from that post was spot on.

Still Pending Predictions

1. I predicted that we would break the normal trend and build gasoline inventories June-August of this year. So far, that prediction is on target (although they did reverse direction this week).

2. I predicted that Shell’s shale oil process will fail to be economical.

3. I predicted that oil will not reach $100 in 2007.

4. Xethanol will go bankrupt.

5. I have predicted on various occasions that world oil production has not yet peaked, but will peak by 2016. My own personal belief is that the odds are 90%.

6. I predicted that the economics of grain ethanol via coal would be far superior to ethanol via natural gas, and this would result in more and more ethanol plants turning to coal as an energy source.

7. I predicted that gas prices would rise again this summer after bottoming out. (Prices are on the way back up).

8. In an essay I wrote over a year ago, I wrote about something I called “Peak Lite.” I have elaborated on it a number of times since then, here and at The Oil Drum. The concept is basically that supply growth can no longer support demand growth, which is going to put extreme pressure on prices.

I have made various predictions in relation to this: Spiraling prices, hardship for a lot of people around the world as a result, while oil companies report strong financial results. I have also predicted that it will mean an end to the cyclicality of the oil industry. Most of this prediction is still pending, but in recent days both the IEA and the NPC have released reports in which they endorse the same general idea: Supply growth failing to keep up with demand. In essence, I would say that while the prediction is not yet fulfilled, the mainstream is starting to come around to that viewpoint. (Incidentally, I would put many of my ethanol writings into that category as well – ethanol was loved by the mainstream a couple of years ago, but now more and more people are questioning the wisdom of what we are doing).

9. In May 2005, when West Texas Intermediate (WTI) crossed $50 a barrel, I predicted to my then boss that it would never drop below $50 again. I have repeated that prediction several times since then. I guess never is a long time, so I will revise this one to: We won’t see oil drop below $50 a barrel in the next 5 years. It did flirt with that level back in January 2007, but if the Peak Lite scenario is correct, I think this prediction is safe.

10. I predict that in 5, 10, even 20 years the majority of U.S. ethanol production will still be corn, and it will still be highly subsidized. The reason for this is that there are too many politicians beholden to farm states that produce corn.

11. None of the cellulosic ethanol plants under construction in the U.S. will prove to be commercially viable. See the bottom of this post for a list of those projects.

12. While we will continue making corn ethanol, biodiesel will give way to hydrotreating technology that results in a petroleum diesel equivalent. The technology is cheaper, and yields a superior fuel with a propane (instead of glycerin) by-product. However, hobbyists will continue to produce biodiesel for personal use.

OK, I think I got most of them. Which ones are Nostradamus-like, in that several different scenarios could be hailed as a successful prediction? Which ones were too vague? Which of the pending ones do you expect me to miss on? Also, feel free to share your own predictions.