Former Petroleos de Venezuela (PDVSA) Finance Coordinator Oliver L Campbell writes: I have been looking at three forecasts of PDVSA'S financial results for 2008 that were made at the end of 2007 or early in 2008. One estimated that both the average price and the volume of exports would fall in 2008 when compared to 2007. Another, that the average export price would be $52.50 a barrel, and a third that the average export price would be $34.53. They all gave reasons why it would be lower than the $64.74 a barrel realized in 2007.
In the event, the average export price obtained during January/September 2008 was $100 a barrel and, though it will be substantially less in the fourth quarter, it should still exceed $80 a barrel for the whole year. None of these forecasters could foresee that the price for the marker crude would reach $147 in July 2008, but that is the point I want to make--forecasting crude oil prices is a lottery.
The worst of the forecasters was the Centro de Investigaciones Económicas (CIECA) which, from its title, you would expect to produce a much better result. They estimated export sales for the whole year as $74,404 millions based on a production of 3.200,000 b/d, and $53,618 millions based on a lower production of 2,430,000 b/d. In fact, export sales to end September totalled $112,095 millions, an error of 50% on their higher forecast and over 100% on their lower one.
- The different volumes they used reflect what PDVSA maintain is their crude oil production and what other commentators believe is the true production.
There is no reason why CIECA should not continue to provide forecasts and I hope they do. But may I suggest in future they use just one production figure but provide a range with three average export prices--one low, one medium and one high--which is a fairly common approach. For instance, for 2009 this could be $30, $50 and $70 a barrel. Incidentally, PDVSA should be planning for 2009 on a similar basis as plans will be different under each scenario.
Let me recount an amusing anecdote about forecasts. When I worked for PDVSA, I attended a lecture in London given by an eminent economist who was an expert on foreign exchange rates. He showed many slides which explained the factors that affected currency rates and then, on the last one, he gave his forecast of the £/US$, £/DM and £/Yen for the next 6 and 12 months. But I shall never forget the candour of his closing remarks, “If I really knew what the rates would be, I would not tell you. I would make my fortune and live the life of Reilly on some tropical island.”
We all put too much faith in “experts.”
On some occasions I have been to the races, I have approached a tipster. You give him £10 and he gives you a slip of paper with the name of the winner of the next race. Needless to say, I have never backed the right horse but, like the divorcé who is getting married for the fifth time, it is the triumph of hope over experience. Of course, if the tipster really knew which horse would win he would be betting from his mansion.
I am always surprised that people will pay hundreds of dollars to hear “oil experts” give their views on future oil prices. There are only three options--prices will go up, they will go down, or they will stay the same, but it is amazing how often they get it wrong, and 2008 is an excellent example as most pundits said prices would fall. You would be better off spending your dollars, or other currency, taking your partner and children for a good meal in a tiptop restaurant.
So, in brief, by all means let us have forecasts, but based on a range of export
prices and not just one figure--the forecaster can assign probabilities to each
value if he wants. Also, don't put too much faith in what the oil experts say in
the press.
Experience tells us they are as likely to be wrong as they are right.
Oliver L Campbell
oliver@lbcampbell.com
Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002.
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