To the Editor:
We read with great interest Timothy J. Considine and Frank A. Clemente’s recent article on the evaluation of the Energy Information Adminstration’s natural-gas forecasts (see “Gas-Market Forecasts: Betting on Bad Numbers,” July, 2007). We, too, recognize the influence that these forecasts have on both business and policy decision making and, like many others, have taken an interest in evaluating their long-term performance. We take issue, however, with one conclusion of the Considine and Clemente article. They assert that the EIA’s forecasts are subject to “systematic bias.” We are more cautious and present evidence to suggest that bias is potentially much harder to identify than it may appear.
First, however, we should be clear about areas of commonality. We have not independently studied the EIA’s forecasts of production and import activity and therefore, have no reason to disagree with Considine and Clemente’s findings (which have also been found by others1). We limit our comments solely to the forecasts of wellhead prices. With respect to wellhead prices, we are also in agreement that the EIA’s forecasting errors are significant. Natural-gas prices, however, exhibit comparatively very high volatility, and any discussion of forecasting “error” must be considered in that context.