This morning you balanced your checkbook with an automatic withdrawal of over $400 for gas and electric for your 4,000-square-foot home. On your way to the airport you filled up your SUV for over $70. You are spending a lot more than you spent last year for your morning cornflakes, the ribeye steak you had last night, and the corn squeezens from your local moonshiner.

You’re mad as hell and want to know what’s going on. Are you being gouged? Do the energy companies really earn obscene profits? And what’s with a new energy policy coming out of Congress every year?

This book gives you some answers to your questions. But more importantly it helps you understand where these prices are going. After all, you already paid for today’s energy. It is really all about being able to plan for the future.

-o0o-

My name is John, and I forecast. To compound my failings, I forecast energy prices. I am following my 12-step program. But I still can’t shake the desire to be actually held accountable for my forecasts. Therefore, I am offering this text as a form of confession, catharsis and soul cleansing.

So, what will you learn as I bare my soul in my 12-step program?

Section I

The first 7 Steps lead up to my forecast for energy prices.

Step 1
Recognize the Anchoring Phenomenon, keep the Trend Line Traps from swallowing you (or your investments, whichever comes first), laugh at the Escalation Myth.

Step 2
Historical ranges and drivers of price, from Standard Oil in 1890 through to current players and what motivates them. What drives price? Are Time Series and Averages useful as a forecasting tool?

Step 3
Definitions, from preliminary to advanced (from the British Thermal Unit, BTU, to the French Thermal Unit and beyond), lead you to an analysis of many technical tools used in forecasting in the financial markets, such as Point and Figure Analysis. Learn how the pros look at price data.

Step 4
All energy is a single commodity with several subsets. Fungibility, what a concept! Learn to look at the interrelationships of all forms of energy, the overall supply/demand picture, by repeating, A BTU by Any Other Color Is Still a BTU.

Step 5
The role of OPEC. How cartels work. Or not. What are OPEC’s motivations and what are its implications for the international financial markets? This Step concludes with the Cartel Game, which demonstrates the propensity to cheat.

Step 6
The role of inventories and other physical data: The influence that incomplete data and reporting have on the energy markets and the implication for the future of energy prices.

Step 7
This is where you consider the Probabilistic Forecast for energy prices and look at a demonstration of how we are all too proud of what we don’t know.

Stating the obvious, oil and gas prices are volatile. That’s where price forecasts come in.

A probabilistic forecast recognizes the reality of uncertainty ― and that is illuminating.. The recognition of uncertainty is intellectually honest, it maximizes information, and it minimizes unwarranted detail. On the other hand, a single point forecast has a zero probability of occurring. So, because accountability in price forecasts requires the admission of how wrong the forecast could be, the only forecast in this book is in the form of a probability distribution.

My forecast is a range for energy prices expressed in terms of oil price to which all other forms of energy are tied. There are, of course, many transient factors pulling the price up or down within this range.

How long any of these current, allegedly transitory issues remain in this tug of war is anyone’s guess. Wouldn’t it be a wonderful world without terrorism, with peace in the Middle East, no more sabotage in Nigeria, and the rule of law actually returning to Venezuela? What would the price of energy and oil be in such a world? What will be the new forces in this game as you read this book?

Section II

The remaining 5 Steps address the use and misuse of energy price forecasts.

Step 8
And this is where you look into the corporate boardroom and see how the energy industry uses and misuses price forecasts, largely because the all-powerful corporate user of such forecasts is usually statistically illiterate. Many interesting results follow.

Step 9
The governmental use and misuse of energy price forecasts. Energy independence/energy dependence; isms; pork, corn, governmentium and ethanol economics; social costs, taxes, tax breaks and subsidies; gouging, obscene profits, windfall profits taxes; national/natural energy policy and an example of governmental influence on entrepreneurial incentive from The Modern Little Red Hen.

Step 10
Communication between the analytical and the management functions isn’t just nice; it’s critical ― and don’t forget credibility and feedback. See the investment decision process use price forecasts, watch the corporate planning process work through the economic evaluation of a project’s merits.

Step 11
Reserves data and the SEC. Learn how problems arise when reserve reporting analysis is used to justify investing in or financing a company or a project. Laugh and cry at some of the ways the mathematics can be carried to their illogical extreme.

Step 12
Learn how to communicate probabilistic data to the statistically illiterate. Some examples of how a probabilistic economic analysis, and continued communication, promotes awareness of the economic merits and consequences of a decision.

Section III

I conclude my program with a bonus Step that is aimed at you, dear reader, turning yourself into an informed, energy-literate consumer.

Step 13
I hope that, in the process of explaining where prices are heading while casting a little light humor on a subject that is basically humorless, I will have provided you with an appreciation of the role energy plays in your own economic well-being, and of how the economic choices you make about your use of energy impact everybody’s environmental quality of life. It is my hope that, armed with the insight and enlightenment gained by reading these confessions, you will become more energy-literate not only in your own use of energy, but in communicating this insight. Be the first on your block to become informed with the hope of driving a stable and sustainable energy policy.

-o0o-

We’re done with the Steps, now let me tell you about three plusses you will find in this book.

First, these confessions are not just words. You are not left on your own to tangle with text. Bearing in mind that one good visual is worth a thousand words, this book has 120 graphs, charts, photos and other visual aids. Imagine! Visuals instead of academic jargon.

Second, I also add what I call Points to Ponder. With every Step, you get more Points, and with each new Point, another door opens. The point of the exercise is to get you pondering about the whole world of energy from perspectives you may not have even guessed existed. The Points cover a huge spectrum of today’s urgent question marks. Just a sampling: Oil shale, the Strategic Petroleum Reserve, hurdles to free markets, stranded costs, taxes, Iraqnophobia, Sinophobia, futures markets, the recycling petrodollars, surveys and missing barrels, Peak Oil, Katrina, risk tolerance, demand destruction, employment levels, gasoline lines, science and politics, conservation and energy efficiency, the carbon footprint, regulatory costs, Mother Nature v. Adam Smith, cash flow, gasoline prices, and NIMBY.

Third, my muse, the Roman Economist Flumius Minor, in 157 BC noted, “Cognitio Est Propositum de Praedictio, Non Numeri.” For those who are Latinus Impaired, this loosely translates as, “The Purpose of Forecasting Is Insight, not Numbers.” You will find such words of wisdom at the beginning of each Step. How much you dare to use these gems in your own life is a risk analysis decision that is personal and can only be made by you.

-o0o-

I intend this book to be the first in a series on the subject of energy prices. This series will serve two purposes.

We live in a time of continuous and radical change, with respect to energy sources both geographic and technological all the way to climate change. As today’s issues and perspectives evolve, and new issues come to light, the next book in this series will review and analyze these developments as well as update any relevant data from the previous books.

And if you are bothered or bewildered by any issue that you’d like to see further explored or addressed, please share your concerns with me, and I’ll dig into, analyze, graph and chart the hell out of it.

Therefore, if upon reading this book you have not been totally confused or sickened by this subject, and if I am not completely burned out, on some tropical island enjoying the rewards of a Nobel Prize in economics, dead, or all of the above; look for the continuing series of these confessions and forecasts in years to come.

A final thought: While the goal of this book is to inform the reader about the economic realities of energy and the limitations seen in forecasting, the reader would probably benefit more if this book was required reading for some 535 individuals in Washington. Therefore, if sales of this book prove to be successful, I will fulfill my patriotic duty by donating at least 535 copies to the uninformed inside the Beltway.