Oil Price Projections Continue to Change Radically - No Sign of Volatility Relief

After raising long term crude oil price projections by 100% last week, the IEA lowered its 2009 per barrel projection for crude oil by nearly 30% yesterday.  Its not an enviable job to sort out the variables that go into oil price projections - but given the magnitude of the revisions we are seeing in these projections I have to wonder how effective the projection models are in dealing with the volatility that the market is showing?  What good model that results in a projection that changes by 30 to 100% on a yearly basis?  I have no idea as to how much this impacts the volatility of oil prices - but it can’t help.

Its evident that the current projection models are getting whipsawed by the changing economic projections as we have seen the global recession spread - but the conditions to ignite the recession have been in place for some time - so one has to wonder where the oil pricing models (particularly the long term ones) are missing the boat.

This volatility is not only causing trouble with the projections used by many to hedge oil bets, etc.  But its wrecking havoc with long term oil production planning as well.  Ideas that seemed good just 6 months ago are now getting shelved as prices and projections of prices are falling. 

Private oil companies are already reining in plans for investment-heavy expansion, in part because falling prices no longer justify the extra output, in part as a punt on further declines in project costs. Both BG Group and Shell have made announcements in recent weeks, postponing planned investment programmes in Kazakhstan and Canada respectively

Of course, this strikes me as incredibly shortsighted.  It is clear that while we don’t have confidence in pricing projections - whatever the price of oil is or will be - the conditions that have led to both the up and down market volatility for oil pricing do not appear to have changed.  Given the long tail on getting production on line - the lack of drilling and other necessary extraction machinery - it would appear that private oil companies actions such as those described above will only add to future volatility by not being in place in the next run up in oil prices.

I wonder if those making early investments in alternative energy technologies will make similar mistakes?