CBO's Oil Price Forecasting Record: Working Paper 2020-03
Oil prices are one of the economic variables that underlie CBO's projections of the federal budget. This paper describes CBO's methods to forecast oil prices and evaluates the quality of the agency's historical forecasts.
CBO forecasts benchmark prices of oil to support its economic and budgetary projections. This paper describes the method CBO uses to forecast oil prices and assesses the quality of the agency's projections during the 1993–2019 period, including how that quality compares with that of other forecasts.
CBO's Method for Forecasting Oil Prices. CBO projects benchmark prices for three subperiods of the forecast window. During the first subperiod, CBO relies on futures prices for two types of crude oil traded globally and information about the expected relationship between those futures prices and the expected spot price at future dates. Projections during the next subperiod are based on expectations of real (inflation-adjusted) growth of oil prices and inflation. For the last subperiod, projected growth of oil prices is based only on expectations of inflation.
Quality of CBO's Forecasts. CBO's forecasts of the average price of imported oil used by refiners (a measure representative of the price of all oil used domestically) were, on average, close to the actual values for the agency's first-year and fifth-year projections—that is, the year the forecast is released and then 4 calendar years later. Measures of the variability of CBO's forecast errors were nearly three times higher for CBO's fifth-year forecasts than for its first-year forecasts, consistent with the greater uncertainty of future prices. Overall, the quality of CBO's forecasts compared favorably to a forecast using a fixed real price and to other oil price forecasts from the Energy Information Administration and IHS Markit. Those forecasts were compared using first-year and fifth-year projections and each of the three subperiods underlying CBO's price projection of imported oil.