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May 5, 1982
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Approved For Release 2009/08/20 :CIA-RDP90B01013R000300470015-8 Routaaa~ SliTa . _?.:; : . ?o ~~ r~ ~~.~. ~; - - ? ACTION INFO DATE iNiT1Al 1 DCi ? DCCI .....~., 3 EXDIR 4 0/ICS ~ ~ - 5 DDI . ~ _ _..- 6 DDA . ~~::;: ~ ~ . ,~ ~7 - DDO `~-' 4^3~Yr-z. x^ a.r ~.q~~ - may'. ..7! ; p x~ _ ,,., `& DDS&T ~- ._~ _~,. Y ?x`, - . 9 Chm~NiC ~o GC 1 'E {ti Comet T%Pers ... _ ~5 3: C~PAD%G=A S~'fA ~ j --- ~ a A?,' ~~ 19 C; t?D/Ols s s~~~i:i~sl R +rari~: NSC review completed. Executiv Secretary Dote Approved For Release 2009/08/20 :CIA-RDP90B01013R000300470015-8 n~~~ Approved For Release 2009/08/20: CIA-RDP90B01013R000300470015-8 UV~~~ ~~C1~ ~ ~~L NATIONAL SECURITY COUNCIL WASHIIdG70N, D.C, 20506 CONFIDENTIAL May 5, 1982 MEMORANDUM FOR L. PAUL BREMER III Executive Secretary Department of State DAVID PICKFORD Executive Secretary Department of the Treasury SYSTEM II: 90284 LTC. ROBERT P. MEEHAN Assistant for Interagency Matters Office of the Secretary of Defense STEPHEN SHIPLEY Executive Assistant to the Secretary Department of Interior JEAN JONES Director, Executive Secretariat Department of Commerce WILLIAM. V. VITALE Director, Office of the. Executive Secretariat Department of Energy WILLIAM SCHNEIDER Associate Director for National Security and International Affairs Office of Management and Budget THOMAS B. CORMACK Executive Secretary Central Intelligence Agency ROGER PORTER Special Assistant to the President for Policy Development JAMES BURNHAM Special Assistant to the Chairman Council of Economic Advisers COL. CHARLES F. STEBBINS Executive Assistant to the Chairman Joint Chiefs of Staff SHEILA DRYDEN Special Assistant to the Director Federal Emergency Management Agency CONFIDENTIAL n Review 5 5 8 8 J ~~i>t~~ `~~~\(~'j ~~ j Approved For Release 2009/08/20: CIA-RDP90B01013R000300470015-8 Approved For Release 2009/08/20: CIA-RDP90B01013R000300470015-8 VVi ~i iiJLiq t it"~G.. Next Meeting of Overview Group for NSSD 9-82 The Overview Group for NSSD 9-82 will not meet as scheduled on May 7. To allow more time for work to progress, the next meeting of the Overview Group will take place on May 19 at 11:00 a.m. in the White House Situation Room. At that meeting, we will discuss the outlines of Parts i and II of the study and an initial draft of Part I. several times between now and May 19. Contact The CIA Working Group on the first two parts will meet? if you are not participating and feel you should be. Attached for your information is a recent Wall Street Journal article on energy forecasting. Michael 0.-Wheeler Staff Secretary CONFIDENTIAL Review on S May 1988 coy ~~ ~~~~~~~r Approved For Release 2009/08/20: CIA-RDP90B01013R000300470015-8 Approved For Release 2009/08/20 :CIA-RDP90B01013R000300470015-8 The Wall Street Journal, Wednesday, May 5, 1982 1~~ore or Less Oil T~~ill Go Up or Dorm Or M?ybe It Won't ~ ~ ~ Energy- Experts Are Gun-Shy after Forecasts, for Years, Ha~-en't Turned Out ~'4'ell Jahn I.ichtblau, an unabashed energy forecaster, is feeli.~tg a bit abashed these cat's. "The less you quote me the better,". ::e says. hfr. Lichtblau's sudden shyness is under standabie. As head of the Petroleum Indus? _by Research Foundation. he predicted ~laom and doom in 1981. World oil demand mould "likely accelerate," oil supplies from 5astern Eumpe and otireL non-0PEC coun- tries would decline, and there would be a contini frig dmp in , U.S. production.- On ail cottnts, just the opposite happened, and the .world is awasb in oil- :. '. - "If we had just applied Economics 101;;_ 3fr. Lichtblau says,_"we would have come., :tp with bettr results." ~ ? .. - _.: ... _ - In making .bum~redictlans, Mr _Licht- ~blsu'"AIl_forecasters; both -tn .the government and ? in the private . sector, have been awful .at figuring, out here *.he energy markets were headed. the. past few years," says Dennis O'Brien, who does his predicting . as a deputy assistant secretary of the U.S.-Department of Energy. .Just why~heir crystal balls failed them is the subject of intense sous-searchirsD among... the energy experts..T'hey, have..huddled:at. :vario~rs~-professional- forums,. brokea.=:dgwn L'teir elaborate energy:mode3s.:.anQ isolate- flaws in them. Marry: forecasters have, concluded that .the errors weren,t en-_ rarely of theft own maldrtg.::. .~~.:=' :. '... Baal Irdta Blamed ?t?;-?-...?.=-- ? _- ?- - Some blame. "bad government. data," Others blame war, weather and other "exogeneous factors," ? as they ~ call ahem, chat can't be cranked into their models. Sti11 aLhers blame "aberrant consumer behav- for" in response to anticipated shortages and rising prices. But a good number of foreczsters simply concede that they grossly r,?:eres:imated energy demand and grossly underestir;.ated energy sa:-irgs from conser- :?atio_, and improvements in technology. _ ' In any case, "the whole profession is now in a state of uproar," says Rep. Albert Gore Jr., Democrat of Ten? -nessee, who. con- ducted a congres- sional investigation of the profession last year because "bil- lions and billions of dollars" in private and federal funds "are gambled on the basis of forecasu." Today, he sa}?s, fore- casters are changing their assumptions. "Conventional wisdom changes faster than we'd like to admit," says James Swee- ney, the director of Stanford Universiry's en- ergy-modeling forum. "Only recently, the general consensus was that demand and prices would keep going up. Now the consen- i sus is that they'll keep going down, at least for a while:" ~ ~ ' That isn't to say, of course, that the cur- rent consensus is correct. Because soothsay- ers share the same statistical techniques, economic theory and data, "they.also tend to share the same ignorance," says Stephen h1clJees, an economist at the Federal Re? serve ~ Bank -of Boston. "So~ they're- either: .going 20 be all right as a group, or all wrong; as a group.,. _ .- ; := ,3nflueaeed:by the'=Present ~~~ _ ~~`: Moreo'ver: many forecasters t_ry to.~3ivine. the. future merely' by extrapolating the past;- `sb their long-range forecasts are: heavily in- ''fluenced ?by. present-day-reality: -"~i'hen the (energyJ. market's going up, they think it's goingup forever; when it's going down, they think it's going .down forever,?' says Arnold f -Safer;~who considers hirriself a~"Tnaverick" Energy forecaster. In .the fall -df.1980, when .pr'sces~ were rising, one forecaster. predicted 3100?x-barrel oil before 1935..Now that tl-ey I ' .are falling; he is :predicting ~E15=a-barrel oil ''before 1985. - ? Throughout history, it seems, oii. fore casters have suffered similar: shortsighted- ness. They have bounced .back`and forth .tie- tween predictions of impending glut and im- pending shortage, and in almost stance their forecasts have been cFrorig one way or another. So if history is any guide, it should teach one important lesson about forecasting: "The only way. to - be sure i 'where the market is headed is to go in just ~ the opposite direction," says James Tanner, the editor of Petroleum Information Interna- tional, aweekly energy publication. The first gloom and-doom forecaster w?as David Kfiite, onetime chief geologist of the U.S. Geological Surrey. During.}World War I -a time when consumption w?as rising, do- mestic production. w?as leeeling off, reserves were d~cind!ing and doubts ~~?ere deeelo~i~g ' over future oii s;lpr;ies from ',fexico R`:en 'the L'.S.'s b;r~est suppliers-Air. t`:hite ;,re? cicted th:.t the peat. of L'.S. oil }roc~.C:i:U.^? I ::~aad soon be reached. Ecen more afar :i^~ was his dire prediction in 1918 chat the U.S. had only 6.7 billion barrels of recoverable oil left fn the ground. But the arrival of peace and oil gushers in Oklahoma and East Texz_c ended the cri- sis and created the nation's first "glut." Ey 1930, the U.S. had produced another 6.7 bil- lion barrels of oil and the consensus among forecasters. was that the surplus was here to stay. 1'Yorld War II resurrected the preaicton that "oi] is in short supply." But as the war waned znd new supplies were tapped in the L'.S. and the Middle East, forecasters found it fashionable to talk about. "a long era of cheap energy" and began issuing "plentiful supply" forecasts again. The Arab oil em? bongo of 1973-14 abruptty ended the eu- One famous forecast was the Central In- telligence Agency`s 2977 prediction that oil output in the Soviet Lrnian, the world's !at'o? est producer, would soon peak, then decline sharply and turn the Soviet into a huge net ls3.i. The prediction sparked. world-wide anxiety that the Russians would be forced.somarch into the hfiddle East and. thereby sendaoil prices soaring..=~~ .Prediction "'R.ei~se~I~-~U ,, , -;; _,~.,., ''~LYaltez"2.f ci3oiialit;;~,private?energy _c_nri~. :sultaniw~iio?tvas'L~en:thehead of the CIA re-~ :sear~ch'team,;;says.-tliaf::tbe aaency.later re- vised iEs-forecast;-but not-because~the origi- nal .ons'tiPas .v~ron~.:.Thanks to the ori,~tal ..forecast; ~e argues; "the Soviets invested ati -incredible_amount ~# money xo find new sup- plies; ';thereby averting the anticipated cri? sis:_ Several==.consumer:-groups; _ however; ,.charged`=tIie;.CIA?svfth ~_deliherate. deceptign aimed at ~-ilrurrurtiag up-st-pport~ ~or.Presf= dent_Carter'senergy,pr~g:aai.= ~}~~ =?? fession-. wilt-probably never be.: the -same. The CIA. forecast "ended the era of fabulous forecasts and made :chose who. practice the profession :somew:iat-~cautiaus,"-says Mr. O'Brien of the.~epartmeat?of Energy. Mr.~ McDonald :puts~~_it .more bluntly:.:"Fore- casters are-scared to death to make specific So they: hedge a lot. For example, Sher- man Clark,- a forecaster i, Brookfield Cen- ter, Conn., who has been "burned badly" by making specific projections on oil prices. now makes L'tree, "different?case forecasts" and assigns probabilities to each ore. His current five-year price fore^.ast ranges from S15 to Sufi a barrel and "Lhe probability that the. price co?.;td be anyw:~_re in that ; w e is abo;:*. ester: ' he sa}~s. Approved For Release 2009/08/20 :CIA-RDP90B01013R000300470015-8 Approved For Release 2009/08/20 :CIA-RDP9OBO1O13ROOO3OO47OO15-8 j,~5 J (2 ) Compatties Hedge . Oii companies are also hedging their bets much more these days. Standard Oil of Cali- f::r^ia's chief economist, William Hermann, says, "In the Bast we gave. our best guess. \ou' we plot different price pa'~tts and ex- plain what we think will happen within those paths." This change is understandable when you consider the difference between the company's 1913 and 1932 forecasts for world energy consunption in the year 2000. The latest one is lower by the equivalent of 137 ~ billion barrels of oil, or about five-sixths of Sa::di Arabia's total proven oil reserves. Exxon Corp. also has looked bad ~ at times. An Exxon forecast released in De- comber 19;9 assumed that oil ?prices, then about S18 a barrel, would rise to 57a a barrel in 1935.. But only a month after the report came out. oil was already selling at S26 a barrel. "We looked pretty stupid on that one." an Exxon man says.. - Some forecasters are considering issuing new forecasts more often. "Rather than sticidng with one forecast and trying to jus- tify it; I -think it would ?make a lot .more sense if every six months or so, one would make a new farecest as conditions change: ' says Mr. Lichtblau of the.Petroleum Indus- try Research Foundation: Meanwhile, at various speaking .en,~agements..l'gt'. ?Zicht-_ :. ?blan bas started citing govemmettteaet'gy:- forecasts '#astead of:-his own: "Tins:=way .if ..: the foceca_~t`Ss=wrasig;- Peoples .can :blame., them, ~~not.`. me; ': he :gays.. "I :don't-want to may, ~~,~y, ,.,,` rr'? - sttck. my. nec3c out.:: ' .. nice- Mf:..I.tchtblan;~? "`mosf:;prominent forecasters=are.afraid to 'strike out on?their I own these days" with a truly original fore- cast. says Dir. b4chees, the Federal Reserve Bank economist, who has studied their re- cent predictions. Faced with so much uncer- tainty, "they've clustered together like a herd of sheep." he says, making it hard to distinguish one forecast from another. There are differences. however. Before a group o? oilmen in Denver recently, Fred Singer, an energy fore;:'aster who contends that the glut is price-;educed and that prices could fall to S25 a barrel next year, debated Ragaet El Mallakh, an energy forecaster who says that the glut is recession-induced and that oil prices could b?gin climbing again once the recession subsides. Although neither forecaster clearly domi- noted the debate ("I don't think either orre of them has the faintest idea what's going io happen," says Glenn Anderson, a Denver oilman), Mr. EI Mallakh admits that Mr. Singer's prediction gets a tot more attention than his. "He tells the public what they want to hear, namely. 'We can live without the foreigners," says Mr. El Mallakh, who Egyptian. "But I can't get my ~ message' . across. because. people don't want ~to-Dear anything about oil shortages anymore."...: " Mr. Singer's_ predictions, in _fact, fre- ~WaIISLreet~Journal's editorial?pagFBnt',Mri^ 'tnrials to rnajor~pubIications=tiacluding:this'. i one). ones I'm always-turned down:" :~~r .~T~=< .guilty-of-it:~'~ ~ -;~-.r-~:~;-_:;.u~- _ -- _? - _ The Jtiuraaleertai~tly t~uotes '"expetgs"ra;?. 'lot, and these ' :experts" -have= sotnettrttes`. ~tinately,,ihe press :decides who arexhe:Px #orecaster; ;'there: are ;-people~~predictittg: ~2ions of gluts t~T shortages are`inore`'media: :events" than realfty_'"Af aziy point in time,~~ says Mr.:Safer. the self-styled..rtiaverick`- Journal article-as saying that'.`we're headed :for a shortage of coal in the Easi":and thaI .by 1983 prices could. almost quadruple. To-. day, with coal demand and prices in the dol- drums, Mr. Kowa freely admits that he has been "consistently wzong"- in making en- ergy forecasts. But chat doesn't seem; to been dead. wroitg:'Two-years apo fvr?exam: ple, coal analyst John Kawa was quoted in a As a securities analyst, "you make or break yourself on earnings projections," he says. "Energy forecasts are just a side- light." Approved For Release 2009/08/20 :CIA-RDP9OBO1O13ROOO3OO47OO15-8 - Approved For Release 2009/08/20 :CIA-RDP90B01013R000300470015.8 _ _ ~ ~ EXSEC -4961 DATE 3 MAY 82 CLASS. -118 &NSSD 9 -82 CONF. sue: MINUTES OF THE OVERVIEW GROUP MEETING APRIL 29, 1982 RE: NSSD 9-82, the next OVERVIEW MEETING WILL BE HELD ON 7 MAY 82. 6 MAY SUSPENSE 4MAY 82; DRUG TO ES. 4MAY82: CYS TO CHM/NIC,DDI,AND ER FILE FM ES. & OGI ~cTacr~ a. rrc~.{sj 3=IR5T P.E~~I.dDcR SE~.7 . 5!?S~~i:`Sc D~tT ~ ~-`r~-~ T0: !~ t tI: L~,,, $~CVIi~. ~.~`1 ~ ~1Qie~. '~i iii l .D~i'+ E G~ ;'ICE C~- LEA ,.~ :: ~ 1.~:?.. i..n i L~ e Approved For Release 2009/08/20 :CIA-RDP90B01013R000300470015-8