12/21/2010 01:35 pm ET | Updated May 25, 2011

EIA's Forecast Is an Energy Fantasy Land

The recently released base case that will be used in the upcoming Annual Energy Outlook 2011 from the US Department of Energy's Energy Information Administration (EIA) paints a future of cheap and abundant energy for the US economy over the next quarter of a century. But its underlying assumptions are no more credible than those that underpinned the equally optimistic forecasts released by the International Energy Agency.

In the EIA base case, electricity prices in the US are basically flat for the next two-and-a-half decades, thanks to cheap natural gas, while oil prices don't even get close to their 2008 peaks until way off in 2035.

To top it all off, despite this new world of cheap energy, carbon emissions in the US economy don't grow. (Since the EIA is counting on no less than five million barrels per day from the Alberta tar sands, the same cannot be said for the Canadian economy.) American emissions remain below their 2005 peak until 2027, even though no cap-and-trade policies are assumed to exist, and even when the agency is forecasting an almost 30 percent increase in national coal consumption over the period.

With fossil-fuel energy abundant, and carbon emissions remarkably self-contained, the forward-looking EIA expects only a marginal increase in the contribution from renewables, whose very viability is challenged in the absence of public subsidies.

A doubling in estimates of shale gas reserves drives much of the energy abundance the EIA predicts. Whether shale gas turns out to be the game-changer the agency claims or the gas industry's version of the subprime mortgage market will ultimately depend on where its true cost curve lies.

If it's really in the neighborhood of $4 per 1,000 cubic feet (Mcf) then there is enough gas to keep the lights on in America for years. But if the true cost curve lies closer to $8 per Mcf (even before environmental costs like local groundwater contamination are factored in), then gas may not be as abundant as the EIA believes, and long-run electricity prices may not be nearly as cheap as forecast.

Either way, as I noted months ago in my post about Boone Pickens's plan, shale gas doesn't address the emerging shortage of the liquid fuel that is needed to power the 250 million vehicles or so that run on US roadways.

Which bring us to the EIA's oil price forecast. Measured in today's dollars, the agency doesn't see oil getting to $125 a barrel until 2035. The $125-per-barrel oil price that the EIA has spotted on the very distant 25-year horizon, I believe, will actually be staring the agency in the face within the next 12 months. I leave it to others to assess what that will imply for the credibility of the rest of the EIA's outlook.