The history of oil tycoons is littered with booms and busts—fortunes that swelled and collapsed with unexpected velocity—subject to the vagaries of oil discoveries and the high-stakes game of world diplomacy and international intrigue. Economic forecasters can’t avoid them, either.
Ever since oil prices collapsed last fall, the best guess of economists has been that oil prices would gradually firm up. The average of predictions in The Wall Street Journal’s survey of economists has shown that forecasters typically expect prices to rise about $5 every six months.
Crude oil prices climbed earlier this year—even briefly surpassing $60 a barrel—only to plunge again over recent weeks as investors contemplated the possibility that there’s simply not enough global demand to support higher prices. As oil prices plunged back below $50 and slid toward $40, it left economists’ forecasts as wrecked as a 1980s oil town in West Texas. At no point in the last 12 months have economists anticipated that oil could drop so low.
The missed forecasts of oil prices matter because of how much oil feeds into inflation. As a crude rule of thumb, energy prices make up about 10% of the consumer-price index, so a major drop in oil can cause inflation to fall through the floor. That’s exactly what’s happened and economists didn’t anticipate it. For the past year, they have forecast that the annual rate of change for the consumer-price index would return to slightly above 2% within about a year.