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APPENDIX II OVERVIEW OF THE SHORT-TERM PETROLEUM FORECASTING PROCEDURE

(1)

The procedure by which FEA's short-term petroleum
forecasts are generated may be summarized as follows:
First, a number of macroeconomic variables
(such as disposable income or industrial
productivity) which can be strongly related
to the demand for petroleum products are
estimated via an econometric model of the

(2)

U.S. economy.

Petroleum

Second price trajectories are estimated for
the pertinent petroleum products.
product prices are estimated by making a
variety of assumptions about future changes
in those factors which influence domestic
prices. These factors would include, among
others, the world price of crude, the existence
of import fees, the rate at whith domestic

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FEA's short-term petroleum demand model is driven
by a macroeconomic model developed by Data Resources.
Inc., (DRI).

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The DRI macroeconomic model is a large-scale
structural model embodying GNP and industry models.
Applied to a data base constructed primarily from the
Federal statistical system, the DRI macroeconomic model
is used to forecast the following variables, which are
subsequently treated as inputs to the FDA petroleum rodel:
(1) disposable personal income (1958 dollars,
seasonally-adjusted at arnual rates);

(2) persoral consumption expenditures (1958

dollars, seasorally-ad Jited at arnual rates);

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Other

(a) Natural gas curtailments are assumed throughout the entire forecast interval. On a yearly average basis, it is assumed that incremental gas curtailments will boost residual demand by 80 thousand barrels per day and will boost distillate demand by 113 thousand barrels per day.

(b) Since Bureau of Mines (BOM) demand data is currently available only through August 1975, the demand model solves from September 1975 through December 1978. Since quarterly BOM supply data is available only through the second quarter of 1975, the supply model solves from July 1975 through December 1978.

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