EIA Reports

U.S. ENERGY INFORMATION ADMINISTRATION
WASHINGTON DC 20585

FOR IMMEDIATE RELEASE
DECEMBER 9, 2004

Long-Run Energy Outlook Examines Impact of Alternative Crude Oil Price Trends

The recent experience with higher and more volatile oil prices has added to uncertainty about the long-term path of crude oil prices.  The Annual Energy Outlook 2005 (AEO2005), released today by the Energy Information Administration (EIA), includes two oil price cases to evaluate the impact of alternative world crude oil price trends.  When released, the complete AEO2005 will include additional oil price cases.

The AEO2005 reference case assumes that the average annual world oil price, measured as the U.S. average refiners’ acquisition cost of imported crude oil (RAC), in real (inflation-adjusted) year 2003 dollars will rise from $27.73 per barrel in 2003 to $35 per barrel in 2004, and then decline to $25 per barrel by 2010 as new domestic and imported supplies enter the market.  The average price then rises slowly to about $30 per barrel in 2025.  An alternative “October oil futures” case, based on an extrapolation of West Texas Intermediate crude oil prices from the NYMEX futures market (corrected for the difference between WTI and RAC prices), starts from a level close to the current U.S. refiners’ acquisition cost and rises through 2005 before falling to about $31 per barrel in 2010.  Prices are assumed to remain above those in the reference case over the entire projection, reaching $35 per barrel in 2025 (Figure 1).

While higher near-term world oil prices in the October oil futures case have some implications for economic growth to 2010, the two scenarios show only modest differences in the evolution of U.S. energy markets to 2025.  In the October oil futures case, U.S. oil production in 2025 is 0.5 million barrels per day (6 percent) higher, and U.S. petroleum product consumption is 0.6 million barrels per day (2 percent) lower, than the reference case projections.  The limited impact of higher prices on oil consumption follows from the fact that the transportation and industrial sectors account for two-thirds and nearly one quarter of total U.S. oil use, respectively. There are currently limited opportunities to switch from petroleum to other fuels in these sectors, so major changes in projected U.S. petroleum consumption are unlikely to occur without much larger price or policy changes that significantly increase energy efficiency. 

Projections for non-oil primary fuels and electricity markets are virtually identical in the reference and October oil futures cases.   Most notably, both cases project a dramatic increase in reliance on LNG imports to meet demand growth. 

Forecast highlights of the AEO2005 (reference case results unless otherwise specified) include:

• Total energy demand is projected to increase from 98.2 to 133.2 quadrillion British thermal units (Btu) between 2003 and 2025, an average annual increase of 1.4 percent, in a scenario where the U.S. economy grows at an average annual rate of 3.1 percent.

• U.S. petroleum demand is expected to become increasingly dependent on imports in both the reference case and October oil futures case.  In 2025, net petroleum imports are expected to account for 68 percent of total petroleum demand in the reference case and 66 percent in the October oil futures case, up from 56 percent in 2003 (Figure 2).

• Average natural gas wellhead prices are projected to increase from $4.98 to $5.30 per thousand cubic feet (2003 dollars) between 2003 and 2005.  After 2005, natural gas wellhead prices are projected to decline to $3.64 per thousand cubic feet in 2010 as supply expands from increased drilling and through the initial availability of new import sources.  After 2010, wellhead prices are projected to increase gradually, reaching $4.79 per thousand cubic feet in 2025.

• Projected natural gas consumption grows from 22 to almost 31 trillion cubic feet between 2003 and 2025.  The growth in U.S. natural gas demand will predominantly be met by increased imports of LNG and Alaska natural gas. Total LNG imports are projected to increase from 0.4 trillion cubic feet in 2003 to 6.4 trillion cubic feet in 2025 (Figure 3).  With the projected completion of an Alaskan natural gas pipeline in 2016, total Alaskan production is projected to increase from 0.4 trillion cubic feet in 2003 to 2.2 trillion cubic feet in 2025.  

• Coal remains the primary fuel for electricity generation through 2025, but the coal share of total generation declines slightly from 51 percent in 2003 to 50 percent in 2025 as large amounts of new gas-fired capacity are added in the early years of the forecast.  The natural gas share is projected to increase from 16 percent in 2003 to 24 percent in 2025 (Figure 4).  Eighty-seven gigawatts of new coal-fired generating capacity and 168 gigawatts of new natural gas capacity are expected to be constructed between 2004 and 2025.

• While no new nuclear units are built in AEO2005, nuclear generating capacity is projected to increase from 99.2 gigawatts in 2003 to 102.7 gigawatts in 2025 through the startup of the Browns Ferry nuclear plant and the addition of 3.5 gigawatts via uprates.

• Total renewable electricity generation is projected to increase by 130 billion kilowatt-hours between 2003 and 2025.  Renewable technologies are projected to grow slowly because of the relatively low cost of fossil-fired generation.

• Average real (2003 dollars) electricity prices are projected to decline from 7.4 cents per kilowatthour in 2003 to a low of 6.6 cents per kilowatthour by 2011 as a result of an increasingly competitive generation market and a decline in natural gas prices.  After 2011, average real electricity prices are projected to increase, reaching 7.3 cents per kilowatthour by 2025 due mainly to increased coal and natural gas fuel costs, particularly in the later years of the forecast.

• The forecast does not assume future policy actions that might be taken to reduce emissions of carbon dioxide or other gases.  Carbon dioxide emissions from energy use are projected to increase at an average annual rate of 1.5 percent between 2003 and 2025.  The carbon intensity of the economy, measured as energy-related carbon dioxide emissions per dollar of gross domestic product, declines at an average annual rate of 1.5 percent per year through 2025.

Reference and October oil futures case projections from the Annual Energy Outlook 2005 and an overview of the results can be accessed on EIA’s Internet site at www.eia.doe.gov/oiaf/aeo/index.html.  The full report, including projections with differing assumptions on the price of oil, the rate of economic growth, and the characteristics of new technologies, will be released in the early part of 2005, along with regional projections and a report on the major assumptions underlying the projections.

EIA Program Contact:  John Conti, 202/586-2222, john.conti@eia.doe.gov

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