Economic Outlook The recent dramatic deterioration in the outlook for economic growth in the United States and the rest of the world has led to a significant reduction in this Outlook’s assumptions for world economic growth and projections of energy demand and prices. World real gross domestic product (GDP) growth is projected to slow from about 4 percent in 2006 and 2007 to about 2.5 percent this year and 1.8 percent in 2009. Last month’s Outlook assumed world GDP would increase by 3.0 percent in 2008 and by 2.8 percent in 2009. Previous lows for world economic growth were 0.3 percent in 1982, 1.7 percent in 1993, and 1.5 percent in 2001. The year-over-year changes in U.S. real GDP in last month’s Outlook were 1.8 percent growth in 2008 and 0.8 percent growth in 2009. U.S. real GDP growth in the current Outlook has been lowered to 1.3 percent for 2008 and is projected to decline by 1.4 percent in 2009. The 2009 average unemployment rate has been raised from 6.2 percent to 7.9 percent in this forecast. The U.S. manufacturing production index was lowered by 1.1 percent and 7.0 percent for 2008 and 2009, respectively, with the 2009 growth rate of the index falling from a positive 0.5 percent (growth) to negative 5.5 percent (decline). Overview Future price levels will primarily depend on the magnitude and duration of the economic downturn as well as OPEC and non-OPEC behavior. Our current expectation of future oil prices assumes that the OPEC production cut may limit, but not reverse, the recent sharp fall in oil prices. We project oil prices to remain relatively flat, averaging $60 to $65 per barrel throughout 2009. The condition of the global economy is expected to remain the most important factor driving world oil prices. Consumption. World oil consumption is projected to increase by almost 100,000 bbl/d in 2008 and to remain virtually flat in 2009. In both years, growth in countries outside of the Organization for Economic Cooperation and Development (OECD)— especially China, Latin America, and oil-exporters in the Middle East—offset projected sharp declines in oil consumption in OECD countries (World Oil Consumption). Between 2007 and 2009, non-OECD oil consumption is projected to rise by 2.3 million bbl/d compared with a decline of 2.2 million bbl/d in the OECD. We expect economic growth in non-OECD countries not to fall as precipitously as in the OECD countries, with the non-OECD countries maintaining modest oil demand growth. Non-OPEC Supply. Non-OPEC supply is expected to decline in 2008, but growth should return in 2009 because of projects currently near completion. EIA expects non-OPEC supply to fall by 280,000 bbl/d in 2008. A combination of factors contributed to the decline in 2008, including project delays and large supply disruptions in Central Asia and the Gulf of Mexico. EIA projects that non-OPEC supply will grow by 500,000 bbl/d in 2009, with the largest sources of growth coming from the United States, Azerbaijan, and Brazil. In the United States, production of petroleum and other liquids is expected to rise by 450,000 bbl/d in 2009 because of the start-up of several offshore crude oil production platforms, recovery from hurricane-induced shut-ins, and continuing growth in fuel ethanol production. Non-OPEC supply growth is at continual risk to unexpected disruptions or project delays, but the global economic slowdown brings additional difficulties as well. Lower oil prices bring into doubt the viability of some high-cost non-OPEC projects. If problems in global financial markets lead to delayed investment in existing and new oil fields, then even a short-lived economic downturn could have longer-term ramifications for world oil supply. This would heighten the risk of a return to a tight supply situation once the world economy (and thereby oil demand growth) recovers. OPEC Supply. OPEC decided at its October meeting to cut its crude oil production targets by 1.5 million bbl/d in response to the global economic slowdown, weakening oil demand, falling oil prices, and in anticipation of rising non-OPEC supplies. The extent of actual OPEC compliance to its new production target is uncertain. This Outlook assumes that the recent sharp decline in oil prices will lead to compliance that is above historical levels. EIA projects that OPEC crude oil production will fall from 32.3 million bbl/d in October 2008 to 31.3 million bbl/d in the first quarter of 2009, where it will remain relatively stable through the end of 2009. This represents a decline of 1 million bbl/d from October 2008 production levels, or about 70 percent of the announced cut. Last month’s assessment already had a 600,000-bbl/d reduction in OPEC crude production over this period, so the new estimate represents an additional 400,000-bbl/d cut from last month’s Outlook. Lower crude oil production, combined with planned increases in OPEC production capacity, suggests OPEC surplus production capacity could increase from 1.6 million bbl/d in the second quarter of 2008 to nearly 4 million bbl/d by the end of next year (OPEC Surplus Oil Production Capacity). Although it is possible that weak market conditions could delay some of these capacity expansion plans, EIA expects OPEC surplus production capacity to rise above 3 million bbl/d next year for the first time since 2003, which would provide Saudi decision makers with a cushion large enough to provide a capability to dampen the impact of future disruptions or geopolitical uncertainties on oil prices. Inventories. Revised data indicate that OECD commercial inventories rose by 400,000 bbl/d in the second quarter of 2008, or at about half of the historic level of inventory build rate during this time of year. OECD commercial inventories stood at 2.6 billion barrels at mid-year, or 56 days of forward consumption cover. On the basis of days of forward cover, OECD commercial inventories are well above historic levels, and EIA projects that they will remain there through the end of 2009 (Days of Supply of OECD Commercial Stocks). Consumption. Consumption of all petroleum products is projected to decline substantially in 2008, driven down by the increase in prices and by a weakening economy during the second half of the year. Total domestic petroleum consumption is projected to average 19.6 million bbl/d in 2008, down 1.1 million bbl/d, or 5.4 percent, from the 2007 average (U.S. Petroleum Products Consumption Growth). This marks the first time since 1980 that annual total petroleum consumption is expected to decline by more than 1 million bbl/d. In 2008, motor gasoline consumption is projected to decline by 280,000 bbl/d, or 3 percent, and distillate fuel consumption is projected to decline by 250,000 bbl/d, or 6 percent. In 2009, total petroleum product consumption is projected to sink by a further 250,000 bbl/d, or 1.3 percent. This decline is more than twice that projected in the previous Outlook. Production. In 2008, domestic crude oil production is projected to average 4.9 million bbl/d, down 120,000 bbl/d from 2007 levels. This is primarily due to the loss of production in the Federal Gulf of Mexico caused by Hurricanes Ike and Gustav (U.S. Crude Oil Production). Domestic crude oil production has been steadily declining since the 1970s, and the 2008 projection for crude oil production falls below 5 million bbl/d for the first time since 1946. However, domestic production is projected to increase in 2009 by 400,000 bbl/d to an average of 5.3 million bbl/d. Contributing to the increase in output are the Gulf of Mexico Thunder Horse platform, which is expected to come on stream later this year, and the Tahiti platform, expected to come on stream late in 2009. Prices. As a result of world-wide economic stagnation, oil markets are expected to remain weak throughout the forecast. WTI prices are projected to average $101 per barrel in 2008. Under the current economic assumptions and assuming no major crude oil supply disruptions, WTI prices are expected to average $63.50 per barrel in 2009 (Crude Oil Prices). This is down from $112 per barrel average projected for 2009 in last month’s Outlook. Further deterioration in actual or expected global economic growth as a fallout of the current financial crisis may lead to even lower oil prices. Regular grade gasoline prices averaged $2.22 per gallon on November 10, down substantially from their July 14 peak of $4.11 per gallon. They are projected to average $2.37 per gallon in 2009, almost $1.20 per gallon below that projected in the previous Outlook. Because of the continued weakness in motor gasoline consumption, the difference between the price of gasoline and the cost of crude is expected to remain low throughout the forecast. Residential heating oil retail prices this winter are projected to average $2.75 per gallon, a decrease of 56 cents from last winter’s average. On-highway diesel fuel retail prices are projected to average $2.73 per gallon in 2009, down $1.08 from the 2008 average, compared with a 90-cent-per-gallon decline in the price of WTI crude oil. This narrowing of margins reflects a projected slowing of the growth in distillate fuel usage outside the United States and a weakening of refining margins during the economic slowdown. Spot propane prices are strongly influenced by both crude oil and natural gas prices. Residential retail propane prices are projected to average $2.22 this winter (down from $2.68 in the previous Outlook), a decrease of about 10 percent from the 2007-2008 winter heating season. However, with current low inventories, propane markets are likely to remain relatively tight this winter, with the potential for upward pressure on residential propane prices if colder-than-expected weather occurs. Consumption. Total natural gas consumption is expected to increase by 1.1 percent in 2008 and fall by 0.2 percent in 2009 (Total U.S. Natural Gas Consumption Growth). Consumption in 2008 is projected to be higher in every sector except for electric power, led by 4.1- and 3.2-percent growth in the residential and commercial sectors, respectively. While very slight growth is expected in the residential and commercial sectors in 2009, the contracting economy is expected to cause a 2.2-percent decline in industrial sector consumption next year. The weakness in global economic growth could limit U.S. exports of natural-gas-intensive products and further reduce natural gas consumption by industrial consumers. Production and Imports. Total U.S. marketed natural gas production is expected to increase by 6 percent in 2008 and by 2 percent in 2009. Production activity from unconventional fields in the States of Texas, Wyoming, and Oklahoma is expected to increase supply from the Lower-48 non-GOM by almost 10 percent this year. While continued onshore production growth is expected in 2009, lower average prices and poor economic conditions are expected to limit the expansion of supplies to 1.9 percent. For 2008, Federal GOM production is now expected to decline by 14.8 percent as repairs to supply infrastructure continue, while 2009 growth of 2.7 percent reflects the expectation of further recovery and less shut-in production during the 2009 hurricane season. Strong global demand, supply constraints, and lower relative U.S. natural gas prices have all contributed to the decline in U.S. imports of liquefied natural gas (LNG), which are expected to fall from 770 billion cubic feet (Bcf) in 2007 to 350 Bcf in 2008, a reduction of 55 percent. LNG imports are expected to total about 410 Bcf in 2009. The limited natural gas storage facilities in LNG-consuming nations outside of the United States could lead to higher U.S. LNG import growth in 2009, particular during the storage injection season (April to September) as more global LNG capacity is brought online. Inventories. On October 31, 2008, working natural gas in storage was 3,405 Bcf (U.S. Working Natural Gas in Storage). Current inventories are now 78 Bcf above the 5-year average (2003–2007) and 130 Bcf below the level during the corresponding week last year. Prices. The Henry Hub spot price averaged $6.94 per Mcf in October, $0.94 per Mcf below the average spot price in September. The slowing economy, continued growth in domestic natural gas production, and the significant decline in oil prices have led to a dramatic shift in expectations for natural gas prices over the forecast. Still, household heating expenditures this winter are expected to be slightly higher than last year due to the pass-through of some higher-priced natural gas that was put in storage earlier in the year to meet winter demand. Beyond the winter, the weak economy and continued growth in onshore natural gas production are expected to keep prices relatively low. On an annual basis, the Henry Hub spot price, which averaged $7.17 per Mcf in 2007, is expected to average $9.25 per Mcf in 2008 and $6.82 per Mcf in 2009, $1.35 per Mcf lower than the forecast 2009 price in last month’s Outlook. Consumption. The latter half of this summer was much cooler than the same period last year (U.S. Summer Cooling Degree-Days), especially in the upper Midwest and Northeast regions. As a result, residential electricity consumption is expected to fall 0.5 percent this year. The economic slowdown will impact consumption in all sectors during 2009, particularly the industrial sector, which is now expected to decline by 2.5 percent next year in contrast to the 0.2-percent decline projected in last month’s Outlook (U.S. Total Electricity Consumption). Prices. The recent drop in power generation fuel costs has caused some utilities to reconsider the steep price increases announced this past summer. However, fuel costs still remain high, and it is unlikely that electricity rates for most customers will fall significantly in the near term. U.S. residential electricity prices are expected to increase by about 6.5 percent in both 2008 and 2009 (U.S. Residential Electricity Prices). Consumption. Although electric-power-sector coal consumption for the first half of 2008 grew by 1.3 percent, slow growth in summer electricity consumption is expected to keep annual growth flat in 2008. In 2009, weak economic growth, which will constrain growth in electricity consumption, coupled with projected increases from other generation sources (nuclear, natural gas, petroleum, and wind), will lead to a 0.4-percent decline in electric-power-sector coal consumption (U.S. Coal Consumption Growth). Production.Growth in both domestic consumption and exports is expected to contribute to a 2.1-percent increase in coal production in 2008. Production is expected to decline by only 0.5 percent in 2009 as lower domestic consumption is nearly offset by continued export growth (U.S. Annual Coal Production). Exports. In the first half of 2008, U.S. coal exports increased by 13 million short tons, or 50 percent, over first-half 2007 shipments. Strong global demand for coal, combined with supply disruptions in several key coal-exporting countries (Australia, South Africa, and China), were the primary factors behind the increase in U.S. coal exports. Although the supply disruptions have ended, continued robust worldwide demand for coal is projected to lead to an overall 40-percent increase in U.S. coal exports in 2008. Coal exports are projected to be 86.5 million short tons, a 5.5-percent increase, in 2009.
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