Industrial from Market Trends

Industrial and commercial sectors lead U.S. growth in primary energy use

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Total primary energy consumption, including fuels used for electricity generation, grows by 0.3 percent per year from 2010 to 2035, to 106.9 quadrillion Btu in 2035 in the AEO2012 Reference case (Figure 72). The largest growth, 3.3 quadrillion Btu from 2010 to 2035, is in the commercial sector, which currently accounts for the smallest share of end-use energy demand. Even as standards for building shells and energy efficiency are being tightened in the commercial sector, the growth rate for commercial energy use, at 0.7 percent per year, is the highest among the end-use sectors, propelled by 1.0 percent average annual growth in commercial floorspace.

The industrial sector, which was more severely affected than the other end-use sectors by the 2008-2009 economic downturn, shows the second-largest increase in total primary energy use, at 3.1 quadrillion Btu from 2010 to 2035. The total increase in industrial energy consumption is 2.1 quadrillion Btu from 2008 to 2035, attributable to increased production of biofuels to meet the Energy Independence and Security Act of 2007 (EISA2007) renewable fuels standard (RFS) as well as increased use of natural gas in some industries, such as food and paper, to generate their own electricity.

Primary energy use in both the residential and transportation sectors grows by 0.2 percent per year, or by just over 1 quadrillion Btu each from 2010 to 2035. In the residential sector, increased efficiency reduces energy use for space heating, lighting, and clothes washers and dryers. In the transportation sector, light-duty vehicle (LDV) energy consumption declines after 2012 to 14.7 quadrillion Btu in 2023 (the lowest point since 1998) before increasing through 2035, when it is still 4 percent below the 2010 level.

Manufacturing heat and power energy consumption increases modestly

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Despite a 49-percent increase in industrial shipments, industrial delivered energy consumption increases by only 15 percent from 2010 to 2035 in the AEO2012 Reference case, reflecting a shift in the share of shipments from energy-intensive manufacturing industries (which include bulk chemicals, petroleum refineries, paper products, iron and steel, food products, aluminum, cement, and glass) to other, less energy-intensive industries, such as plastics, computers, and transportation equipment. Although energy use for most of the energy-intensive industries continues to grow after 2012, with the stronger growth in refining, declines in the energy intensity of heat and power production offset some the growth in their energy use.

The share of industrial delivered energy consumption used for heat and power in manufacturing increases from 64 percent in 2010 to 71 percent in 2035 (Figure 82). The increase in heat and power energy consumption in manufacturing in the Reference case is primarily a result of a large increase (2 quadrillion Btu) in total energy use in the petroleum refining industry, including production increases for CTL, coal- and biomass-to-liquids (CBTL), and biomass pyrolysis oil production.

Heat and power consumption in the nonmanufacturing industries (agriculture, mining, and construction) is flat in the Reference case projection, accounting for about 16 percent of total industrial energy consumption over the 2010-2035 period. The remaining consumption consists of nonfuel uses of energy—primarily, feedstocks for chemical manufacturing and asphalt for construction. The share of total industrial energy consumption represented by nonfuel use increases by 1.6 percent from 2010 to 2020 as a result of increased shipments of organic chemicals, then declines as competition from foreign producers slows the growth of domestic production.

Reliance on natural gas and natural gas liquids rises as industrial energy use grows

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Led by increasing use of natural gas, total delivered industrial energy consumption grows at an annual rate of 0.6 percent from 2010 through 2035 in the Reference case. The mix of fuels changes slowly, reflecting limited capability for fuel switching with the current capital stock (Figure 83).

Industrial natural gas use grows by 8 percent from 2010 to 2035, reflecting relatively low natural gas prices. As a result, 33 percent of delivered industrial energy consumption is met with natural gas in 2035. The second-largest share is met by petroleum and other liquids (30 percent) and the remainder by renewables, electricity, and coal (37 percent). NGL, an increasingly valuable liquid component of natural gas processing, are consumed as a feedstock in the bulk chemicals industry and also are used for heat in other sectors. Industrial use of all petroleum and other liquids increases slightly from 2010 to 2035, and in 2035 the chemical industries use nearly one-half of the total as feedstock.

Coal use in the industrial sector for boilers and for smelting in steelmaking declines as more boilers are fired with natural gas and less metallurgical coal is used for steelmaking. After 2016, increased use of coal for CTL and CBTL production fully offsets the decline in the steel industry and boiler fuel use.

A decline in the electricity share of industrial energy consumption reflects modest growth in combined heat and power (CHP), which offsets purchased electricity requirements, as well as efficiency improvements across industries, primarily as a result of rising standards for motor efficiency. With growth in lumber, paper, and other industries that consume biomassbased byproducts, the renewable share of industrial energy use expands.

Iron and steel and cement industries are most sensitive to economic growth rate

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Total shipments from the energy-intensive industries grow by an average of 1 percent per year from 2010 to 2035 in the Reference case, as compared with 0.6 percent in the Low Economic Growth case and 1.2 percent in the High Economic Growth case. The post-recession recovery in shipments is uneven among the industrial subsectors. Paper, bulk chemicals, aluminum, and cement all show strong short-term recoveries from 2010 levels, while shipments from the liquids refinery industry lag. The iron and steel and glass industries show flat to moderate growth in the near term.

Among the energy-intensive industries, the value of shipments in the bulk chemicals, paper, and aluminum take less than 10 years to return to their 2006-2007 pre-recession levels. Others, including cement, iron and steel, and glass, take longer. Shipments from the liquids refinery industry do not reach prerecession levels by 2035, because demand for transportation fuels is moderated by increasing vehicle efficiencies. Food shipments, which grow in proportion to population and are resistant to recessions, have not shown the same recession-related decline as the other industries. Shipments of bulk chemicals, especially organic chemicals, grow sharply from 2012 to 2025 with the increased use of NGL as feedstock. After 2025, shipments from the bulk chemical industry level off as a result of foreign competition.

The energy-intensive iron and steel and cement industries show the greatest variability in shipments across the three cases (Figure 84), because they supply downstream industries that are sensitive to GDP growth. Construction is a downstream industry for both iron and steel and cement, and the metalbased durables industry is a downstream industry for iron and steel. Shipments in the metal durables industry levels off after 2020, following a decline in iron and steel shipments.

Energy use reflects output and efficiency trends in energy-intensive industries

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Changes in energy consumption from 2010 to 2035 in the energy-intensive industries ranges from almost nothing in the Low Economic Growth case to 0.8 percent per year or 5 quadrillion Btu in the High Economic Growth case (Figure 85). Changes in energy consumption by the industrial subsector largely reflect the corresponding changes in gross shipments. Energy efficiency improvements and changes in manufacturing methods and requirements, however, also affect energy consumption.

Starting from low levels of economic activity in 2010, shipments from all industries grow over the projection period. For example, steel industry shipments grow by 23 percent in the AEO2012 Reference case from 2010 to 2035, but energy use declines by 12 percent due to a shift from the use of blast furnace steel production to the use of recycled products and electric arc furnaces. The continued decline of primary aluminum production and concurrent rise in less energy-intensive secondary production lead to a similar decline in aluminum industry energy use despite an increase in shipments. The paper industry shows a far less noticeable improvement in energy efficiency because of greater demand for more energy-intensive products such as paperboard by consumers.

The only industrial subsector that shows an increase in energy intensity is refining. In each of the three Economic Growth cases (Reference, Low Growth, and High Growth), the increase in liquids refinery industry energy consumption exceeds the growth in shipments over the projection period as a result of increased use of coal after 2015 for CTL and CBTL production. Production of alternative fuels is inherently more energy-intensive than production of traditional fuels, because they are refined from solids with relatively low energy densities.

Transportation equipment shows strongest growth in non-energy-intensive shipments

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In 2035, non-energy-intensive manufacturing and nonmanufacturing industrial subsectors account for $6.7 trillion (2005 dollars) in shipments in the Reference case—a 57-percent increase from 2010. From 2010 to 2035, growth in those shipments averages 1.2 percent per year in the Low Economic Growth case and 2.5 percent in the High Economic Growth case, compared with 1.8 percent in the Reference case (Figure 86). Non-energyintensive manufacturing and nonmanufacturing are segments of the industrial sector that primarily consume fuels for thermal or electrical needs, not as raw materials or feedstocks.

In the three cases, shipments from the two subsectors grow at roughly twice the annual rate projected for energy-intensive manufacturing, based on production of high-tech, high-value goods and strong supply chain linkages between energyintensive manufacturing and many non-energy-intensive manufacturing industries (such as machinery and transportation equipment produced for the metals industries). Recovery in the two subsectors from 2010 to 2015 is rapid because of increased U.S. competiveness in the transportation equipment and machinery industries, as well as a recovering construction industry, which saw residential starts bottom out in 2010. After 2015, the growth is more moderate.

In the Reference case, shipments from the non-energy-intensive manufacturing and nonmanufacturing industries generally exceed pre-recession levels by 2017, reflecting a slow and extended economic recovery. Pre-recession shipment levels are exceeded in 2015 and 2024 in the High Economic Growth and Low Economic Growth cases, respectively.

Nonmanufacturing and transportation equipment lead energy efficiency gains

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From 2010 to 2035, total energy consumption in the nonenergy- intensive manufacturing and nonmanufacturing industrial subsectors changes by 2 percent or 178 trillion Btu in the Low Economic Growth case, 15 percent or 1,134 trillion Btu in the Reference case, and 30 percent or 2,282 trillion Btu in the High Economic Growth case (Figure 87). In each of the three cases, those industries together account for more than 40 percent of the projected increase in total industrial natural gas consumption.

The transportation equipment and construction industries account for roughly 20 percent of the projected increase in energy use but approximately 40 percent of the projected growth in total industrial shipments in all cases. The transportation equipment industry, in particular, shows a rapid decline in energy intensity from 2010 to 2035. Energy consumption increases by 37 percent from 2010 to 2035 and production doubles, yielding an annualized decline in energy intensity of 1.3 percent per year in the transportation equipment industry over the projection period in the AEO2012 Reference case.

Overall, the combined energy intensity of the non-energyintensive manufacturing and nonmanufacturing industries declines by 25 percent in the Low Economic Growth case and 29 percent in the High Economic Growth case. The more rapid decline in the High Economic Growth case is consistent with an expectation that energy intensity will fall more rapidly when stronger economic growth facilitates additional investment in more energy-efficient equipment.

Transportation uses lead growth in consumption of petroleum and other liquids

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In 2010, the United States imported 11 percent of its total natural gas supply. In the AEO2012 Reference case, U.S. natural gas production grows faster than consumption, so that early in the next decade exports exceed imports. In 2035, U.S. net natural gas exports are about 1.4 trillion cubic feet (about 4 billion cubic feet per day), half of which is exported overseas as liquefied natural gas (LNG). The other half is transported by pipelines, primarily to Mexico.

U.S. LNG exports supplied from lower 48 natural gas production are assumed to start when LNG export capacity of 1.1 billion cubic feet per day goes into operation in 2016. An additional 1.1 billion cubic feet per day of capacity is expected to come on line in 2019. At full capacity, the facilities could ship 0.8 trillion cubic feet of LNG to overseas consumers per year. Net U.S. LNG exports are somewhat lower than those figures imply, however, because LNG imports to the New England region are projected to continue. In general, future U.S. exports of LNG depend on a number of factors that are difficult to anticipate and thus are highly uncertain.

Net natural gas imports from Canada decline over the next decade in the Reference case and then stabilize at about 1.1 trillion cubic feet per year (Figure 109), when natural gas prices in the U.S. lower 48 States become high enough to motivate Canadian producers to expand their production of shale gas and tight gas. In Mexico, natural gas consumption shows robust growth through 2035, while Mexico's production grows at a slower rate. As a result, increasing volumes of imported natural gas from the United States fill the growing gap between Mexico's production and consumption.