Market Trends — Oil/Liquids

Transportation uses lead growth in consumption of petroleum and other liquids

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U.S. consumption of petroleum and other liquids totals 19.9 million barrels per day in 2035 in the AEO2012 Reference case, an increase of 0.7 million barrels per day over the 2010 total (Figure 110). With the exception of the transportation sector, where consumption grows by about 0.6 million barrels per day from 2010 through 2035, petroleum and other liquids consumption remains relatively flat. The transportation sector accounts for 72 percent of total petroleum and other liquids consumption in 2035. Proposed fuel economy standards covering MYs 2017 through 2025 that are not included in the Reference case would further reduce projected petroleum use (see "Issues in focus").

Motor gasoline, ultra-low-sulfur diesel fuel, and jet fuel are the primary transportation fuels, supplemented by biofuels such as ethanol and biodiesel. Petroleum-based motor gasoline consumption drops by approximately 0.9 million barrels per day from 2010 to 2035 in the Reference case, displaced by increased ethanol use in the form of higher blends in gasoline and by E85 consumption, which increases from virtually zero in 2010 to 0.8 million barrels per day in 2035. Diesel fuel consumption increases from 3.3 million barrels per day in 2010 to 4.1 million barrels per day in 2035.

Biodiesel and a number of next-generation biofuels account for a large share of the increase in petroleum and other liquids consumption (excluding ethanol) for transportation from 2010 to 2035 (about 0.7 million barrels per day). The growth in biofuels consumption (including ethanol) is attributable to the EISA2007 RFS mandates, as well as high crude oil prices. The growth in diesel fuel use results primarily from increased sales of light-duty diesel vehicles needed to meet more stringent CAFE standards, with a corresponding increase in domestic production of diesel fuel.

Biofuels and natural gas liquids lead growth in total petroleum and other liquids supply

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In the AEO2012 Reference case, domestic production of petroleum and other liquids grows by 3.1 million barrels per day from 2010 to 2035 (Figure 111). Total production grows rapidly, from 9.7 million barrels per day in 2010 to 12.1 million barrels per day in 2020, as production of crude oil and NGL from tight oil formations (including shale plays) increases sharply. After 2020, total U.S. production of petroleum and other liquids grows more slowly, to 12.7 million barrels per day in 2035, as tight oil production levels off despite continued increases in crude oil prices. As production of other liquid fuels increases, the crude oil share of total domestic petroleum and other liquids production declines from 56 percent in 2010 to 47 percent in 2035. NGL production increases by more than 0.9 million barrels per day, to 3.0 million barrels per day in 2035, mainly as a result of strong growth in production of both tight oil and shale gas, which contain significant volumes of NGLs.

Biofuels production grows by 0.8 million barrels per day from 2010 to 2035 as a result of the EISA2007 RFS, with ethanol and biodiesel accounting for 0.7 and 0.1 million barrels per day, respectively, of the increase in the Reference case. The increase in domestic ethanol production reduces consumption of petroleum- based motor gasoline components by about 6 percent in 2035 on an energy-equivalent basis. In the early years of the projection, ethanol is used primarily for blending in E10 (motor gasoline blends containing up to 10 percent ethanol) and E15 (15 percent ethanol). In 2035, 37 percent of domestic ethanol production is used in E85 (85 percent ethanol) and 63 percent in E10 and E15 blends. In addition, growth in next-generation "xTL" production, which includes both biomass-to-liquids and CTL, contributes significantly to the growth in total U.S. petroleum and other liquids production, particularly after 2020, adding about 0.6 and 0.3 million barrels per day of production, respectively, from 2010 to 2035.

U.S. crude oil production increases, led by lower 48 onshore production

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As world oil prices increase in the AEO2012 Reference case, U.S. production of tight oil (liquid oil embedded in low-permeable sandstone, carbonate, and shale rock) and production using carbon dioxide-enhanced oil recovery (CO₂-EOR) techniques add to the projected increase in domestic crude oil production from 2010 to 2035 (Figure 112). Growth in lower 48 onshore crude oil production comes primarily from the continued development of tight oil resources, mostly from the Bakken and Eagle Ford formations. Tight oil production surpasses 1.3 million barrels per day in 2027 and then declines to about 1.2 million barrels per day in 2035 as "sweet spots" are depleted. AEO2012 also includes six other tight formations in the projections for tight oil production: the Austin Chalk, Avalon/Bone Springs, Monterey, Niobrara, Spraberry, and Woodford formations. Additional tight oil resources are likely to be identified in the future as more work is completed to identify currently producing reservoirs that may be better categorized as tight formations, and as new tight oil plays are identified and incorporated (see next column).

Crude oil production using CO₂-EOR increases significantly after 2020, when oil prices are higher, the more profitable tight oil deposits are depleted, and affordable anthropogenic sources of carbon dioxide (CO₂) are available. It plateaus at about 650,000 barrels per day from 2032 to 2035, when its profitability is limited by reservoir quality and CO₂ availability. From 2011 through 2035, CO₂-EOR production exceeds 4 billion barrels of oil.

Lower 48 offshore oil production remains relatively constant in the Reference case. The decline in currently producing fields is offset primarily by exploration and development of new fields in the deep waters of the Gulf of Mexico and, after 2029, in the Pacific Outer Continental Shelf.

U.S. crude oil production varies with price and resource assumptions

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U.S. crude oil production varies with changes in assumptions about the extent of productivity improvement and well spacing in emerging tight oil resources examined in the High Technically Recoverable Resources (TRR) case and in the High and Low EUR cases (see discussion in "Issues in focus") and with changes in assumptions about crude oil prices in the Low and High Crude Oil Price cases (Figure 113). In the High TRR case, assumptions for tight oil allow for more rapid growth in crude oil production in the short and long term than in the Reference case, with production reaching nearly 8 million barrels per day in 2020. In the Low EUR case there is very little growth in domestic crude oil production over the projection period.

Higher oil prices lead to an increase in the level of investment in new oil projects. However, the returns from increased investment diminish as the average size and quality of available reservoirs decline. For example, in the High Oil Price case tight oil production is, on average, 225,000 barrels per day higher from 2020 to 2030 than in the Reference case but returns to Reference case levels in 2035. In contrast, low oil prices result in less investment in new oil projects and encourage producers to plug and abandon existing fields at earlier dates. For example, in the Low Oil Price case, oil production from the Alaska North Slope is shut down by around 2025, when the projected operating costs exceed wellhead production revenues (see "Issues in focus"). From 2020 to 2035, tight oil production is, on average, roughly 300,000 barrels per day lower in the Low Oil Price case than in the Reference case.

U.S. net imports of petroleum and other liquids fall in the Reference case

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U.S. imports of petroleum and other liquids (including crude oil, petroleum liquids, and liquids derived from nonpetroleum sources) grew steadily from the mid-1980s to 2005 but have declined since then. In the AEO2012 Reference and High Oil Price cases, U.S. imports of petroleum and other liquids continue to decline from 2010 to 2035, even as they provide a major part of total U.S. supply. Tighter fuel efficiency standards, increased use of biofuels, and greater production of domestic petroleum and other liquids contribute to the decrease in the share of imports. The combination of higher prices and renewable fuel mandates leads to more domestic production of petroleum and biofuels, which, combined with declines in the petroleum share of finished products after 2015, results in sustained net product exports.

The net import share of U.S. petroleum and other liquids consumption, which fell from 60 percent in 2005 to 50 percent in 2010, continues to decline in the Reference case, with the net import share falling to 36 percent in 2035 (Figure 114). In the High Oil Price case, the net import share falls even lower to a 22-percent share in 2035. In the Low Oil Price case, the net import share remains flat in the near term but rises to 51 percent in 2035, as domestic demand increases and imports become cheaper than crude oil produced domestically. As a result of increased domestic production and slow growth in consumption, the United States becomes a net exporter of petroleum products, with net exports in the Reference case increasing from 0.18 million barrels per day in 2011 to 0.34 million barrels per day in 2035. In the High Oil Price case, net exports of petroleum products increase to 0.9 million barrels per day in 2035.

U.S. Consumption of cellulosic biofuels exceeds renewable fuels standard in 2035

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Although biofuel production increases substantially in the AEO2012 Reference case, it does not meet the mandated RFS of 36 billion gallons in 2022 (Figure 115). Financial and technological hurdles delay the start of many advanced biofuel projects, particularly cellulosic biofuel projects. Three consecutive years of substantial reductions in the cellulosic biofuels mandate [133, 134, 135] have significantly reduced the possibility that the original RFS levels mandated in EISA2007 will be reached by 2022.

Between 2012 and 2022, it is expected that the EPA will evaluate the status of biofuel capacity annually and revise the production mandates for the following year, according to provisions in the RFS [136]. In 2011, after the EPA reduced the cellulosic biofuel mandate for both 2010 and 2011 from 100 million and 250 million gallons, respectively, to approximately 6 million gallons in both years, it also reduced the 2012 mandate from 500 million gallons to about 8 million gallons. Taking into account those modifications and anticipated future changes, only 22.1 billion of RFS credits are generated in 2022 in the Reference case, with 15 billion gallons of credits coming from domestic production of corn-based ethanol.

In the Reference case, the remainder of the biofuel supply consists of imported ethanol, biodiesel, cellulosic ethanol, and smaller volumes of next-generation biofuels. U.S. consumption of cellulosic ethanol grows from 0.6 billion gallons in 2022 to 7.2 billion gallons in 2035, when imports of ethanol and biodiesel total 2.2 billion gallons and 0.2 billion gallons, respectively.

Infrastructure hurdles limit near-term growth in consumption of E15 and E85 fuels

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A number of factors have recently limited the amount of ethanol that can be consumed domestically. Currently, given the limited availability of E85, the primary use of ethanol is as a blendstock for gasoline. With rapid growth in ethanol capacity and production in recent years, ethanol consumption in 2010 approached the legal gasoline blending limit of 10 percent (E10). As of January 2011, the EPA increased the blending limit to 15 percent for vehicles built in 2001 and later [137]. Once the final requirements are put in place, blenders will no longer be prohibited from blending beyond 10 percent for the general stock; however, a number of issues are expected to limit the rate at which terminals and retail outlets choose to take advantage of the option.

Liability from potential misfueling and infrastructure problems is one of the top concerns expected to slow the widespread adoption of E15. Retailers are hesitant to sell E15, even with the EPA's warning label, if they are not relieved of responsibility for damage to consumers' vehicles that may result from misfueling with the higher ethanol blend or from malfunctions of storage equipment or infrastructure. Consumer acceptance of the new fuel blend will also play a part, and warning labels may deter customers from risking potential damage from the use of E15, which potentially could void vehicle warranties.

In light of those potential issues, ethanol blending in gasoline increases slowly in the Reference case, from 13.2 billion gallons in 2010 (about 9 percent of the gasoline pool) to 15.0 billion gallons in 2020 (about 11 percent) and 15.8 billion gallons in 2035 (12.5 percent). Given the blending limitations, the remaining growth in ethanol use is in E85, which grows from about 0.6 billion gallons in 2018 to 9.5 billion gallons in 2035 (Figure 116).

Shifts in fuel consumption guide future investment decisions for refiners

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Tighter vehicle efficiency standards for LDVs require new LDVs to average 35 mpg by 2020, and newly issued regulations require increased use of ethanol. The Reference case does not include the proposed fuel economy standards covering MYs 2017 through 2025 that would raise vehicle efficiency standards even higher. Demand for motor gasoline declines in the Reference case. In combination with a tighter market for diesel fuel, the decrease in gasoline consumption leads to a shift in refinery outputs and investments. As some smaller and less integrated refineries begin to idle capacity as a result of higher costs, new refinery projects are focused on shifting production from gasoline to distillate fuels. The restructuring results in a net reduction in refinery capacity of 2.4 million barrels per day over the projection period.

In the Reference case, new capacity that was planned before the economic downturn of 2008-2009 comes on line early in the projection period, adding approximately 400,000 barrels per day of new refining distillation capacity from 2010 to 2015. As a result of refinery economics and concerns about the potential for enactment of legislation that could constrain carbon emissions, raise refiners' costs, and limit the growth in demand for petroleum and other liquids, no additional refinery capacity is built after 2015 until around 2030. Total refining capacity in the United States declines gradually after 2015 as additional capacity is idled.

Motor gasoline consumption and diesel fuel consumption (either including or excluding biofuels) trend in opposite directions in the Reference case (Figure 117). Consumption of diesel fuel increases by approximately 0.8 million barrels per day from 2010 to 2035, while motor gasoline consumption falls by 0.9 million barrels per day.