Macroeconomic from Executive Summary

The rate of growth in energy use slows over the projection period, reflecting moderate population growth, an extended economic recovery, and increasing energy efficiency in end-use applications

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Overall U.S. energy consumption grows at an average annual rate of 0.3 percent from 2010 through 2035 in the AEO2012 Reference case. The U.S. does not return to the levels of energy demand growth experienced in the 20 years prior to the 2008- 2009 recession, because of more moderate projected economic growth and population growth, coupled with increasing levels of energy efficiency. For some end uses, current Federal and State energy requirements and incentives play a continuing role in requiring more efficient technologies. Projected energy demand for transportation grows at an annual rate of 0.1 percent from 2010 through 2035 in the Reference case, and electricity demand grows by 0.7 percent per year, primarily as a result of rising energy consumption in the buildings sector. Energy consumption per capita declines by an average of 0.6 percent per year from 2010 to 2035 (Figure 1). The energy intensity of the U.S. economy, measured as primary energy use in British thermal units (Btu) per dollar of gross domestic product (GDP) in 2005 dollars, declines by an average of 2.1 percent per year from 2010 to 2035. New Federal and State policies could lead to further reductions in energy consumption. The potential impact of technology change and the proposed vehicle fuel efficiency standards on energy consumption are discussed in "Issues in focus."

Much of the projected decline in the net import share of energy supply is accounted for by liquids. Although U.S. consumption of liquid fuels continues to grow through 2035 in the Reference case, reliance on petroleum imports as a share of total liquids consumption decreases. Total U.S. consumption of liquid fuels, including both fossil fuels and biofuels, rises from about 18.8 million barrels per day in 2009 to 21.9 million barrels per day in 2035 in the Reference case. The import share, which reached 60 percent in 2005 and 2006 before falling to 51 percent in 2009, falls to 42 percent in 2035 (Figure 1).

With modest economic growth, increased efficiency, growing domestic production, and continued adoption of nonpetroleum liquids, net imports of petroleum and other liquids make up a smaller share of total U.S. energy consumption

U.S. dependence on imported petroleum and other liquids declines in the AEO2012 Reference case, primarily as a result of rising energy prices; growth in domestic crude oil production to more than 1 million barrels per day above 2010 levels in 2020; an increase of 1.2 million barrels per day crude oil equivalent from 2010 to 2035 in the use of biofuels, much of which is produced domestically; and slower growth of energy consumption in the transportation sector as a result of existing corporate average fuel economy standards. Proposed fuel economy standards covering vehicle model years (MY) 2017 through 2025 that are not included in the Reference case would further reduce projected need for liquid imports.

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Although U.S. consumption of petroleum and other liquid fuels continues to grow through 2035 in the Reference case, the reliance on imports of petroleum and other liquids as a share of total consumption declines. Total U.S. consumption of petroleum and other liquids, including both fossil fuels and biofuels, rises from 19.2 million barrels per day in 2010 to 19.9 million barrels per day in 2035 in the Reference case. The net import share of domestic consumption, which reached 60 percent in 2005 and 2006 before falling to 49 percent in 2010, continues falling in the Reference case to 36 percent in 2035 (Figure 3). Proposed light-duty vehicles (LDV) fuel economy standards covering vehicle MY 2017 through 2025, which are not included in the Reference case, could further reduce demand for petroleum and other liquids and the need for imports, and increased supplies from U.S. tight oil deposits could also significantly decrease the need for imports, as discussed in more detail in "Issues in focus."

Macroeconomic from Market Trends

Recovery in real gross domestic product growth continues at a modest rate

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AEO2012 presents three views of U.S. economic growth (Figure 58). In 2011, the world economy experienced shocks that included turmoil in the Middle East and North Africa, a Greek debt crisis with financial impacts spreading to other Eurozone countries, and an earthquake in Japan, all leading to slower economic growth. U.S. growth projections in part reflect those world events.

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U.S. recovery from the 2007-2008 recession has been slower than past recoveries (Figure 59). A feature of economic recoveries since 1975 has been slowing employment gains, and, following the most recent recession, growth in nonfarm employment has been slower than in any other post-1960 recovery [121]. The average rates of growth are strong starting from the trough of the recessions.

Slow consumption growth, fast investment growth, and an ever-improving trade surplus

AEO2012 presents three economic growth cases: Reference, High, and Low. The High Economic Growth case assumes high growth and low inflation; the Low Economic Growth case assumes low growth and high inflation. Figure 60 compares the average annual growth rates for output and its major components in each of the three cases.

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The short-term outlook (5 years) in each case represents current thinking about economic activity in the United States and the rest of the world; about the impacts of domestic fiscal and monetary policies; and about potential risks to economic activity. The long-term outlook projects smooth economic growth, assuming no shocks to the economy.

Differences among the Reference case and the High and Low Economic Growth cases reflect different expectations for growth in population (specifically, net immigration), labor force, capital stock, and productivity, which are above trend in the High Economic Growth case and below trend in the Low Economic Growth case. The average annual growth rate for real gross domestic product (GDP) from 2010 to 2035 in the Reference case is 2.5 percent, as compared with about 3.0 percent in the High Economic Growth case and about 2.0 percent in the Low Economic Growth case.

Compared with the 1985-2010 period, investment growth from 2010 to 2035 is faster in all three cases, whereas consumption, government expenditures, and imports grow more slowly in all three cases. Opportunities for trade are assumed to expand in each of the three cases, resulting in real trade surpluses by 2018 that continue through 2035.

Output growth for energy-intensive industries remains slow

Industrial sector output has grown more slowly than the overall economy in recent decades, with imports meeting a growing share of demand for industrial goods, whereas the service sector has grown more rapidly [122]. In the AEO2012 Reference case, real GDP grows at an average annual rate of 2.5 percent from 2010 to 2035, while both the industrial sector as a whole and its manufacturing component grow by 1.6 percent per year (Figure 61). As the economy recovers from the 2008-2009 recession, growth in U.S. manufacturing output in the Reference case accelerates from 2010 through 2020.

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After 2020, growth in manufacturing output slows due to increased foreign competition, slower expansion of domestic production capacity, and higher energy prices. These factors weigh heavily on the energy-intensive manufacturing sectors, which taken together grow at a slower rate of about 1.0 percent per year from 2010 to 2035, with variation by industry ranging from 0.8-percent annual growth for bulk chemicals to 1.5-percent annual growth for food processing.

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A decline in U.S. dollar exchange rates, combined with modest growth in unit labor costs, stimulates U.S. exports, eventually improving the U.S. current account balance. From 2010 to 2035, real exports of goods and services grow by an average of 5.9 percent per year, and real imports of goods and services grow by an average of 4.1 percent per year. Strong growth in exports is an important component of projected growth in the transportation equipment, electronics, and machinery industries.

Energy expenditures decline relative to gross domestic product and gross output

Total U.S. energy expenditures decline relative to GDP in the AEO2012 Reference case (Figure 62) [123]. The projected share of energy expenditures falls from 2011 through 2035, averaging 7.5 percent from 2010 to 2035, which is below the historical average of 8.8 percent from 1970 to 2010.

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Gross output corresponds roughly to sales in the U.S. economy. Figure 63 provides an approximation of total energy expenditures relative to total sales. Energy expenditures as a share of gross output show roughly the same pattern as do energy expenditures as a share of GDP. The projected average shares of gross output relative to expenditures for total energy, petroleum, and natural gas are close to their historical averages, at 4.1 percent, 2.1 percent, and 0.5 percent, respectively.

In the United States, average energy use per person declines from 2010 to 2035

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Growth in energy use is linked to population growth through increases in housing, commercial floorspace, transportation, and goods and services. These changes affect not only the level of energy use but also the mix of fuels consumed.

Changes in the structure of the economy and in the efficiency of the equipment deployed throughout the economy also have an impact on energy use per capita. The shift in the industrial sector away from energy-intensive manufacturing toward services is one reason for the projected decline in industrial energy intensity (energy use per dollar of GDP), but its impact on energy consumption per capita is less direct (Figure 71). From 1990 to 2007, the service sectors increased from a 69-percent share of total industrial output to a 75-percent share, but energy use per capita remained fairly constant, between 330 and 350 million British thermal units (Btu) per person, while energy use per dollar of GDP dropped from about 10,500 to 7,700 Btu. Increases in the efficiency of freight vehicles and the shift toward output from the service sectors are projected to continue through 2035, lowering energy use in relation to GDP. Energy use per dollar of GDP is projected to be about 4,400 Btu in 2035, or about one-third of the 1980 level.

Efficiency gains in household appliances and personal vehicles have a direct, downward impact on energy use per capita, as do efficiency gains in the electric power sector, as older, inefficient coal and other fossil steam electricity generating plants are retired in anticipation of lower electricity demand growth, changes in fuel prices, and new environmental regulations. As a result, U.S. energy use per capita declines to 274 million Btu in 2035.

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.

Average minemouth price continues to rise, but at a slower pace than in recent years

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In the AEO2012 Reference case, the average real minemouth price for U.S. coal increases by 1.5 percent per year, from $1.76 per million Btu in 2010 to $2.56 in 2035, continuing the upward trend in coal prices that began in 2000 (Figure 120). A key factor underlying the higher coal prices in the projection is an expectation that coal mining productivity will continue to decline, but at slower rates than during the 2000s.

In the Appalachian region, the average minemouth coal price increases by 1.7 percent per year from 2010 to 2035. In addition to continued declines in coal mining productivity, the higher price outlook for the Appalachian region reflects a shift to higher-value coking coal, resulting from the combination of growing exports of coking coal and declining shipments of steam/thermal coal to domestic markets. Recent increases in the average price of Appalachian coal, from $1.28 per million Btu in 2000 to $2.77 per million Btu in 2010, in part a result of significant declines in mining productivity over the past decade, have substantially reduced the competitiveness of Appalachian coal with coal from other regions.

In the Western and Interior coal supply regions, declines in mining productivity, combined with increasing production, lead to increases in the real minemouth price of coal, averaging 2.3 percent per year for the Western region and 1.0 percent per year for the Interior region from 2010 to 2035.