Energy Prices

Crude Oil

Oil prices are influenced by a number of factors, including some elements that have mainly short-term impacts. Others, such as expectations about future world demand for petroleum and other liquids and production decisions by the Organization of the Petroleum Exporting Countries (OPEC), affect prices over the longer term. Supply and demand in the world oil market are balanced through responses to price movements, and the underlying supply and demand expectations are both numerous and complex. The key determinants of long-term petroleum and other liquids supply and prices can be summarized in four broad categories: the economics of non-OPEC petroleum liquids supply; OPEC investment and production decisions; the economics of other liquids supply; and world demand for petroleum and other liquids.

For AEO2013, the oil price is represented by spot prices for light, sweet Intercontinental Exchange Brent crude oil instead of WTI crude oil traded on NYMEX. This change was made to better reflect the price refineries pay for imported light, sweet crude oil and takes into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent. WTI prices have diverged from other benchmark crude prices because of insufficient pipeline capacity to move crude oil to and from Cushing, Oklahoma (the location at which WTI prices are quoted), and the growth of midcontinent and Canadian oil production that has overwhelmed the transportation infrastructure needed to move crude from Cushing to the U.S. Gulf of Mexico.

figure dataAmong the key assumptions defining the Reference case over the projection period are average economic growth of 1.8 percent per year for major U.S. trading partners; average annual economic growth in other U.S. trading partners of 4.0 percent; and declining liquid fuels consumption per unit of GDP. The OPEC market share of total liquid fuels production remains at approximately 40 to 45 percent over the projection period. Production from non-OPEC countries increases to levels above those in AEO2012. In the AEO2013 Reference case, the Brent spot oil price decreases from $111 per barrel (in 2011 dollars) in 2011 to $96 per barrel in 2015. After 2015, the Brent price increases, reaching $163 per barrel in 2040 (or about $269 per barrel in nominal dollars) as growing demand leads to the development of more costly resources (Figure 5). A wide range of price scenarios and discussion of the significant uncertainty surrounding future world oil prices will be included in the complete AEO2013 publication released in early 2013.

Liquid Products

Real prices (in 2011 dollars) for motor gasoline and diesel delivered to the transportation sector in the AEO2013 Reference case increase from $3.45 and $3.58 per gallon, respectively, in 2011 to $4.32 and $4.94 per gallon in 2040. Although both prices dip modestly over the early portion of the projection period, increases are steady thereafter. Motor gasoline prices in 2035 are slightly higher in AEO2013 than in AEO2012, but diesel prices are considerably higher in 2035. The diesel share of total domestic liquids production rises, and the gasoline share falls, as a result of incorporation of the model year 2017 to 2025 GHG and CAFE standards for LDVs. Increasing demand for distillate puts pressure on refiners to increase distillate yield and results in higher prices relative to gasoline.

Natural Gas

For AEO2013, the Henry Hub spot price is projected using a new methodology. Previously, the Henry Hub prices were based on the average national wellhead price and its historical relationship with the Henry Hub price. Given historical correlations, the projected difference between the Henry Hub price and the national average wellhead price increased as the wellhead price rose over the projection period. The Henry Hub spot prices in the AEO2013 Reference case are based on natural gas prices that balance the supply and demand for Gulf Coast natural gas, which contributes to a lower Henry Hub price projection in AEO2013 than in AEO2012.

With increasing natural gas production, reflecting continued success in tapping the nation's extensive shale gas resource, Henry Hub spot natural gas prices remain below $4 per million Btu (2011 dollars) through 2018 in the AEO2013 Reference case. The resilience of drilling activity, despite low natural gas prices, is in part a result of high crude oil prices, which significantly improve the economics of natural gas plays that have relatively high liquids content (crude oil, lease condensates, and natural gas liquids). Also contributing to growing production volumes are improved drilling efficiencies, which result in a greater number of wells being drilled more quickly, with fewer rigs and higher initial production rates.

After 2018, natural gas prices increase steadily as tight gas and shale gas drilling activity expands to meet growing domestic demand for natural gas and offsets declines in natural gas production from other sources. Natural gas prices rise as lower cost resources are depleted and production gradually shifts to less productive and more expensive resources. Henry Hub spot natural gas prices (in 2011 dollars) reach $5.40 per million Btu in 2030 and $7.83 per million Btu in 2040.

Coal

The average minemouth price of coal increases by 1.4 percent per year in the AEO2013 Reference case, from $2.04 per million Btu in 2011 to $3.08 per million Btu in 2040 (2011 dollars). The upward trend of coal prices primarily reflects an expectation that cost savings from technological improvements in coal mining will be outweighed by increases in production costs associated with moving into reserves that are more costly to mine. The upward trend in the minemouth price of coal in the AEO2013 Reference case is similar to the trend in the AEO2012 Reference case, but the average price through the projection period in AEO2013 is generally higher, primarily because of the smaller share of total coal production accounted for by production from lower-cost mines in the West and higher price projections for coking coal.

Electricity

Following the recent rapid decline of natural gas prices, real average delivered electricity prices in the AEO2013 Reference case fall from 9.9 cents per kilowatthour in 2011 to as low as 9.2 cents per kilowatthour in 2015, as natural gas prices remain relatively low. Retail electricity prices are influenced by fuel prices, particularly natural gas prices. However, the relationship between retail electricity prices and natural gas prices is complex, and many factors influence the degree to which and the timeframe over which they are linked. These factors include the share of natural gas generation in a region, the level of costs associated with electricity transmission and distribution systems not directly linked to fuel costs, the mix of competitive versus cost-of-service pricing, and the number of customers who purchase power directly from wholesale power markets. As a result, it can take time for fuel price changes to affect electricity prices, and the impacts will vary from region to region.

In the AEO2013 Reference case, electricity prices are lower throughout the projection than they were in the AEO2012 Reference case. Natural gas prices to electricity generators are significantly lower than those in AEO2012 in the first few years and are between 3 percent and 5 percent lower from 2025 to 2035, while the cost of coal is higher after 2015. As a result, reliance on natural gas-fired generation in the electric power sector increases, with lower operating costs per kilowatthour than in AEO2012. In the long term, however, both natural gas prices and electricity prices rise. Electricity prices in 2035 are 10.1 cents per kilowatthour (2011 dollars) in the AEO2013 Reference case, compared with 10.3 cents per kilowatthour in the AEO2012 Reference case. In AEO2013, the prices continue rising to 10.8 cents per kilowatthour in 2040.