Executive Summary

The projections in the U.S. Energy Information Administration's Annual Energy Outlook 2013 (AEO2013) focus on the factors that shape the U.S. energy system over the long term. Under the assumption that current laws and regulations remain unchanged throughout the projections, the AEO2013 Reference case provides a basis for examination and discussion of energy production, consumption, technology, and market trends and the direction they may take in the future. AEO2013 also includes alternative cases (see Appendix E, Table E1), which explore important areas of uncertainty for markets, technologies, and policies in the U.S. energy economy. Many of the implications of the alternative cases are discussed in the Issues in focus section of AEO2013.

Key results highlighted in the AEO2013 Reference and alternative cases include:

• Continued strong growth in domestic crude oil production over the next decade—largely as a result of rising production from tight formations—and increased domestic production of natural gas;
• The potential for even stronger growth in domestic crude oil production under alternative conditions;
• Evolving natural gas markets that spur increased use of natural gas for electric power generation and transportation and an expanding natural gas export market;
• A decline in motor gasoline consumption over the projection period, reflecting the effects of more stringent corporate average fuel economy (CAFE) standards, as well as growth in diesel fuel consumption and increased use of natural gas to power heavy-duty vehicles; and
• Low electricity demand growth, and continued increases in electricity generation capacity fueled by natural gas and renewable energy, which when combined with environmental regulations put pressure on coal use in the electric power sector. In some cases, coal's share of total electricity generation falls below the natural gas share through the end of the projection period.

Oil production, particularly from tight oil plays, rises over the next decade, leading to a reduction in net import dependence

Crude oil production has increased since 2008, reversing a decline that began in 1986. From 5.0 million barrels per day in 2008, U.S. crude oil production increased to 6.5 million barrels per day in 2012. Improvements in advanced crude oil production technologies continues to lift domestic supply, with domestic production of crude oil increasing in the Reference case before declining gradually beginning in 2020 for the remainder of the projection period. The projected growth results largely from a significant increase in onshore crude oil production, particularly from shale and other tight formations, which has been spurred by technological advances and relatively high oil prices. Tight oil development is still at an early stage, and the outlook is highly uncertain. In some of the AEO2013 alternative cases, tight oil production and total U.S. crude oil production are significantly above their levels in the Reference case.

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The net import share of U.S. petroleum and other liquids consumption (including crude oil, petroleum liquids, and liquids derived from nonpetroleum sources) grew steadily from the mid-1980s to 2005 but has fallen in every year since then (Figure 1). In the Reference case, U.S. net imports of petroleum and other liquids decline through 2019, while still providing approximately one-third of total U.S. supply. The net import share of U.S. petroleum and other liquids consumption continues to decline in the Reference case, falling to 34 percent in 2019 before increasing to 37 percent in 2040.

The U.S. could become a net exporter of liquid fuels under certain conditions. An article in the Issues in focus section considers four cases that examine the impacts of various assumptions about U.S. dependence on imported liquids. Two cases (Low Oil and Gas Resource and High Oil and Gas Resource) vary only the supply assumptions, and two cases (Low/No Net Imports and High Net Imports) vary both the supply and demand assumptions. The different assumptions in the four cases generate wide variation from the liquid fuels import dependence values in the AEO2013 Reference case. In the Low/No Net Imports case, the United States ends its reliance on net imports of liquid fuels in the mid-2030s, with net exports rising to 8 percent of total U.S. liquid fuel production in 2040. In contrast, in the High Net Imports case, net petroleum import dependence is above 44 percent in 2040, which is higher than the Reference case level of 37 percent but still well below the 2005 level of 60 percent.

While other combinations of assumptions or unforeseen technology breakthroughs might produce a comparable outcome, the assumptions in the Low/No Imports case illustrate the magnitude and type of changes that would be required for the United States to end its reliance on net imports of liquid fuels, which began after World War II and has continued to the present day. Some of the assumptions in the Low/No Net Imports case, such as increased fuel economy for light-duty vehicles (LDVs) after 2025 and wider access to offshore resources, could be influenced by possible future energy policies. However, other assumptions in this case, such as the greater availability of onshore technically recoverable oil and natural gas resources, depend on geological outcomes that cannot be influenced by policy measures. In addition, economic trends, consumer preferences and behaviors, and technological factors also may be unaffected, or only modestly affected, by policy measures.

In the High Oil and Gas Resource case, changes due to the supply assumptions alone cause net import dependence to decline to 7 percent in 2040, with U.S. crude oil production rising to 10.2 million barrels per day in 2040, or 4.1 million barrels per day above the Reference case level. Tight oil production accounts for more than 77 percent (or 3.2 million barrels per day) of the difference in production between the two cases. Production of natural gas plant liquids in the United States also exceeds the Reference case level.

One of the most uncertain aspects of this analysis is the potential effect of different scenarios on the global market for liquid fuels, which is highly integrated. Strategic choices made by leading oil-exporting countries could result in U.S. price and quantity changes that differ significantly from those presented here. Moreover, regardless of how much the United States reduces its reliance on imported liquids, consumer prices will not be insulated from global oil prices if current policies and regulations remain in effect and world markets for delivery continue to be competitive.

The United States becomes a net exporter of natural gas

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U.S. dry natural gas production increases 1.3 percent per year throughout the Reference case projection, outpacing domestic consumption by 2019 and spurring net exports of natural gas (Figure 2). Higher volumes of shale gas production are central to higher total production volumes and a transition to net exports. As domestic supply has increased in recent years, natural gas prices have declined, making the United States a less attractive market for imported natural gas and more attractive for export.

U.S. net exports of natural gas grow to 3.6 trillion cubic feet in 2040 in the Reference case. Most of the projected growth in U.S. exports consists of pipeline exports to Mexico, which increase steadily as growing volumes of imported natural gas from the United States fill the widening gap between Mexico's production and consumption. Declining natural gas imports from Canada also contribute to the growth in U.S. net exports. Net U.S. imports of natural gas from Canada decline sharply from 2016 to 2022, then stabilize somewhat before dropping off again in the final years of the projection, as continued growth in domestic production mitigates the need for imports.

Continued low levels of liquefied natural gas (LNG) imports in the projection period, combined with increased U.S. exports of domestically sourced LNG, position the United States as a net exporter of LNG by 2016. U.S. exports of domestically sourced LNG (excluding exports from the existing Kenai facility in Alaska) begin in 2016 and rise to a level of 1.6 trillion cubic feet per year in 2027. One-half of the U.S. exports of LNG originate from the Lower 48 states and the other half from Alaska. The prospects for exports are highly uncertain, however, depending on many factors that are difficult to gauge, such as the development of new production capacity in foreign countries, particularly from deepwater reservoirs, shale gas deposits, and the Arctic. In addition, future U.S. exports of LNG depend on a number of other factors, including the speed and extent of price convergence in global natural gas markets and the extent to which natural gas competes with liquids in domestic and international markets.

In the High Oil and Gas Resource case, with more optimistic resource assumptions, U.S. LNG exports grow to more than 4 trillion cubic feet in 2040. Most of the additional exports originate from the Lower 48 states.

Coal's share of electric power generation falls over the projection period

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Although coal is expected to continue its important role in U.S. electricity generation, there are many uncertainties that could affect future outcomes. Chief among them are the relationship between coal and natural gas prices and the potential for policies aimed at reducing greenhouse gas (GHG) emissions. In 2012, natural gas prices were low enough for a few months for power companies to run natural gas-fired generation plants more economically than coal plants in many areas. During those months, coal and natural gas were nearly tied in providing the largest share of total electricity generation, something that had never happened before. In the Reference case, existing coal plants recapture some of the market they recently lost to natural gas plants because natural gas prices rise more rapidly than coal prices. However, the rise in coal-fired generation is not sufficient for coal to maintain its generation share, which falls to 35 percent by 2040 as the share of generation from natural gas rises to 30 percent.

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In the alternative High Oil and Natural Gas Resource case, with much lower natural gas prices, natural gas supplants coal as the top source of electricity generation (Figure 3). In this case, coal accounts for only 27 percent of total generation in 2040, while natural gas accounts for 43 percent. However, while natural gas generation in the power sector surpasses coal generation in 2016 in this case, more coal energy than natural gas energy is used for power generation until 2035 because of the higher average thermal efficiency of the natural gas-fired generating units. Coal use for electric power generation falls to 14.7 quadrillion Btu in 2040 in the High Oil and Natural Gas Resource case (compared with 18.7 quadrillion Btu in the Reference case), while natural gas use rises to 15.1 quadrillion Btu in the same year (Figure 4). Natural gas use for electricity generation is 9.7 quadrillion Btu in 2040 in the Reference case.

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Coal's generation share and the associated carbon dioxide (CO₂) emissions could be further reduced if policies aimed at reducing GHG emissions were enacted (Figure 5). For example, in the GHG15 case, which assumes a fee on CO₂ emissions that starts at $15 per metric ton in 2014 and increases by 5 percent per year through 2040, coal's share of total generation falls to 13 percent in 2040. Energy-related CO₂ emissions also fall sharply in the GHG15 case, to levels that are 10 percent, 15 percent, and 24 percent lower than projected in the Reference case in 2020, 2030, and 2040, respectively. In 2040, energy-related CO₂ emissions in the GHG15 case are 28 percent lower than the 2005 total. In the GHG15 case, coal use in the electric power sector falls to only 6.1 quadrillion Btu in 2040, a decline of about two-thirds from the 2011 level. While natural gas use in the electric power sector initially displaces coal use in this case, reaching more than 10 quadrillion Btu in 2016, it falls to 8.8 quadrillion Btu in 2040 as growth in renewable and nuclear generation offsets natural gas use later in the projection period.

With more efficient light-duty vehicles, motor gasoline consumption declines while diesel fuel use grows, even as more natural gas is used in heavy-duty vehicles

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The AEO2013 Reference case incorporates the GHG and CAFE standards for LDVs [6] through the 2025 model year. The increase in vehicle efficiency reduces LDV energy use from 16.1 quadrillion Btu in 2011 to 14.0 quadrillion Btu in 2025, predominantly motor gasoline (Figure 6). LDV energy use continues to decline through 2036, then levels off until 2039 as growth in population and vehicle miles traveled offsets more modest improvement in fuel efficiency.

Furthermore, the improved economics of natural gas as a fuel for heavy-duty vehicles result in increased use that offsets a portion of diesel fuel consumption. The use of petroleum-based diesel fuel is also reduced by growing consumption of diesel produced with gas-to-liquids (GTL) technology. Natural gas use in vehicles (including natural gas used in the production of GTL) totals 1.4 trillion cubic feet in 2040 in the Reference case, displacing 0.7 million barrels per day of other motor fuels [7]. Diesel fuel use nonetheless increases at a relatively strong rate, with freight travel demand supported by increasing industrial production.

Natural gas consumption grows in industrial and electric power sectors as domestic production also serves an expanding export market

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Relatively low natural gas prices, maintained by growing shale gas production, spur increased use in the industrial and electric power sectors, particularly over the next decade. In the Reference case, natural gas use in the industrial sector increases by 16 percent, from 6.8 trillion cubic feet per year in 2011 to 7.8 trillion cubic feet per year in 2025. After 2025, the growth of natural gas consumption in the industrial sector slows, while total U.S. consumption continues to grow (Figure 7). This additional growth is mostly for use in the electric power sector. Although natural gas continues to capture a growing share of total electricity generation, natural gas consumption by power plants does not increase as sharply as generation because new plants are very efficient (needing less fuel per unit of power output). The natural gas share of generation rose from 16 percent of generation in 2000 to 24 percent in 2011 and increases to 27 percent in 2025 and 30 percent in 2040. Natural gas use in the residential and commercial sectors remains nearly constant, as increasing end-use demand is balanced by increasing end-use efficiency.

Natural gas consumption also grows in other markets in the Reference case, including heavy-duty freight transportation (trucking) and as a feedstock for GTL production of diesel and other fuels. Those uses account for 6 percent of total U.S. natural gas consumption in 2040, as compared with almost nothing in 2011.

Natural gas use in the electric power sector grows even more sharply in the High Oil and Natural Gas Resource case, as the natural gas share of electricity generation grows to 39 percent, reaching 14.8 trillion cubic feet in 2040, more than 55 percent greater than in the Reference case. Industrial sector natural gas consumption growth is also stronger in this case, with growth continuing after 2025 and reaching 13.0 trillion cubic feet in 2040 (compared to 10.5 trillion cubic feet in 2040 in the Reference case). Much of the industrial growth in the High Oil and Natural Gas Resource case is associated with natural gas use for GTL production and increased lease and plant use in natural gas production.

Renewable fuel use grows at a faster rate than fossil fuel use

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The share of U.S. electricity generation from renewable energy grows from 13 percent in 2011 to 16 percent in 2040 in the Reference case. Electricity generation from solar and, to a lesser extent, wind energy sources grows as their costs decline, making them more economical in the later years of the projection. However, the rate of growth in renewable electricity generation is sensitive to several factors, including natural gas prices and the possible implementation of policies to reduce GHG emissions. If future natural gas prices are lower than projected in the Reference case, as illustrated in the High Oil and Gas Resource case, the share of renewable generation would grow more slowly, to only 14 percent in 2040. Alternatively, if broad-based policies to reduce GHG emissions were enacted, renewable generation would be expected to grow more rapidly. In three cases that assume GHG emissions fees that range from $10 to $25 per metric ton in 2014 and rise by 5 percent per year through 2040 (GHG10, GHG15, and GHG25), the renewable share of total U.S. electricity generation in 2040 ranges from 23 percent to 31 percent (Figure 8).

The AEO2013 Reference case reflects a less optimistic outlook for advanced biofuels to capture a rapidly growing share of the liquid fuels market than earlier Annual Energy Outlooks. As a result, biomass use in the Reference case totals 5.9 quadrillion Btu in 2035 and 7.1 quadrillion Btu in 2040, up from 4.0 quadrillion Btu in 2011.