EIA Outlook Projects Sustained Growth

The U.S. continues to produce more and more diversified energy

The U.S. Energy Information Administration (EIA) has released its Annual Energy Outlook 2018, with projections for the domestic energy market through 2050.

As always, the outlook outlines multiple cases, each based on different assumptions. The central set of assumptions, known as the “Reference case,” assumes trend improvement in known technologies along with a view of economic and demographic trends reflecting the current views of leading economic forecasters and demographers. It generally assumes that current laws and regulations affecting the energy sector, including sunset dates for laws that have them, are unchanged throughout the projection period.

In addition to the Reference case, AEO2018 includes the following side cases:

• In the High Oil Price case, the price of Brent crude, in 2017 dollars, reaches $229 per barrel (b) by 2050, compared to $114/b in the Reference case.
• In the Low Oil Price case, the Brent crude price for 2050 is $52/b.
• In the High Oil and Gas Resource and Technology case, lower costs and higher resource availability than in the Reference case allow for higher production at lower prices.
• In the Low Oil and Gas Resource and Technology case, assumptions of lower resources and higher costs are applied.
• The effects of economic assumptions on energy consumption are addressed in the High and Low Economic Growth cases, which assume compound annual growth rates for U.S. gross domestic product of 2.6% and 1.5%, respectively, from 2017-50, compared with 2.0%/year growth in the Reference case.

Readers should note that the Clean Power Plan is not accounted for in the Reference case, nor is it in any of the aforementioned side cases. In October 2017, the U.S. Environmental Protection Agency proposed repealing the plan. Its absence affects the electricity generation mix discussed on page 32-33.

Following are key takeaways from the Annual Energy Outlook 2018.

The fuel mix of U.S. consumption changes, with natural gas and renewables growing the most.

• Natural gas grows the most on an absolute basis in the Reference case projection, and nonhydroelectric renewables grows the most on a percentage basis.
• The industrial sector accounts for the most growth in natural gas consumption, with expanding use in the chemical industries; for industrial heat and power; and for liquefied natural gas production. Natural gas consumption also increases significantly in the power sector as a result of the scheduled expiration of renewables tax credits in the mid-2020s.
• A combination of reductions in technology costs and implementation of policies that encourage the use of renewables at the state level (renewable portfolio standards) and at the federal level (production and investment tax credits) drives down the costs of renewables technologies (wind and solar photovoltaic), supporting their expanded adoption.

Energy-related carbon dioxide emissions mirror the trends in energy consumption.

• Energy-related CO2 emissions from the industrial sector grow the most on both an absolute and relative basis—0.6% annually—from 2017 to 2050 in the Reference case. Natural gas has the largest share of both energy and CO2 emissions in the industrial sector throughout the projection period. The relatively low cost of natural gas leads to further increases in usage and emissions.
• Electric power sector CO2 emissions are relatively flat in the Reference case through 2050 as a result of favorable market conditions for natural gas and supportive policies for renewables compared with coal.
• Natural gas emissions grow at an annual rate of 0.8%, while petroleum and coal emissions decline at annual rates of 0.3% and 0.2%, respectively. Petroleum emissions rise in each of the final 13 years of the projection period, when increased vehicle usage outweighs efficiency gains.

Energy production is expected to increase by more than 30 percent.

• Total U.S. energy production increases by about 31% from 2017 through 2050 in the Reference case, led by increases in the production of renewables other than hydropower, natural gas, and crude oil (although crude oil production only increases during the first 15 years of the projection period).

Natural gas accounts for the largest share of total energy production while renewables other than hydropower grow the most on a percentage basis.

• Natural gas production accounts for nearly 39% of U.S. energy production by 2050 in the Reference case. Production from shale gas and tight oil plays as a share of total U.S. natural gas production is projected to continue to grow because of the large size of the associated resources.
• Wind and solar generation leads the growth in renewables generation throughout the projection, accounting for 64% of the total electric generation growth in the Reference case through 2050. With a continued (but reduced) tax credit and declining capital costs, solar capacity continues to grow throughout the projection period, while tax credits that phase out for plants entering service through 2024 provide incentives for new wind capacity in the near term.
• In the Reference case, U.S. crude oil production in 2018 is projected to surpass the 9.6 million barrels per day (b/d) record set in 1970 and will plateau between 11.5 million b/d and 11.9 million b/d. The continued development of tight oil and shale gas resources supports growth in natural gas plant liquids production, which reaches 5.0 million b/d in 2023 in the Reference case—a nearly 35% increase from the 2017 level.
• Hydropower, nuclear power, and coal production are relatively flat in the Reference case through 2050, limited by slow growth in electricity demand as well as unfavorable economics and other considerations.

The United States is a net energy exporter, and in some cases net exports continue to increase through 2050.

• The United States is projected to become a net energy exporter by 2022 in the Reference case projection, but the transition occurs earlier in three of the AEO2018 side cases.
• In the High Oil and Gas Resource and Technology case, favorable geology and technological developments lead to oil and natural gas production at lower prices, supporting exports that increase over time.
• In the High Oil Price case, before 2038, economic conditions are favorable for oil producers. Higher prices support higher levels of exports, but lower domestic consumption. After 2038, exports decline as a result of the lack of substantial improvements in technology, and production moves to less-productive regions.
• With less favorable geology and technology, as assumed in the Low Oil and Gas Resource and Technology case, and low world oil prices, as assumed in the Low Oil Price case, the United States remains a net energy importer.

Even though the U.S. becomes a net energy exporter, both imports and exports continue through the projection period.

• The United States has been a net energy importer since 1953, but declining energy imports and growing energy exports make the United States a net energy exporter by the early 2020s in the Reference case.
• Historically and in the projection, most U.S. energy trade is in crude oil and petroleum products. The United States remains both an importer and exporter of petroleum liquids, importing mostly crude oil and exporting mostly petroleum products such as gasoline and diesel through 2050 in the Reference case.

The United States remains a net importer of petroleum and other liquids on an energy basis.

• U.S. natural gas trade, which historically was shipments by pipeline from Canada and to Mexico, is projected to be increasingly dominated by liquefied natural gas exports to more distant destinations.
• The United States continues to be a net exporter of coal (including coal coke) through 2050, but its export growth is not expected to increase significantly, because of competition from other global suppliers closer to major markets.

Assumptions about the size of U.S. resources and the improvement in technology affect domestic oil and natural gas prices, but global market conditions play a more significant role in oil price projections.

• In real terms, crude oil prices in 2016 (based on the global benchmark North Sea Brent) were at their lowest level since 2004, and natural gas prices (based on the domestic benchmark Henry Hub) were the lowest since before 1990. These prices increased modestly in 2017, and this trend continues over the projection period in all cases except the High Oil and Gas Resource and Technology case.
• Natural gas prices are highly sensitive to domestic resource and technology assumptions explored in the side cases. Across all cases, to satisfy the growing demand for natural gas, production expands into more expensive-to-produce areas, putting upward pressure on production costs and prices.
• Crude oil prices in the Reference case are projected to rise at a faster rate in the near term than in the long term because of weak near-term investment coupled with strong demand. At the same time, domestic and export market demand growth drives an increase in natural gas prices at the U.S. benchmark Henry Hub in the Reference case, despite technological advances supporting production.

Although world oil prices play a role in U.S. crude oil and natural gas production, resource availability and technological improvements are more significant determinants of domestic production levels.

• Projections of tight oil and shale gas production are uncertain because large portions of the known formations have relatively little or no production history, and extraction technologies and practices continue to evolve rapidly. Continued high rates of drilling technology improvement could increase well productivity and reduce drilling, completion, and production costs.
• In the High Oil and Gas Resource and Technology case, crude oil and natural gas production both continue to grow through 2050.
• Crude oil prices affect natural gas production primarily through changes in global natural gas consumption, U.S. natural gas exports, and natural gas produced from oil formations (associated gas).
• In the High Oil Price case, the difference between crude oil and natural gas prices creates a greater incentive to consume natural gas in energy-intensive industries, for transportation, and to export overseas as liquefied natural gas, all of which drive U.S. production upward. Without the more favorable resources and technological developments in the High Oil and Gas Resource and Technology case, U.S. crude oil production begins to decline in the High Oil Price case in the early 2030s, and by 2050 crude oil production is nearly the same as in the Reference case.

U.S. crude oil and natural gas plant liquids production grows to exceed its peak 1970 level, and consumption is lower than its 2004 peak level through 2050.

• In the Reference case, U.S. crude oil production in 2018 is projected to surpass the record of 9.6 million barrels per day (b/d) set in 1970 and will continue to grow as upstream producers increase output because of the combined effects of rising prices and production cost reductions.
• With continued development of tight oil and shale gas resources, natural gas plant liquids production reaches 5.0 million b/d in 2023, nearly 35% above the 2017 level.
• Total liquids production varies widely under different assumptions about resources, technology, and oil prices. Production is less variable in the economic growth cases because domestic wellhead prices are less sensitive to macroeconomic growth assumptions.
• With higher levels of economic activity and relatively low oil prices, petroleum product consumption increases in the High Economic Growth and Low Oil Price cases, and it remains relatively flat or decreases in the other cases through 2050.

Tight oil production remains the leading source of U.S. crude oil production from 2017 to 2050.

• Lower 48 onshore tight oil development continues to be the main driver of total U.S. crude oil production, accounting for about 65% of cumulative domestic production in the Reference case over the projection period 2017 to 2050.
• Despite rising oil prices, Reference case U.S. crude oil production levels off between 11 million and 12 million barrels per day as tight oil development moves into less productive areas and as well productivity declines.
• Previously announced deepwater discoveries in the Gulf of Mexico lead to increases in Lower 48 states offshore production through 2021. In the Reference case, offshore production then declines through 2035 and remains flat through 2050 as new discoveries offset declines in legacy fields.

The Southwest region leads growth in U.S. tight oil production, but the Gulf Coast and Dakotas/Rocky Mountains regions also remain important contributors to overall production.

• Growth in Lower 48 onshore crude oil production occurs mainly in the Permian basin in the Southwest region. This basin includes many prolific tight oil plays with multiple layers, including Bone Spring, Spraberry, and Wolfcamp, making it one of the lower-cost areas to develop.
• Production growth in the Dakotas/Rocky Mountains region is driven by increases in production from the Bakken and Niobrara tight oil plays.
• Production in the Gulf Coast region increases through 2025 before flattening out as drilling in the Eagle Ford becomes less productive.

The United States is a modest net exporter of petroleum on a volume basis from 2029 to 2045.

• Net imports of crude oil and liquid fuels are projected to fall between 2017 and 2035 in the Reference case as strong production growth and decreasing domestic demand push the United States to net exporter status.
• In the Reference case, net exports from the United States as a percentage of product supplied (a proxy for domestic consumption) is projected to peak at more than 3% in 2037, before gradually reversing as domestic consumption rises. The United States returns to being a net petroleum importer in 2045 on a volume basis.
• Changes in net imports are larger across different price and resource scenarios as domestic crude oil production shifts. Net exports as a percentage of product supplied reaches a high of 30% in 2034 in the High Oil Price case. Conversely, low oil prices in the Low Oil Price case drive the net import share of product supplied up from 21% in 2017 to 32% in 2050.
• The export share of petroleum product supplied continues to grow in the High Oil and Gas Resource and Technology case, reaching 42% by 2050.

Petroleum product exports increase as domestic consumption decreases, and refinery utilization rates remain relatively stable.

• In the Reference case, domestic consumption of petroleum products generally decreases through 2035, mainly because of vehicle fuel efficiency gains, and petroleum product exports generally increase through 2040. Domestic liquids consumption and petroleum product exports are two of the main drivers for refinery utilization both historically and through the projection period.
• In the Low Oil Price case, lower global demand for petroleum products leads to lower levels of petroleum product exports and refinery utilization in the United States. Refinery utilization stays relatively stable at slightly below 80% through most of the projection period.
• In the early years of the projection, the elevated international demand in the High Oil Price case leads to higher U.S. petroleum product exports and, initially, higher U.S refinery utilization. Refinery utilization drops gradually as U.S. domestic consumption declines in response to high oil prices.

Motor gasoline and diesel fuel prices rise after 2018, but neither price returns to its previous peak.

• Retail prices of motor gasoline and diesel fuel are projected to increase from 2018 to 2050 in the Reference case, largely because of expected increases in crude oil prices.
• Although the spread between diesel fuel and motor gasoline retail prices has tightened on a volume basis in recent years, this trend reverses through 2041 because of strong growth in global diesel demand for use in transportation and industry.
• Motor gasoline and diesel fuel retail prices move in the same direction as crude oil prices in the High and Low Oil Price cases. Motor gasoline retail prices in 2050 range from $5.95 per gallon (gal) in the High Oil Price case to $2.41/gal in the Low Oil Price case. In 2050, diesel fuel retail prices range from $7.02/gal in the High Oil Price case to $2.56/gal in the Low Oil Price case.

U.S. natural gas consumption and production increase, with production growth outpacing consumption.

• Natural gas production in the Reference case grows 6%/year from 2017 to 2020, which is greater than the 4%/year average growth rate from 2005 to 2015. However, after 2020, it slows to less than 1%/year for the remainder of the projection.
• Near-term production growth across all cases is supported by growing demand from large natural gas intensive, capital-intensive chemical projects and from the development of liquefaction export terminals in an environment of low natural gas prices.
• After 2020, production grows at a higher rate than consumption in all cases except in the Low Oil and Gas Resource and Technology case, where production and consumption remain relatively flat as a result of higher production costs.
• In all cases other than the Low Oil and Gas Resource and Technology case, U.S. natural gas consumption increases over the entire projection period.

Growing demand in domestic and export markets leads to increasing natural gas spot prices over the projection period at the U.S. benchmark Henry Hub despite continued technological advances that support increased production.

• To satisfy the growing demand for natural gas, production must expand into less prolific and more expensive-to-produce areas, which will put upward pressure on production costs.
• The High Oil and Gas Resource and Technology case, which reflects lower costs and higher resource availability, shows an increase in production and lower prices relative to the Reference case. In the Low Oil and Gas Resource and Technology case, high prices, which result from higher costs and fewer available resources, result in lower domestic consumption and lower exports over the projection period.
• Natural gas prices in the AEO2018 Reference case are lower than in the AEO2017 Reference case because of an estimated increase in lower-cost resources, primarily in the Permian and Appalachian basins, which support higher production levels at lower prices over the projection period.

Industrial and electric power demand drives natural gas consumption growth, as consumption in the residential and commercial sectors remains relatively flat.

• The industrial sector is the largest consumer of natural gas in the Reference case. Major natural gas consumers in this sector include the chemical industry (where natural gas is used as a feedstock in the production of methanol and ammonia), industrial heat and power, and liquefied natural gas export facilities.
• Natural gas used for electric power generation generally increases over the projection period but at a slower rate than in the industrial sector. This growth is supported by the scheduled expiration of renewable tax credits in the mid-2020s.
• Natural gas consumption in the residential and commercial sectors remains largely flat because of efficiency gains and population shifts that counterbalance demand growth.
• Although natural gas use rises in the transportation sector, particularly for freight and marine shipping, it remains a small share of total natural gas consumption, and natural gas remains a small share of transportation fuel demand.

Natural gas supply assumptions that affect prices result in significant changes in natural gas consumption, particularly in the electric power sector as natural gas prices change its competitiveness with other generation fuels.

• Between the two largest sectors of natural gas consumption—industrial and electric power—the electric power sector is more responsive to prices. In the short term, electric generators can react quickly to take advantage of changes in relative fuel costs and generally have more fuel options than the industrial sector. In contrast, although energy costs are considered when making long-term decisions about the number, siting, and types of industrial facilities, these costs are only one of many factors.
• The industrial sector is projected to be the largest natural gas-consuming sector in the Reference case, accounting for 38% of the domestic market in 2050. However, in the High Oil and Gas Resource and Technology case, the electric power sector is the largest natural gas consumer. Because Henry Hub spot prices remain lower than $3.50 per million British thermal units (MMBtu) in that case through the entire projection period, natural gas is more competitive with renewables and coal. By 2050, natural gas use in the electric power sector is 41% of total U.S. domestic natural gas consumption in that case.
• Conversely, in the Low Oil and Gas Resource and Technology case, the electric power sector only accounts for an average 25% of U.S. natural gas use from 2020 to 2050 because of higher natural gas prices—Henry Hub natural gas prices reach $6.50/MMBtu by 2025 and more than $9.40/MMBtu by 2050. The industrial sector accounts for 42% of the domestic natural gas market from 2020–2050 in that case.

The U.S. is a net natural gas exporter because of near-term export growth and continued import decline as liquefied natural gas export facilities allow domestic production to reach global markets.

• In the Reference case, pipeline exports to Mexico and liquefied natural gas (LNG) exports increase until 2020. Through 2030, pipeline export growth to Mexico slows, and LNG exports grow rapidly.
• Increasing natural gas exports to Mexico are the result of more pipeline infrastructure to and within that country, allowing for increased natural gas-fired power generation. By the mid-2020s, Mexican domestic natural gas production begins to displace U.S. exports.
• One LNG export facility currently operates in the Lower 48 states with a second facility expected to be operating in March 2018. After the five U.S. LNG export facilities currently under construction are completed by 2021, LNG export capacity is projected to increase as Asian demand grows and U.S. natural gas prices remain competitive. As U.S.-sourced LNG becomes less competitive, export volumes remain constant during the later years of the projection.
• U.S. imports of natural gas from Canada, primarily from its prolific Western region, remain relatively stable for the next few years before declining from historically high levels. U.S. exports of natural gas to Eastern Canada continue to increase because of Eastern Canada’s proximity to U.S. natural gas resources in the Marcellus and Utica plays.

U.S. LNG exports are sensitive to both oil and natural gas prices, resulting in a wide range of expected U.S. LNG export levels.

• Historically, most LNG was traded under long-term, oil price-linked contracts, in part because oil could substitute for natural gas in industry and for power generation. However, as the LNG market expands, contracts are expected to change with weaker ties to oil prices.
• When the oil-to-natural gas price ratio is highest, as in the High Oil Price case, U.S. LNG exports are at their highest levels. Demand for LNG increases as consumers move away from petroleum products. U.S. LNG supplies have the advantage of being priced based on relatively low domestic spot prices instead of on oil-linked contracts.
• In the High Oil and Gas Resource and Technology case, low U.S. natural gas prices make U.S. LNG exports competitive relative to other suppliers. Conversely, higher U.S. natural gas prices in the Low Oil and Gas Resource and Technology case result in lower U.S. LNG exports.
• As more natural gas is traded via short-term contracts or traded on the spot market, the link between LNG and oil prices is projected to weaken over time, making U.S. LNG exports less sensitive to the oil-to-natural gas price ratio and resulting in slower growth in U.S. LNG exports in all cases.

The projected mix of electricity generation technologies varies widely, as differences in fuel prices result in significant substitution.

• Fuel prices in the near term drive the share of natural gas-fired and coal-fired generation. In the longer term, the relatively low cost of coal moderates the decline in coal-fired generation in the Reference case.
• Federal tax credits drive near-term growth in renewables generation, moderating growth in natural gas-fired electricity generation except with in the High Oil and Gas Resource and Technology case, which projects very low natural gas prices.
• Lower natural gas prices in the High Oil and Gas Resource and Technology case support significantly higher natural gas-fired generation, with less growth in renewables generation than in the Reference case and declining coal-fired generation from 2017 through 2050.
• Higher natural gas prices in the Low Oil and Gas Resource and Technology case lead to higher levels of coal-fired generation compared with the Reference case, with 460 billion kilowatthours more renewables generation in 2050 than in the Reference case.

Generation from renewable sources grows even in cases with relatively low electricity demand or low natural gas prices.

• In the Reference case, renewable generation is projected to increase 139% through the end of the projection period, reaching 1,650 billion kilowatthours (BkWh) by 2050.
• The increase in wind and solar generation leads the growth in renewable generation through the projection period, accounting for nearly 900 BkWh (94%) of the total growth in the Reference case. The extended tax credits account for much of the accelerated growth in the near term. Solar photovoltaic (PV) growth continues through the projection period as solar PV costs continue to decrease.
• In the High Oil and Gas Resource and Technology case, low natural gas prices limit the growth of renewables in favor of additional natural gas-fired generation. Renewables generation is 277 BkWh lower than Reference case levels in 2050, although this level still represents a near doubling from 2017 levels.
• In the Low Economic Growth case, electricity demand is lower than in the Reference case. Because renewables are a marginal source of new generation, this lower level of demand results in 228 BkWh less renewable generation in 2050 compared with the Reference case.

Increasing wind and solar capacity additions support growth of energy storage capacity.

• From 2020 to 2050, utility-scale wind capacity is projected to grow by 20 gigawatts (GW), and utility-scale solar photovoltaic capacity is projected to grow by 127 GW. Over this same period, utility-scale storage capacity is projected to grow by 34 GW.
• Battery-based storage costs are expected to continue to decline as utility-scale energy storage markets grow.
• Policies such as storage mandates in California and market participation rules in the PJM electricity market support near-term growth in storage systems to stabilize grid operations, improve utilization of existing generators, and integrate intermittent technologies such as wind and solar into the grid.
• In the longer term, wind and solar growth are projected to support economic opportunities for storage systems that can provide several hours of storage and enable renewables generation produced during the hours with high wind or solar output to supply electricity at times of peak electricity demand.

Sales of electric and plug-in hybrid electric light-duty vehicles increase, though gasoline vehicles remain the dominant vehicle type through 2050.

• Combined sales of new electric, plug-in hybrid electric, and hybrid vehicles grow in market share from 4% in 2017 to 19% in 2050 in the Reference case.
• The combined share of sales attributable to gasoline and flex-fuel vehicles (which use gasoline blended with up to 85% ethanol) declines from 95% in 2017 to 78% in 2050 because of the growth in the sales of electric vehicles.
• Passenger cars gain market share relative to light-duty trucks because of their higher fuel efficiency in periods when motor gasoline prices are projected to increase and because crossover vehicles, often classified as passenger cars, increase in availability and popularity.
• New vehicles of all fuel types show significant improvements in fuel economy because of compliance with increasing fuel economy standards. New vehicle fuel economy rises by 45% from 2017 to 2050.

Residential and commercial energy consumption grows gradually from 2017 to 2050, led by modest electricity consumption growth in the residential and commercial sectors.

• Energy delivered to the buildings sector (residential and commercial) grows 0.3%/year from 2017 to 2050 in the Reference case,
• In the buildings sector, efficiency gains, increases in distributed generation, and regional shifts in the population partially offset the impacts of growth in population, number of households, and commercial floorspace.
• Electricity accounts for most of U.S. buildings energy consumption growth in all AEO2018 cases, followed by natural gas. Consumption of delivered electricity would be even higher if not for the expected growth in distributed generation sources, particularly rooftop solar panels.
• Growth in commercial sector natural gas use later in the projection period reflects increased use of combined heat and power in the sector.

Industrial sector energy consumption increases at a similar rate for most fuels.

• Total industrial delivered energy consumption grows 1% per year from 2017 to 2050 in the Reference case. All fuels have a similar annual growth rate (1%, ±0.5%), with the exception of coal, which remains relatively flat through the projection period. Overall energy consumption in the industrial sector grows more slowly than economic growth because of efficiency gains.
• Natural gas (used for heat and power in many industries) and petroleum (a feedstock for bulk chemicals) account for the majority of delivered industrial energy consumption. Hydrocarbon gas liquids such as ethane, propane, and butane are used as feedstock for bulk chemical production and are a major source of growth in industrial use of petroleum.

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