Energy Outlook Points to Paradigm Shift

The U.S. Energy Information Administration (EIA) has released its Annual Energy Outlook 2019, 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, AEO2019 includes the following side cases:

• In the High Oil Price case, the price of Brent crude, in 2018 dollars, reaches $212 per barrel (b) by 2050 compared with $108/b in the Reference case.
• In the Low Oil Price case, the Brent crude price for 2050 is $50/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 average annual growth in real gross domestic product (GDP) of 2.4% and 1.4%, respectively, from 2018-50, compared with 1.9% /year growth in the Reference case.

Readers should note that the EIA has updated its modeling of the Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention), which limits sulfur emissions for ocean-going ships to 0.5% by weight by 2020. The new modeling and projected effects on pricing are discussed on pages 31 and 33.

The United States becomes a net energy exporter after 2020, but imports and exports continue through the projection period.

• The United States has been a net energy importer since 1953, but continued growth in petroleum and natural gas exports results in the United States becoming a net energy exporter by 2020 in all cases.
• In the Reference case, the United States becomes a net exporter of petroleum liquids after 2020 as U.S. crude oil production increases and domestic consumption of petroleum products decreases. Near the end of the projection period, the United States returns to being a net importer of petroleum and other liquids on an energy basis as a result of increasing domestic gasoline consumption and falling domestic crude oil production in those years.
• The United States became a net natural gas exporter on an annual basis in 2017 and continued to export more natural gas than it imported in 2018. In the Reference case, U.S. natural gas trade, which includes shipments by pipeline from and to Canada and to Mexico as well as exports of liquefied natural gas (LNG), will be increasingly dominated by LNG exports to more distant destinations.

Production of U.S. crude oil and natural gas plant liquids continues to grow through 2025, and natural gas plant liquids comprise nearly one-third of cumulative 2019-2050 U.S. liquids production.

• In the Reference case, U.S. crude oil production continues to set annual records through 2027 and remains greater than 14.0 million barrels per day (b/d) through 2040. Lower 48 onshore tight oil development continues to be the main source of growth in total U.S. crude oil production.
• The continued development of tight oil and shale gas resources supports growth in natural gas plant liquids (NGPL) production, which reaches 6.0 million b/d by 2029 in the Reference case.
• The High Oil and Gas Resource and Technology case represents a potential upper bound for crude oil and NGPL production, as additional resources and higher levels of technological advancement result in continued growth in crude oil and NGPL production. In the High Oil Price case, high crude oil prices lead to more drilling in the near term, but cost increases and fewer easily accessible resources decrease production of crude oil and NGPL.
• Conversely, under conditions with fewer resources, lower levels of technological advancement, and lower crude oil prices, the Low Oil and Gas Resource and Technology case and the Low Oil Price case represent potential lower bounds for domestic crude oil and NGPL production. Changes in economic growth have little impact on domestic crude oil and NGPL production.

The United States continues to produce large volumes of natural gas from oil formations, even with relatively low oil prices — putting downward pressure on natural gas prices.

• The percentage of dry natural gas production from oil formations increased from 8% in 2013 to 17% in 2018 and remains near this percentage through 2050 in the Reference case.
• Growth in drilling in the Southwest region, particularly in the Wolfcamp formation in the Permian basin, is the main driver for natural gas production growth from tight oil formations.
• The Low Oil Price case, with the U.S. crude oil benchmark West Texas Intermediate (WTI, Cushing, Oklahoma) price at $58 per barrel or lower, is the only case in which natural gas production from oil formations is lower in 2050 than at current levels.
• The level of drilling in oil formations primarily depends on crude oil prices rather than natural gas prices. Increased natural gas production from oil-directed drilling puts downward pressure on natural gas prices throughout the projection period.

U.S. net exports of natural gas continue to grow as liquefied natural gas becomes an increasingly significant export.

• In the Reference case, U.S. liquefied natural gas (LNG) exports and pipeline exports to Canada and to Mexico increase until 2030 and then flatten through 2050 as relatively low, stable natural gas prices make U.S. natural gas competitive in North American and global markets.
• After LNG export facilities currently under construction are completed by 2022, U.S. LNG export capacity increases further. Asian demand growth allows U.S. natural gas to remain competitive there. After 2030, U.S. LNG is no longer as competitive because additional suppliers enter the global LNG market, reducing LNG prices and making additional U.S. LNG export capacity uneconomic.
• Increasing natural gas exports to Mexico are a result of more pipeline infrastructure to and within Mexico, resulting in increased natural gas-fired power generation. By 2030, Mexican domestic natural gas production begins to displace U.S. exports.
• As Canadian natural gas faces competition from relatively low-cost U.S. natural gas, U.S. imports of natural gas from Western Canada continue to decline from historical levels. U.S. exports of natural gas to Eastern Canada continue to increase because of its proximity to U.S. natural gas resources in the Marcellus and Utica plays and because of recent additions to pipeline infrastructure.

Electricity generation from natural gas and renewables increases as lower natural gas prices and declining costs of renewable capacity make these fuels increasingly competitive.

• The continuing decline in natural gas prices and increasing penetration of renewable electricity generation have resulted in lower wholesale electricity prices, changes in utilization rates, and operating losses for a large number of baseload coal and nuclear generators.
• The share of natural gas generation rises from 34% in 2018 to 39% in 2050, and the share of renewable generation increases from 18% to 31%.
• Assumptions of declining costs and improving performance make wind and solar increasingly competitive compared with other renewable resources in the Reference case. Most of the wind generation increase occurs in the near term, when new projects enter service ahead of the expiration of key federal production tax credits.
• Solar Investment Tax Credits (ITC) phase down after 2024, but solar generation growth continues because the costs for solar continue to fall faster than for other sources.

New limit on global sulfur emissions affects refinery operations and maritime transport as refiners and marine transporters adapt to meet the new requirements.

• Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention) limits emissions for ocean-going ships by 2020 (IMO 2020). From January 1, 2020, the limit for sulfur in fuel used on board ships operating outside designated emission control areas will be reduced to 0.5% m/m (mass by mass), a reduction of more than 85% from its present level of 3.5% m/m. Ships can meet the new global sulfur limit by installing pollutant-control equipment (scrubbers); by using a low-sulfur, petroleum-based marine fuel; or by switching to an alternative non-petroleum fuel such as liquefied natural gas (LNG).
• Shippers that install scrubbers have remained limited, and refineries continue to announce plans to upgrade high-sulfur fuel oils into higher quality products and increase availability of low-sulfur compliant fuel oils. Some shippers have also announced plans to address the costs associated with higher quality fuels by shifting those costs to their customers.
• Although some price swings and fuel availability issues are expected when the regulations take effect in 2020, by 2030 more than 83% of international marine fuel purchases in U.S. ports are for low-sulfur compliant fuel in the Reference case, and the share of LNG increases from negligible levels in 2018 to 7% in 2030.

Refinery utilization peaks in 2020 as a result of sulfur emissions regulations that take effect that year.

• U.S. refinery utilization peaks in most cases in 2020 as complex refineries in the United States that can process high-sulfur fuel oil in downstream units take advantage of the increased price spread between light and heavy crude oil. In the Reference case, refinery utilization peaks at 96% in 2020, gradually decreases between 2020 and 2026, and remains between 90% and 92% for the rest of the projection.
• The share of U.S. refinery throughput that is exported increases as more petroleum products are exported from 2020 to 2036 and as domestic consumption of refined products decreases. The trend reverses after 2036 when domestic consumption (especially of gasoline) increases.
• Imports of unfinished oils peak in 2020 as U.S. refineries take advantage of the increased discount of the heavy, high-sulfur residual fuel oil available on the global market.

Development of the Arctic National Wildlife Refuge increases Alaskan crude oil production, but only after 2030 because of the time needed to acquire leases and develop infrastructure.

• The passage of Public Law 115-97 required the Secretary of the Interior to establish a program to lease and develop oil and natural gas from the coastal plain (1002 Area) of the Arctic National Wildlife Refuge (ANWR). Previously, ANWR was effectively under a drilling moratorium.
• Opening ANWR is not expected to have a significant impact on crude oil production before the 2030s because of the time needed to acquire leases, explore, and develop the required production infrastructure. Alaskan crude oil production in AEO2019 is 90% higher (3.2 billion barrels) from 2031 to 2050 than previously forecasted for that period in last year’s AEO Reference case.
• The ANWR projections are highly uncertain because of several factors that affect the timing and cost of development, little direct knowledge of the resource size and quality that exists in ANWR, and inherent uncertainty about market dynamics. Cumulative ANWR crude oil production from 2031 to 2050 is 6.8 billion barrels, 0.7 billion barrels, and zero in the High Oil and Gas Resource and Technology, Low Oil and Gas Resource and Technology, and Low Oil Price cases, respectively.

Renewable generation exceeds requirements for state renewable portfolio standards even with recent increases in several states’ standards.

• California, New Jersey, and Massachusetts enacted new policies since AEO2018 to increase renewable and/or non-emitting electric generation and, in New Jersey, to support operation of existing nuclear generators.
• The combined generation required to comply with all U.S. state-level renewable portfolio standards (RPS) is 704 billion kilowatthours by 2050, but compliant renewable generation collectively exceeds these requirements in all AEO2019 cases in 2050, nearly double the requirement for 2050 in the Reference case.
• Near-term expiration of tax credits for wind and solar photovoltaics (PV) spurs installation of these generating technologies through 2024. The continued decline in solar PV costs throughout the projection period encourages new additions beyond the existing RPS requirements.

U.S. crude oil and natural gas plant liquids production continues to increase through 2022 with crude oil exceeding its previous peak 1970 level in 2018 while consumption declines to lower than its 2004 peak level through 2050 in most cases.

• In the Reference case, U.S. crude oil production continues to grow through 2030 and then plateaus at more than 14.0 million barrels per day (b/d) until 2040.
• With continuing development of tight oil and shale gas resources, natural gas plant liquids (NGPL) production reaches the 6.0 million b/d mark by 2030, a 38% increase from the 2018 level.
• Total liquids production varies widely under different assumptions about resources, technology, and oil prices. The size of resources and the pace of technology improvements to lower production costs translate directly to long-term total production. Much higher oil prices can boost near-term production but cannot sustain the higher production pace. Production is less variable in the economic growth cases because domestic wellhead prices are less sensitive to macroeconomic growth assumptions.
• Consumption of petroleum and other liquids is less sensitive to varying assumptions about resources, technology, and oil prices. With higher levels of economic activity and relatively low oil prices, consumption of petroleum and other liquids increases in the High Economic Growth and Low Oil Price cases, while consumption remains comparatively flat or decreases in the other cases.

Tight oil development drives U.S. crude oil production from 2018 to 2050.

• Lower 48 onshore tight oil development continues to be the main driver of total U.S. crude oil production, accounting for about 68% of cumulative domestic production in the Reference case during the projection period.
• U.S. crude oil production levels off at about 14 million barrels per day (b/d) through 2040 in the Reference case as tight oil development moves into less productive areas and well productivity declines.
• In the Reference case, oil and natural gas resource discoveries in deepwater in the Gulf of Mexico lead Lower 48 states offshore production to reach a record 2.4 million b/d in 2022. Many of these discoveries resulted from exploration when oil prices were higher than $100 per barrel before the oil price collapse in 2015 and are being developed as oil prices rise. Offshore production then declines through 2035 before flattening through 2050 as a result of new discoveries offsetting declines in legacy fields.

The Southwest region leads tight oil production growth in the United States, but the Gulf Coast and Northern Great Plains regions also contribute.

• 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 the Bone Spring, Spraberry, and Wolfcamp, making it one of the lower-cost areas to develop.
• Northern Great Plains production grows into the 2030s, driven by increases in production from the Bakken and Three Forks tight oil plays.
• Production in the Gulf Coast region increases through 2021 before flattening out as the decline in production from the Eagle Ford is offset by increasing production from other tight/shale plays such as the Austin Chalk.

The United States becomes a net exporter of petroleum on a volume basis from 2020 to 2049.

• Net U.S. imports of crude oil and liquid fuels will fall between 2018 and 2034 in the Reference case as strong production growth and decreasing domestic demand result in the United States becoming a net exporter.
• In the Reference case, net exports from the United States peak at more than 3.68 million barrels per day (b/d) in 2034 before gradually reversing as domestic consumption rises. The United States returns to being a net importer in 2050 on a volume basis.
• Additional resources and higher levels of technological improvement in the High Oil and Gas Resource and Technology case results in higher crude oil production and higher exports, with exports reaching a high of 10.26 million b/d in 2041. Projected net exports reach a high of 8.39 million b/d in 2033 in the High Oil Price case as a result of higher prices that support higher domestic production. Conversely, low oil prices in the Low Oil Price case drive projected net imports up from 2.37 million b/d in 2018 to 7.17 million b/d in 2050.

Motor gasoline and diesel fuel prices rise after 2018 throughout the projection, but neither price returns to previous peaks.

• In the Reference case, motor gasoline and diesel fuel retail prices increase by 76 cents per gallon and 82 cents per gallon, respectively, from 2018 to 2050, largely because of increasing crude oil prices.
• Implementing the International Maritime Organization sulfur regulations in 2020 (IMO 2020) triggers short-term price increases because the refinery and maritime shipping industries must adjust fuel specifications and consumption. These effects peak in 2020 and gradually fade out of the market by 2026.
• The recent trend of an increasing price spread between diesel fuel and motor gasoline retail prices continues in the Reference case through 2038, in part, because of strong growth in domestic diesel fuel demand and declining demand for gasoline.
• 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 $5.57 per gallon in the High Oil Price case to $2.51 per gallon in the Low Oil Price case. Diesel fuel retail prices range from $6.61 per gallon in the High Oil Price case to $2.57 per gallon in the Low Oil Price case in 2050.

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

• Natural gas production in the Reference case grows 7% per year from 2018 to 2020, which is more than the 4% per year average growth rate from 2005 to 2015. However, after 2020, growth slows to less than 1% per year as growth in both domestic consumption and demand for U.S. natural gas exports slows.
• Across the Reference and all sensitivity cases, recent historical and near-term natural gas production growth in an environment of relatively low and stable prices supports growing demand from large natural gas- and capital-intensive projects currently under construction, including chemical projects and liquefaction export terminals.
• After 2020, production grows at a higher rate than consumption in most cases, leading to a corresponding growth in U.S. exports of natural gas to global markets. The exception is in the Low Oil and Gas Resource and Technology case, where production, consumption, and net exports all remain relatively flat as a result of higher production costs.
• The Low Oil and Gas Resource and Technology case, which has the highest natural gas prices relative to the other cases, is the only case where U.S. natural gas consumption does not increase during the projection period.

Net exports of natural gas from the United States continue to grow because of near-term export growth and LNG export facilities delivering domestic production to global markets.

• In the Reference case, pipeline exports to Mexico and liquefied natural gas (LNG) exports increase until 2025, after which pipeline export growth to Mexico slows and LNG exports continue rising through 2030.
• Increasing natural gas exports to Mexico are a result of more pipeline infrastructure to and within Mexico, allowing for increased natural gas-fired power generation. By 2030, Mexican domestic natural gas production begins to displace U.S. exports.
• Three LNG export facilities were operational in the Lower 48 states by the end of 2018. After all LNG export facilities and expansions currently under construction are completed by 2022, LNG export capacity increases further as a result of growing Asian demand and U.S. natural gas prices remaining competitive. As U.S.-sourced LNG becomes less competitive, export volumes stop growing, remaining steady during the later years of the projection period.
• U.S. imports of natural gas from Canada, primarily from its prolific western region, continue their decline from historical 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 and additional, recently built pipeline infrastructure.

An abundance of natural gas supports its growth in the electric generation fuel mix, but the results are sensitive to resource and price assumptions.

• Persistent low natural gas prices have decreased the competitiveness of coal-fired power generation. The 2017 coal-fired generation level was only about three-fifths of its peak in 2005. With relatively low natural gas prices throughout the projection period in the Reference case, natural gas-fired generation grows steadily and remains the dominant fuel in the electric power sector through 2050.
• Continued availability of renewable tax credits and declining capital costs for solar photovoltaic result in strong growth in non-hydro renewables generation. Increased natural gas-fired generation and renewables additions result in coal-fired generation slightly decreasing in the Reference case.
• In the Low Oil and Gas Resource and Technology case, renewables emerge as the primary source of electricity generation. Although higher natural gas prices increase utilization of the existing coal-fired generation fleet and prevent some coal-fired unit retirements, growth in coal-fired generation is muted by the lack of new capacity additions because of the relatively-high capital costs compared with other fuels.
• Lower projected natural gas prices in the High Oil and Gas Resource and Technology case support substantially higher natural gas-fired generation at the expense of renewables growth. In addition, coal-fired generation by 2050 is 26% lower than projected in the Reference case.

Expected requirements for new generating capacity will be met by renewables and natural gas, as a result of declining costs and competitiveness.

• In the Reference case, the United States adds 72 gigawatts (GW) of new wind and solar photovoltaic (PV) capacity between 2018 and 2021, motivated by declining capital costs and the availability of tax credits.
• New wind capacity additions continue at much lower levels after production tax credits expire in the early 2020s. Although the commercial solar Investment Tax Credits (ITC) decreases and the ITC for residential-owned systems expires, the growth in solar PV capacity continues through 2050 for both the utility-scale and small-scale applications because the cost of PV declines throughout the projection.
• Most electric generation capacity retirements occur by 2025 as a result of many regions that have surplus capacity and lower natural gas prices. The retirements reflect both planned and additional projected retirements of coal-fired capacity. On the other hand, new high-efficiency natural gas-fired combined cycle and renewables generating capacity is added steadily through 2050 to meet growing electricity demand.

Increases in renewables generation are led by solar and wind.

• Renewables generation increases more than 130% through the end of the projection period in the Reference case, reaching nearly 1,700 billion kilowatthours (BkWh) by 2050.
• Increases in wind and solar generation lead the growth in renewables generation throughout the projection period across all cases, accounting for nearly 900 BkWh (about 90%) of total renewables 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 a result of solar PV costs continuing to decrease.

Transportation energy consumption declines between 2019 and 2037, because increases in fuel economy more than offset growth in vehicle miles traveled.

• Increases in fuel economy standards temper growth in U.S. motor gasoline consumption, which decreases by 26% between 2018 and 2050.
• Increases in fuel economy standards result in heavy-duty vehicle energy consumption and related diesel use remaining at approximately the same level in 2050 as in 2018, despite rising economic activity that increases the demand of freight truck travel.
• Excluding electricity (which starts from a comparatively low base), jet fuel consumption grows more than any other transportation fuel during the projection period, rising 35% from 2018 to 2050. This growth arises from increases in air transportation outpacing increases in aircraft fuel efficiency.
• Motor gasoline and distillate fuel oil’s combined share of total transportation energy consumption decreases from 84% in 2018 to 74% in 2050 as the use of alternative fuels increases.
• Continued growth of on-road travel increases energy use later in the projection period because current fuel economy and greenhouse gas standards require no additional efficiency increases for new light-duty vehicles after 2025 and for new heavy-duty vehicles after 2027.

Passenger travel increases across all transportation modes, and freight movement increases across all categories except domestic marine.

• Light-duty vehicle miles traveled increase by 20% in the Reference case, growing from 2.9 trillion miles in 2018 to 3.5 trillion miles in 2050 as a result of rising incomes and growing population.
• Truck vehicle miles traveled, the dominant mode of freight movement in the United States, grows by 52%, from 397 billion miles in 2018 to 601 billion miles in 2050 as a result of increased economic activity. Freight rail ton-miles grow by 20% during the same period, led primarily by rising industrial output. However, U.S. coal shipments, which are primarily via rail, decline slightly.
• Air travel grows 77% from 990 billion revenue passenger miles to 1,753 billion revenue passenger miles between 2018 and 2050 in the Reference case because of increased demand for global connectivity and rising personal incomes. Bus and passenger rail travel increase 11% and 31%, respectively.
• Domestic marine shipments decline modestly during the projection period, continuing a historical trend related to logistical and economic competition with other freight modes.

Alternative and electric vehicles gain market share, but gasoline vehicles remain the dominant vehicle type through 2050.

• The combined share of sales attributable to gasoline and flex-fuel vehicles (which use gasoline blended with up to 85% ethanol) declines from 93% in 2018 to 75% in 2050 because of the growth in battery electric vehicle (BEV), plug-in hybrid electric vehicle (PHEV), and hybrid electric vehicle sales.
• California’s Zero-Emission Vehicle regulation, which nine additional states have adopted, requires a minimum percentage of vehicle sales of BEV and PHEV. In 2025, the year the regulation and new federal fuel economy standards go into full effect, projected sales of BEV and PHEV reach 1.3 million, or about 8% of projected total vehicle sales in the Reference case.
• Sales of the longer ranged 200- and 300-mile BEVs grow during the entire projection period, tempering sales of the shorter-range 100-mile BEV and PHEV.
• 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 43% from 2018 to 2050.

Residential and commercial energy consumption grows slowly, accounting for changes to energy efficiency standards and technological advances.

• In the AEO2019 Reference case, delivered energy consumption for buildings increases by 0.2% per year from 2018 to 2050, as growth outpaces energy efficiency improvements later in the projection period. Residential delivered energy consumption decreases by 0.1% per year to 2050 and commercial delivered energy consumption rises by 0.5% per year. Together, residential and commercial buildings account for 27% of U.S. total delivered energy consumption during the projection period.
• Electricity consumption grows in both sectors as a result of increased demand for electricity-using appliances, devices, and equipment. During the projection period, consumption of purchased electricity increases by 0.4% and 0.5% per year in the residential and commercial sectors, respectively.
• Natural gas consumption by commercial buildings grows by 0.5% per year from 2018 to 2050, led by increased natural gas-driven distributed generation (combined heat and power). Consumption of natural gas in the residential sector falls by 0.3% per year as its use for space heating continues to decline.

Residential and commercial electricity prices remain flat during the projection period, while natural gas prices rise, moderating natural gas consumption.

• Electricity prices fall in the near term, primarily because utilities pass along savings from lower taxes under the Tax Cuts and Jobs Act of 2017, but also because they replace more costly power plants with new plants that are less expensive to construct and operate. Lower prices encourage more consumption in the near term in both sectors, although near-term efficiency standards and population shifts to warmer areas of the country moderate this trend.
• Natural gas prices in both the residential and commercial sectors increase steadily by an average of 0.9% per year during the projection period. Increasing natural gas prices decrease consumption in the residential sector and moderate consumption growth in the commercial sector.

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