Oil/Liquids

Transportation uses lead growth in liquid fuels consumption

U.S. consumption of liquid fuels—including fuels from petroleum-based sources and, increasingly, those derived from non-petroleum primary fuels such as biomass and natural gas—totals 21.9 million barrels per day in 2035 in the AEO2011 Reference case, an increase of 2.9 million barrels per day over the 2009 total (Figure 93). In all sectors except transportation, where consumption grows by about 2.5 million barrels per day, liquid fuel consumption remains at about the same level from 2009 to 2035. The transportation sector accounts for 73 percent of total liquid fuels consumption in 2035, up slightly from 71 percent in 2009.

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Motor gasoline, ultra-low sulfur diesel, and jet fuel are the primary transportation fuels, supplemented by biofuels such as ethanol and biodiesel. The increase in demand for transportation fuels is met primarily by diesel and biofuels. Motor gasoline consumption increases by approximately 0.3 million barrels per day from 2009 to 2035 in the Reference case, while diesel fuel and E85 consumption increase by 1.3 and 0.8 million barrels per day, respectively, over the period.

Biodiesel and a number of next-generation biofuels account for about 0.6 million barrels per day of the increase in liquid fuels consumption for transportation in 2035. The growth in biofuel use is primarily a result of the RFS mandates in EISA2007, although there is moderate production of corn ethanol beyond that which qualifies for RFS credits. The growth in diesel fuel consumption results from both an expansion of light-duty diesel vehicle sales to meet more stringent CAFE standards and an increase in industrial output that leads to more fuel use by heavy trucks.

 

Biofuels and natural gas liquids lead growth in total liquids supply

With world oil prices rising in the AEO2011 Reference case, domestic liquids production grows (Figure 94). From 2009 to 2035, U.S. crude oil production increases by about 600,000 barrels per day.

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As a result of the EISA2007 RFS, biofuels production increases by almost 1.5 million barrel per day, with ethanol accounting for the largest share of the increase. Ethanol production increases by more than 800,000 barrels per day from 2009 to 2035, displacing approximately 12 percent of gasoline demand in 2035 on an energy-equivalent basis. In the early years of the projection, ethanol is blended with gasoline and consumed as E10, motor gasoline blends containing up to 10 percent ethanol, or E15, moror gasoline blends containing up to 15 percent ethanol. By 2035, however, ethanol is consumed in roughly equal shares as E10, E15, and E85.

NGL production increases by 1.0 million barrels per day, to 2.9 million barrels per day in 2035, mainly as a result of strong growth in gas shale production, which tends to have relatively large amounts of liquids associated with it. BTL production increases to 516,000 barrels per day, and CTL production increases to 550,000 barrels per day in 2035.

Much of the increased liquids production comes from oil in shale formations (i.e., produced from kerogen, a solid hydrocarbon), CO2-enhanced oil recovery (EOR), and next-generation "xTL" production, which includes biomass-to-liquids (BTL), GTL, and CTL.

U.S. crude oil production increases as projected world oil prices rise

Rising world oil prices, growing shale oil resources (i.e., liquid oil embedded in non-porous shale rock), and increased production using enhanced oil recovery (EOR) techniques contribute to increased domestic crude oil production from 2009 to 2035 in the AEO2011 Reference case (Figure 95). The Bakken shale oil formation contributes to growth in crude oil production in the Rocky Mountain Region, and growth in the Gulf Coast region is spurred by the resources in the Eagle Ford and Austin Chalk formations. Some of the decline in oil production in the Southwest region is offset by production coming from the Avalon shale formation.

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Production with CO2-enhanced oil recovery increases beginning in 2015 (largely using natural CO2 sources), continues to grow through 2025 as anthropogenic CO2 sources increase, and eventually dominates CO2 production, supporting just over 20 percent of total crude oil production in 2035.

Lower 48 offshore production increases by 13 percent from 2009 to 2035 in the Reference case. According to the recent Bureau of Ocean Energy Management (BOEM) leasing plan, lease sales in the Mid- and South-Atlantic OCS will not occur before 2017. In the Pacific OCS, leasing is assumed to occur only off the coast of Southern California and not until after 2023 in the Reference case, because the Pacific OCS is considered to have low potential [97]. Oil shale liquid production (i.e., produced from kerogen, a solid hydrocarbon), which comes on line in the Rocky Mountain region in 2029 in the Reference case, accounts for roughly 2 percent of total domestic crude oil production in 2035.

U.S. oil production is more responsive to price changes than to technology gains

In the AEO2011 Oil Price and Technology cases, total U.S. crude oil production is more responsive to changes in world oil prices than it is to advances in technology (Figure 96). The most significant difference between the Reference case and the High and Low Oil Price cases is the change in use of CO2–enhanced EOR in response to the changes in oil price assumptions. From 2015 to 2035, when compared with the Reference case, crude oil production using CO2 EOR is 17 percent higher on average in the High Oil Price case. In comparison, in the Rapid Technology case, CO2 EOR technology shows little change, in part because of the limited availability of CO2 supplies.

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Oil production from offshore areas, Alaska, and oil shale deposits also is responsive to changes in world oil prices, because higher or lower prices improve or worsen the economics of those supply sources. For example, production from oil shale in 2035 is nearly threefold higher in the High Oil Price case than in the Reference case, and oil production from offshore drilling is 26 percent higher than in the Reference case.

Advances in horizontal drilling and hydraulic fracturing techniques continue to enhance the development of shale oil formations. Improvements in drilling equipment and monitoring instrumentation are among the key advances that have contributed to the slowdown and subsequent reversal in the decline in U.S. domestic oil production.

Imports of liquid fuels vary with world oil price assumptions

U.S. imports of liquid fuels (including crude oil, petroleum liquids, and liquids derived from nonpetroleum sources), which grew steadily from the mid-1980s to 2005, have been declining since 2005. In the AEO2011 Reference and High Oil Price cases, imports of liquid fuels continue to decline from 2009 to 2035, although they provide a major part of total U.S. liquids supply over the period. Tighter fuel efficiency standards and higher prices for liquid fuels moderate the growth in liquids demand, even as the combination of higher prices and renewable fuel mandates leads to increased domestic production of both oil and biofuels. Consequently, while consumption of liquid fuels increases steadily in the Reference case from 2009 to 2035, the growth in demand is met by domestic production.

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The net import share of U.S. liquid fuels consumption fell from 60 percent in 2005 to 52 percent in 2009. The net import share continues to decline in the Reference case, to 42 percent in 2035 (Figure 97). In the High Oil Price case, the net import share falls to an even lower 24 percent in 2035. Increased penetration of biofuels in the liquids market reduces the need for imports of crude oil and petroleum products in the High Oil Price case. In the Low Oil Price case, the net import share remains flat in the near term, then rises to 56 percent in 2035 as demand increases and imports become cheaper than crude oil produced domestically.

 

Renewable fuels standard leads to increased production of biofuels

The RFS results in a strong increase in renewable fuel production between 2009 to 2022 in the AEO2011 Reference case (Figure 98). Renewable fuel production, however, does not meet the RFS requirement of 36 billion gallons in 2022 because financial and technological hurdles delay the start of many advanced biofuel projects—particularly, cellulosic biofuel projects.

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The provisions of the RFS require annual evaluations by the U.S. EPA to determine the status of biofuel production capacity and revise the production mandates for the following year, as needed. The Reference case reflects an EPA reduction in the mandate for cellulosic biofuel production in both 2010 and 2011. Accounting for those modifications and anticipated future changes, only 25.7 billion credits are generated in 2022 in the Reference case, including 15 billion gallons of credits for domestic corn-based ethanol. Corn ethanol consumption grows above the 15 billion gallons that qualifies for the RFS credit to as high as 18 billion gallons by 2035.

The remainder of the biofuel supply in the Reference case consists of cellulosic ethanol, small volumes of next-generation biofuels, and imports of ethanol and biodiesel. In 2022, cellulosic ethanol contributes 3.5 billion gallons of credits towards the RFS mandate, and biodiesel and imported ethanol contribute 2.0 and 2.8 billion gallons of credits, respectively.

The Reference case assumes that the EPA will continue to set RFS targets after 2022, leading to more capacity builds than would have occurred otherwise. The mandate for 36 billion gallons of biofuel is met by 2030, and total biofuel production increases to 37.2 billion ethanol-equivalent gallons in 2035.

 

Future refinery operations and investments target diesel output

Tighter CAFE standards and increased consumption of ethanol as E85 slow the growth of gasoline consumption in the AEO2011 Reference case, but diesel consumption increases steadily through 2035 (Figure 99). The resulting increase in diesel output, coupled with a decrease in refinery capacity, causes a shift in the overall slate of refinery outputs.

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Although demand for petroleum products declined during the recent economic downturn, new refining capacity that was planned before the downturn comes on line early in the projection, despite lower utilization levels. This new capacity results in the addition of approximately 400,000 barrels per day of new refining distillation capacity by the end of 2012. A portion of the new capacity is configured to process heavier and previously less desirable crudes, capitalizing on their lower costs. The expansions are focused on diesel output for use both domestically and abroad. Given the current economics of refining operations, no additional capacity additions are expected after 2013. As a result, total refining capacity declines gradually after 2013, and more capacity is idled.

Diesel fuel consumption increases by approximately 1.3 million barrels per day from 2009 through 2035 in the Reference case, while motor gasoline consumption increases by 0.3 million barrels per day. The share of total refinery output represented by diesel fuel increases over the projection period.

Higher limit on ethanol blending spurs consumption growth in the near term

Currently, given the limited retail availability of E85, the primary use of ethanol in the United States is as a blendstock for gasoline. With rapid growth in ethanol capacity and production in recent years, ethanol consumption in 2010 approached the legal gasoline blending limit of 10 percent (E10). Recent EPA actions have increased the blending limit to 15 percent (E15) for vehicles built in 2001 and after. Although the higher blending limit allows ethanol consumption to increase in the near term, a number of issues may constrain its immediate impact.

One of the primary issues expected to slow the widespread adoption of E15 is liability for potential misfueling and infrastructure problems. Retailers will be hesitant to sell E15 if they are not relieved of responsibility for damage to consumer vehicles that may result from misfueling, as well as malfunctions of storage equipment or infrastructure that may be caused by the higher ethanol blend. Consumer acceptance will also play a part; warning labels could deter customers from risking any potential damage from the use of E15.

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Given the issues above, ethanol blending in gasoline increases only gradually in the AEO2011 Reference case (Figure 100), from 13.1 billion gallons in 2010 (about 9 percent of the gasoline pool) to 17.8 billion gallons in 2020 (about 12 percent of the gasoline pool). In 2020, vehicles built in 2001 and after consume E15 primarily, and the remaining growth in ethanol consumption shifts to E85 use, which increases from about 0.8 billion gallons in 2017 to 9.6 billion gallons in 2035.

Oil price cases depict uncertainty in world oil markets

World oil prices in AEO2011, defined in terms of the average price of low-sulfur, light crude oil delivered to Cushing, Oklahoma, span a broad range that reflects the inherent volatility and uncertainty of world oil prices (Figure 52). The AEO2011 price paths are not intended to reflect absolute bounds for future oil prices, but rather to allow analysis of the implications of world oil market conditions that differ from those assumed in the AEO2011 Reference case. The Reference case assumes a continuation of current trends in terms of economic access to (OPEC) resources outside of the Organization of the Petroleum Exporting Countris (OPEC), the OPEC market share of world production, and global economic growth.

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The High Oil Price case depicts a world oil market in which total GDP growth in the non-OECD countries is faster than in the Reference case, driving up demand for liquids. On the supply side, conventional production is more restricted by political decisions and limits on economic access to resources (e.g., use of quotas, fiscal regimes, and other approaches that restrict access) compared to the Reference case. Oil production in the major producing countries is reduced (e.g., OPEC share falls to 37 percent), and the consuming countries turn to high-cost unconventional liquids production to satisfy demand.

In the Low Oil Price case, GDP growth in non-OPEC countries is slower than in the Reference case, resulting in lower demand for liquids. Regarding supply, producing countries develop stable fiscal policies and investment regimes directed at encouraging development of their resources. OPEC nations increase production, achieving approximately a 48-percent market share of total liquids production by 2035, up from approximately 40 percent in 2009.

Liquids demand in developing nations is driven by the rate of GDP growth

Total use of liquids is similar in the Reference, High Oil Price, and Low Oil Price cases, ranging from 108 to 115 million barrels per day in 2035, respectively. This occurs because the alternative oil price cases reflect a shifting of both supply and demand, with a resulting consumption and production level that is similar. Although total GDP growth in the OECD countries is assumed to be the same in all three cases, non-OECD GDP growth is lower in the Low Oil Price case and higher in the High Oil Price case, changing the shares of global liquids use by OECD and non-OECD countries among the three cases (Figure 53). Thus the cases reflect a future where the impact of income growth as a demand driver of oil prices overwhelms any countervailing impact of oil prices as a driver of growth.

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In the Reference case, OECD liquids use grows to 47.9 million barrels per day, while non-OECD liquids use grows to 62.9 million barrels per day, in 2035. In the Low Oil Price case, OECD liquids use in 2035 is higher than in the Reference case, whereas non-OECD use is lower. In the High Oil Price case, OECD use falls to 53.1 million barrels per day in 2035. In contrast, non-OECD use, driven by higher GDP growth, increases to nearly 70 million barrels per day in 2035. Non-OECD Asia and the Middle East account for most of the difference from the Reference case, but liquids use in Central and South America in 2035 is also 1.1 million barrels per day higher than in the Reference case.

Total liquids production is nearly identical in the Reference and High Oil Price cases, with the most significant difference coming from increased unconventional production in the High Oil Price case as some advanced production technologies become economical. In the Low Oil Price case, lower demand and lower prices shutter more expensive conventional liquids projects and reduce unconventional liquids production.

Unconventional liquids gain market share as prices rise

World production of liquid fuels from unconventional resources in 2009 was 4.1 million barrels per day, or about 5 percent of total liquids production. In the AEO2011 projections, production from unconventional sources grows to about 10.4, 13.5, and 19.4 million barrels per day in 2035 in the Low Oil Price, Reference, and High Oil Price cases, respectively, accounting for about 10, 12, and 17 percent of total world liquids production (Figure 54).

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The factors most likely to affect production levels vary for the different types of unconventional liquid. Price is the most important factor for bitumen production from Canadian oil sands, because the fiscal regime and extraction technologies remain relatively constant, regardless of world oil prices. Production of Venezuela’s extra-heavy oil depends more on the prevailing investment environment and the assumed government-imposed levels of economic access to resources in the different price cases. In the Low Oil Price case, with more foreign investment in extra-heavy oil, production in 2035 climbs to 3.6 million barrels per day. In the Reference and High Oil Price cases, with growing investment restrictions, extra-heavy oil production is limited to 1.5 million barrels per day and 1.7 million barrels per day, respectively, in 2035.

Production levels for biofuels, coal-to-liquids (CTL), and gas-to-liquids (GTL) are driven largely by the price level and the extent of the need to compensate for restrictions on economic access to conventional liquid resources in other nations. In the Low Oil Price and High Oil Price cases, production from those three sources in 2035 totals 3.6 million barrels per day and 9.0 million barrels per day, respectively.