Introduction

In preparing the AEO2013 Reference case, the U.S. Energy Information Administration (EIA) evaluated a wide range of trends and issues that could have major implications for U.S. energy markets. This overview presents the AEO2013 Reference case and compares it with the AEO2012 Reference case released in June 2012 (see Table 1 on pages 15-16). Because of the uncertainties inherent in any energy market projection, the Reference case results should not be viewed in isolation. Readers are encouraged to review the alternative cases when the complete AEO2013 publication is released, in order to gain perspective on how variations in key assumptions can lead to different outlooks for energy markets.

To provide a basis against which alternative cases and policies can be compared, the AEO2013 Reference case generally assumes that current laws and regulations affecting the energy sector remain unchanged throughout the projection (including the implication that laws that include sunset dates do, in fact, end at the time of those sunset dates). This assumption helps increase the comparability of the Reference case with other analyses, clarifies the relationship of the Reference case to other AEO2013 cases, and enables policy analysis with less uncertainty regarding unstated legal or regulatory assumptions.

As in past editions, the complete AEO2013 will include additional cases, many of which reflect the impacts of extending a variety of current energy programs beyond their current expiration dates and the permanent retention of a broad set of programs that currently are subject to sunset provisions. In addition to the alternative cases prepared for AEO2013, EIA has examined proposed policies at the request of Congress over the past few years. Reports describing the results of those analyses are available on EIA's website.³

Key updates made for the AEO2013 Reference case include the following:

• Extension of the projection period through 2040, an additional five years beyond AEO2012.
• Adoption of a new Liquid Fuels Market Module (LFMM) in place of the Petroleum Market Module used in earlier AEOs provides for more granular and integrated modeling of petroleum refineries and all other types of current and potential future liquid fuels production technologies. This allows more direct analysis and modeling of the regional supply and demand effects involving crude oil and other feedstocks, current and future processes, and marketing to consumers.
• A shift to the use of Brent spot price as the reference oil price. AEO2013 also presents the average West Texas Intermediate (WTI) spot price of light, low-sulfur crude oil delivered in Cushing, Oklahoma, and includes the U.S. annual average refiners' acquisition cost of imported crude oil, which is more representative of the average cost of all crude oils used by domestic refiners.
• A shift from using regional natural gas wellhead prices to using representative regional natural gas spot prices as the basis of the natural gas supply price. Due to this change, the methodology for estimating the Henry Hub price was revised.
• Updated handling of data on flex-fuel vehicles (FFVs) to better reflect consumer preferences and industry response. FFVs are necessary to meet the Renewable Fuels Standard (RFS), but the phasing out of CAFE credits for their sale and limited demand from consumers reduce their market penetration.
• A revised outlook for industrial production to reflect the impacts of increased shale gas production and lower natural gas prices, which result in faster growth for industrial production and energy consumption. The industries affected include, in particular, bulk chemicals and primary metals.
• Incorporation of a new aluminum process flow model in the industrial sector, which allows for diffusion of technologies through choices made among known commercial and emerging technologies based on relative capital costs and fuel expenditures and provides for a more realistic representation of the evolution of energy consumption than in previous AEOs.
• An enhanced industrial chemical model, in several respects: the baseline liquefied petroleum gas (LPG) feedstock data have been aligned with 2006 survey data; use of an updated propane-pricing mechanism that reflects natural gas price influences in order to allow for price competition between LPG feedstock and petroleum-based (naphtha) feedstock; and specific accounting in the Industrial Demand Model for propylene supplied by the LFMM.
• Updated handling of the U.S. Environmental Protection Agency's (EPA) National Emissions Standards for Hazardous Air Pollutants for industrial boilers and process heaters to address the maximum degree of emissions reduction using maximum achievable control technology. An industrial capital expenditure and fuel price adjustment for coal and residual fuel has been applied to reflect risk perception about the use of those fuels relative to natural gas.
• Augmentation of the construction and mining models in the Industrial Demand Model to better reflect AEO2013 assumptions regarding energy efficiencies in off-road vehicles and buildings, as well as the productivity of coal, oil, and natural gas extraction.
• Adoption of final model year 2017 to 2025 GHG emissions and CAFE standards for LDVs, which increases the projected fuel economy of new LDVs to 47.3 mpg in 2025.
• Updated handling of the representation of purchase decisions for alternative fuels for heavy-duty vehicles. Market factors used to calculate the relative cost of alternative-fuel vehicles, specifically natural gas, now represent first buyer-user behavior and slightly longer breakeven payback periods, significantly increasing the demand for natural gas fuel in heavy trucks.
• Updated modeling of LNG export potential, which includes a rudimentary assessment of pricing of natural gas in international markets.
• Updated power generation unit costs that capture recent cost declines for some renewable technologies, which tend to lead to greater use of renewable generation, particularly solar technologies.
• Reinstatement of the Clean Air Interstate Rule (CAIR) after the court's announcement of intent to vacate the Cross-State Air Pollution Rule (CSAPR).
• Modeling of California's Assembly Bill 32, the Global Warming Solutions Act (AB 32), that allows for representation of a cap-and-trade program developed as part of California's GHG reduction goals for 2020. The coordinated regulations include an enforceable GHG cap that will decline over time. AEO2013 reflects all covered sectors, including emissions offsets and allowance allocations.
• Incorporation of the California Low Carbon Fuel Standard, which requires fuel producers and importers who sell motor gasoline or diesel fuel in California to reduce the carbon intensity of those fuels by 10 percent between 2012 and 2020 through the increased sale of alternative low-carbon fuels.

Footnotes

³ See "Congressional Requests," website www.eia.gov/analysis/reports.cfm?t=138.