‹ Analysis & Projections

Annual Energy Outlook 2016

Release Date: July 7, 2016   |  Next Release Date: July 2017 

Energy Prices

Crude oil

AEO2015 considers a number of factors related to the uncertainty of future world crude oil prices, including changes in worldwide demand for petroleum products, crude oil production, and supplies of other liquid fuels.[15] In the Reference, High Oil Price, and Low Oil Price cases, the North Sea Brent (Brent) crude oil price reflects the market price for light sweet crude oil free on board (FOB) at the Sullen Voe oil terminal in Scotland.

The Reference case reflects global oil market events through the end of 2014. Over the past two years, growth in U.S. crude oil production, along with the late-2014 drop in global crude oil prices, has altered the economics of the oil market. These new market conditions are assumed to continue in the Reference case, with the average Brent price dropping from $109/barrel (bbl) in 2013 to $56/bbl in 2015, before increasing to $76/bbl in 2018. After 2018, growth in demand from non-OECD countries—countries outside the Organization for Economic Cooperation and Development (OECD)—pushes the Brent price to $141/bbl in 2040 (in 2013 dollars). The increase in oil prices supports growth in domestic crude oil production.

The High Oil Price case assumes higher world demand for petroleum products, less upstream investment by the Organization of the Petroleum Exporting Countries (OPEC), and higher non-OPEC exploration and development costs. These factors all contribute to a rise in the average spot market price for Brent crude oil to $252/bbl in 2040, 78% above the Reference case. The reverse is true in the Low Oil Price case: lower non-OECD demand, higher OPEC upstream investment, and lower non-OPEC exploration and development costs cause the Brent spot price to increase slowly to $76/bbl, or 47% below the price in the Reference case, in 2040 (Figure 3).


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World liquid fuels consumption varies in the three cases as a result of different assumptions about future trends in oil prices, world oil supply, and the rate of non-OECD demand growth. Uncertainty about world crude oil production is also captured in the three cases. In the Reference case, world production is 99.1 million bbl/d in 2040. In comparison to the Reference case, total liquid fuel supplies and OPEC's market share are higher in the Low Oil Price case and lower in the High Oil Price case. For OPEC
countries in the Middle East, Africa, and South America, combined production grows from less than 32.6 million bbl/d in 2013 to 58.3 million bbl/d in 2040 in the Low Oil Price case, compared with 43.5 million bbl/d in 2040 in the Reference case and 35.0 million bbl/d in 2040 in the High Oil Price case.

As increased OPEC production depresses world oil prices in the Low Oil Price case, development of some non-OPEC resources that are viable in the Reference case become uneconomical. As a result, non-OPEC production increases only slightly in the Low Oil Price case, from 45.3 million bbl/d in 2013 to 46.8 million bbl/d in 2040. In the High Oil Price case, non-OPEC production totals 63.8 million bbl/d in 2040. Unlike the High Oil and Gas Resource case, which assumes higher estimated ultimate recovery of crude oil and natural gas per well, closer well spacing, and greater advancement in production technology than the Reference case, the High Oil Price and Low Oil Price cases assume no changes in those factors from the Reference case.

Petroleum and other liquids products

The prices charged for petroleum products and other liquid products in the United States reflect the price that refiners pay for crude oil inputs, as well as operation, transportation, and distribution costs, and the margins that refiners receive. Changes in gasoline and distillate fuel oil prices generally move in the same direction as changes in the world crude oil price, but the changes in price are also influenced by demand factors. A 30% rise in the North Sea Brent crude oil spot price from 2013 to 2040 in the Reference case results in the weighted average U.S. petroleum product price rising by 15%, from $3.16/gallon to $3.62/gallon (in 2013 dollars). However, the effect of rising crude oil prices on distillate fuel use in the United States is less than for motor gasoline, because of a greater increase in distillate fuel demand as freight requirements continue to grow and the mix of light-duty vehicle fuels shifts from gasoline to diesel fuel. U.S. distillate fuel prices rise by 23% through 2040 in the Reference case, compared to an 11% increase for motor gasoline (Figure 4 and Figure 5). However, distillate fuel consumption rises by 15%, compared to a 20% decrease in motor gasoline consumption.


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In the High Oil Price case, higher demand for crude oil in non- OECD countries and lower supply of OPEC crude oil push world crude oil prices up. As a result, the weighted average price for U.S. petroleum products increases by 84%, from $3.16/gallon in 2013 to $5.81/gallon in 2040. In the Low Oil Price case, with lower non-OECD demand and higher OPEC supply pushing world oil prices down, the weighted average price for U.S. petroleum products drops by 26%, from $3.16/gallon in 2013 to $2.32/gallon in 2040.

In all the AEO2015 cases, U.S. laws and regulations shape demand and, consequently, the price of petroleum products in the United States. The Corporate Average Fuel Economy (CAFE) standards for new light-duty vehicles (LDVs), which typically use gasoline, rise from 30 miles per gallon (mpg) in 2013 to 54 mpg in 2040 under the fleet composition assumptions used in the final rule issued by the U.S. Environmental Protection Agency (EPA) and National Highway Transportation Safety Administration.[16] The rise in vehicle miles traveled (VMT) for LDVs does not fully offset the increase in fuel efficiency, and motor gasoline consumption declines through 2040 in all the AEO2015 cases. However, the effect of the standards varies by case because of the use of different assumptions about prices and economic growth. The 32% decrease in motor gasoline consumption in the High Oil Price case is larger than the decrease in the Reference case because higher gasoline prices reduce VMT, reducing consumption. In the Low Oil Price case, the decrease in gasoline consumption (11%) is smaller than in the Reference case because lower gasoline prices stimulate enough increased VMT to offset a part of the impact of fuel efficiency improvements resulting from regulation.

The efficiency and greenhouse gas (GHG) standard for heavy-duty vehicles, which typically consume distillate fuel, rises by about 16% through 2040, remaining below 8 mpg in all AEO2015 cases. Unlike the case for LDVs, the higher VMT in the Low Oil Price case more than offsets the increase in vehicle fuel efficiency, and distillate fuel consumption increases by 21% from 2013 to 2040. The increase in fuel consumption in the Low Oil Price case is greater than in the Reference case as a result of a 22% decrease in distillate fuel prices, to $2.97/gallon in 2040. In the High Oil Price case, the price of distillate fuel oil increases to $7.55/gallon in 2040—61% higher than in the Reference case—resulting in a 2% decline in distillate fuel consumption.

Natural Gas

Henry Hub natural gas spot prices vary according to assumptions about the availability of domestically produced natural gas resources, overseas demand for U.S. liquefied natural gas (LNG), and trends in domestic consumption. In all cases, prices are lower in 2015 than the $3.73/million British thermal units (Btu) average Henry Hub spot price in 2013, and in most cases they are above that level by 2020 (Figure 6). In the AEO2015 Reference case, the Henry Hub spot price is $4.88/million Btu (2013 dollars) in 2020 and $7.85/million Btu in 2040, as increased demand in domestic and international markets requires an increased number of well completions to achieve higher levels of production. In addition, lower cost resources generally are expected to be produced earlier, with more expensive production occurring later in the projection period.


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In the High Oil and Gas Resource case, U.S. domestic production from tight oil and natural gas formations is higher than in the Reference case as a result of assumed greater estimated ultimate recovery (EUR) per well, closer well spacing, and greater gains in technological development. Consequently, even with low natural gas prices, total U.S. domestic dry natural gas production grows sufficiently to satisfy higher levels of domestic consumption, as well as higher pipeline and LNG exports. With the abundance of natural gas produced domestically, the Henry Hub spot price (in 2013 dollars) falls from $3.14/million Btu in 2015 to $3.12/ million Btu in 2020 (36% below the Reference case price) before rising to $4.38/million Btu in 2040 (44% below the Reference case price).

The Low and High Oil Price cases assume the same level of resource availability as the Reference case but different world oil prices, which affect the level of overseas demand for U.S. LNG exports. International LNG contracts are often linked to crude oil prices, even though their relationship may be weakening. Global demand for LNG is also directly influenced by oil prices, as LNG competes directly with petroleum products in many applications. When the North Sea Brent spot price, which is the principal benchmark price for crude oil on world markets, rises in the High Oil Price case, world LNG contracts linked to oil prices become more expensive, making LNG exports from the United States more desirable.

In the High Oil Price case, the Henry Hub natural gas spot price remains close to the Reference case price through 2020. However, higher overseas demand for U.S. LNG exports raises the average Henry Hub spot price to $10.63/million Btu in 2040, which is 35% above the Reference case price.

In the Low Oil Price case, with lower demand for U.S. LNG exports, the Henry Hub spot price is only $7.15/million Btu in 2040— which is 9% lower than in the Reference case but 63% higher than in the High Oil and Gas Resource case.

Changes in the Henry Hub natural gas spot price generally translate to changes in the price of natural gas delivered to end users. The delivered price of natural gas to the electric power sector is highest in the High Oil Price case, where it rises from $4.40/ million Btu in 2013 to $10.08/million Btu in 2040, compared with $8.28/million Btu in the Reference case. Higher delivered natural gas prices result in a decline in natural gas consumption in the electric power sector in the High Oil Price case, from 8.2 Tcf in 2013 to 6.8 Tcf in 2040, compared with an increase in natural gas consumption in the electric power sector to 9.4 Tcf in 2040 in the Reference case. In the Low Oil Price and High Oil and Gas Resource cases, smaller increases in delivered natural gas prices result in more consumption for power generation than in the Reference case or High Oil Price case in 2040.

As in the electric power sector, natural gas consumption in the U.S. industrial sector also changes in response to delivered natural gas prices. However, industrial natural gas consumption also changes in response to shifts in the mix of industrial output, as well as changes in refinery output and utilization. Consumption also varies with the relative economics of using natural gas for electricity generation in industrial combined heat and power (CHP) facilities. The largest increase in the price of natural gas delivered to the industrial sector, from $4.56/million Btu in 2013 to $11.03/million Btu in 2040, is seen in the High Oil Price case, followed by the Reference case ($8.78/million Btu in 2040), Low Oil Price case ($8.25/million Btu in 2040), and High Oil and Gas Resource case ($5.22/million Btu in 2040). Of those four cases, the largest increase in industrial natural gas consumption occurs in the High Oil and Gas Resource case, in which lower prices contribute to higher consumption. The next largest increase occurs in the High Oil Price case, where higher prices spur a significant increase in U.S. crude oil production and, accordingly, natural gas consumption at U.S. oil refineries.[17]

The price of natural gas delivered to the residential and commercial sectors increases from 2013 to 2040 in all the AEO2015 cases. The largest increase in delivered natural gas prices to both sectors through 2040 is in the High Oil Price case, followed by the Reference, Low Oil Price, and High Oil and Gas Resource cases. In the commercial sector, natural gas consumption increases in all cases, mainly as a result of increased commercial CHP use and growth in aggregate commercial square footage. Conversely, consumption in the residential sector decreases in all cases despite economic growth, as overall demand is reduced by population shifts to warmer areas, improvements in appliance efficiency, and increased use of electricity for home heating.

Coal

The average minemouth coal price increases by 1.0%/year in the AEO2015 Reference case, from $1.84/million Btu in 2013 to $2.44/million Btu in 2040. Higher prices result primarily from declines in coal mining productivity in several key supply regions, including Central Appalachia and Wyoming’s Powder River Basin.

Across the AEO2015 alternative cases, the most significant changes in the average minemouth coal price compared with the Reference case occur in the Low and High Oil Price cases. In 2040, the average minemouth price is 6% lower in the Low Oil Price case and 7% higher in the High Oil Price case than in the Reference case. These variations from the Reference case are primarily the result of differences in the projections for diesel fuel and electricity prices in the Low and High Oil Price cases, because diesel fuel and electricity are key inputs to the coal mining process. The AEO2015 cases do not include the EPA’s proposed Clean Power Plan,[18] which if implemented would likely have a substantial impact on coal use for power generation and coal markets more generally.

Increases in minemouth coal prices (in dollars/million Btu) occur in all coal-producing regions (Figure 7). In Appalachia and in the West, increases of 1.2%/year and 1.5%/year between 2013 and 2040, respectively, are primarily the result of continuing declines in coal mining productivity. In the Interior region, a more optimistic outlook for coal mining productivity, combined with substantially higher production quantities, results in slower average price growth of 0.8%/ year from 2013 to 2040. Increased output from large, highly productive longwall mines in the Interior region support labor productivity gains averaging 0.3%/year over the same period.


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The average delivered price of coal (the sum of minemouth and coal transportation costs) increases at a similar, but slightly slower pace of 0.8%/year than minemouth prices, with prices rising from $2.50/million Btu in 2013 to $3.09/million Btu in 2040 in the AEO2015 Reference case (Figure 8). A relatively flat outlook for coal transportation rates results in a slightly lower growth rate for the average delivered price of coal.


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Electricity

The average retail price of electricity in real 2013 dollars increases in the AEO2015 Reference case by 18% from 2013 to 2040 as a result of rising costs for power generation and delivery, coupled with relatively slow growth in electricity demand (0.7%/ year on average). Electricity prices are determined by a complex set of factors that include economic conditions; energy use and efficiency; the competitiveness of electricity supply; investment in new generation, transmission, and distribution capacity; and the fuel, operation, and maintenance costs of plants in service. Figure 9 illustrates effects on retail electricity prices in the AEO2015 Reference and alternative cases resulting from different assumptions about the factors determining prices.


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In the AEO2015 Reference case, average retail electricity prices (2013 dollars) increase by an average of 0.6%/year, from 10.1 cents/kilowatthour (kWh) in 2013 to 11.8 cents/kWh in 2040, an overall increase of 18%. The High Oil Price case shows the largest overall average price increase, at 28%, to 12.9 cents/kWh in 2040. The High Oil and Gas Resource case shows the smallest average increase, at 2%, to 10.3 cents/kWh in 2040. With more fuel resources available to meet demand from power producers in the High Oil and Gas Resource case, lower fuel prices lead to lower generation costs and lower retail electricity prices for consumers. In the High Economic Growth case, stronger economic growth increases demand for electricity, putting price pressure on the fuel costs and the construction cost of new generating plants. In the Low Economic Growth case, weaker growth results in lower electricity demand and associated costs.

The average annual growth in electricity use (including sales and direct use) in the United States has slowed from 9.8%/year in the 1950s to 0.5%/year over the past decade. Contributing factors include slowing population growth, market saturation of major electricity-using appliances, efficiency improvements in appliances, and a shift in the economy toward a larger share of consumption in less energy-intensive industries. In the AEO2015 Reference case, U.S. electricity use grows by 0.8%/year on average from 2013 to 2040.

Combined electricity demand in the residential and commercial sectors made up over 70% of total electricity demand in 2013, with each sector using roughly the same amount of electricity. From 2013 to 2040, residential and commercial electricity prices increase by 19% and 16%, respectively, in the Reference case; by 30% and 27% in the High Oil Price case; and by 5% and 0% in the High Oil and Gas Resource case. These variations largely reflect the importance of natural gas prices to electricity prices.

Industrial electricity prices grow by 22% in the Reference case, from 6.9 cents/kWh in 2013 to 8.4 cents/kWh in 2040. Among the alternative cases, growth in industrial electricity prices ranges from 35% (9.3 cents/kWh in 2040) in the High Oil Price case to 2% (7.1 cents/KWh in 2040) in the High Oil and Gas Resource case. In the industrial sector, electricity use increases in most industries but falls throughout the projection period for the energy-intensive refining and paper industries and, after 2024, in the aluminum, bulk chemical, and mining industries.

Retail electricity prices include generation, transmission, and distribution components. In the AEO2015 cases, about two-thirds of the retail price of electricity (between 59% and 67%) is attributable to the price of generation, which includes generation costs and retail taxes, with the remaining portion attributable to transmission and distribution costs. The generation price increases by 0.5% annually in the Reference case, from 6.6 cents/kWh in 2013 to 7.6 cents/kWh in 2040. In the High Oil Price Case, the price of generation increases by 1%/year to 8.6 cents/kWh in 2040; and in the High Oil and Gas Resource Case, it falls by 0.3%/year to 6.1 cents/kWh in 2040.

Generation prices are determined differently in states with regulated and competitive electricity supplies. The AEO2015 Reference case assumes that 67% of electricity sales are subject to regulated average-cost pricing and 33% are priced competitively, based on the marginal cost of energy. In fully regulated regions, the price of generation is determined by both fixed costs (such as the costs of paying off electricity plant construction and fixed operation and maintenance costs) and variable costs (fuel and variable operation and maintenance costs).

In the Reference case, new generation capacity added through the projection period includes 167 GW of natural gas capacity, 109 GW of renewable capacity (45% is wind and 44% solar), 9 GW of nuclear capacity, and 1 GW of coal-fired capacity. Significant variation in the mix of generation capacity types added in the different AEO2015 cases also affects generation prices. Natural gas capacity additions vary substantially, with only 117 GW added in the Low Economic Growth case and 236 GW added in the High Economic Growth case. In the High Economic Growth case, a more vibrant economy leads to more industrial and commercial activity, more consumer demand for electric devices and appliances, and consequently greater demand for electricity.

Renewable generation capacity additions vary the most, with 66 GW added in the High Oil and Gas Resource case, but 194 GW added in the High Economic Growth case. Only 6 GW of new nuclear capacity is built in the Low Economic Growth and High Oil and Gas Resource cases, but 22 GW of new nuclear capacity is added in the High Oil Price case where natural gas prices are significantly above those in the Reference case. Across all the AEO2015 cases, very little new coal-fired capacity—and no new oil-fired capacity—is built through 2040.

Most generating fuel costs are attributed to coal and natural gas. In 2013, coal made up 44% of total generation fuel costs, and natural gas made up 42%. In 2040, coal makes up only 35% of total fuel costs in the Reference case, compared with 55% for natural gas. Oil, which is the most expensive fuel for generation, accounted for 6% of the total generating fuel costs in 2013 and from 2019 through 2040 accounts for only 3% of the total. Nuclear fuel accounts for 6% to 8% of electricity generation fuel costs throughout the projection period.

In regions with competitive wholesale electricity markets, the generation price generally follows the natural gas price. The price of electricity in wholesale markets is determined by the marginal cost of energy—the cost of serving the next increment of demand for a determined time period. Natural gas fuels the marginal generators during most peak and some off-peak periods in many regions.

There has been a fivefold increase in investment in new electricity transmission capacity since 1997, as well as large increases in spending for distribution capacity. Since 1997, roughly $107 billion has been spent on new transmission infrastructure and $318 billion on new distribution infrastructure, both in 2013 dollars. Those investments are paid off gradually over the projection period.

Although investment in new transmission and distribution capacity does not continue in the AEO2015 Reference case at the pace seen in recent years, spending still occurs at a rate greater than that needed to keep up with demand driven by requirements for additional transmission and distribution capacity to interconnect with new renewable energy sources, grid reliability and resiliency improvements, community aesthetics (including burying lines), and smart grid construction. In the AEO2015 Reference case, the transmission portion of the price of electricity increases by 1.2%/year, from 0.9 cents/kWh in 2013 to 1.3 cents/kWh in 2040. The distribution portion of the electricity price increases by 0.6%/year over the projection period, from 2.6 cents/ kWh in 2013 to 3.0 cents/kWh in 2040. The investments in distribution capacity are undertaken mainly to serve residential and commercial customers. As a result, residential and commercial customers typically pay significantly higher distribution charges per kilowatthour than those paid by industrial customers.

Endnotes

  1. Liquid fuels, or petroleum and other liquids, includes crude oil and products of petroleum refining, natural gas liquids, biofuels, and liquids derived from other hydrocarbon sources (including coal-to-liquids and gas-to-liquids).
  2. U.S. Environmental Protection Agency and National Highway Transportation Safety Administration, “2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards; Final Rule,” Federal Register, Vol. 77, No. 199 (Washington, DC, October 15,
    2012), https://www.federalregister.gov/articles/2012/10/15/2012-21972/2017-and-later-model-year-light-duty-vehicle-greenhouse-gas-emissionsand-corporate-average-fuel.
  3. While not discussed in this section, the High Economic Growth case has higher levels of industrial natural gas consumption through 2040 than any of the four cases mentioned, in response to higher demand that results from significantly higher levels of industrial output.
  4. U.S. Environmental Protection Agency, “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units,” Federal Register, pp. 34829-34958 (Washington, DC: June 18, 2014) https://www.federalregister.gov/articles/2014/06/18/2014-13726/carbonpollution-emission-guidelines-for-existing-stationary-sources-electric-utility-generating.