Assumptions to the Annual Energy Outlook 2001 Report

Gasoline and Diesel Fuel Updates

March 02, 2001 
(Next Release: 
March, 2002)



Macroeconomic Activity

International Energy

Household Expenditure

Residential Demand

Commercial Demand

Industrial Demand

Transportation Demand

Electricity Market

Oil and Gas Supply

Natural Gas Transmission
 & Distribution

Petroleum Market

Coal Market

Renewable Fuels

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This report presents the major assumptions of the National Energy Modeling System (NEMS) used to generate the projections in the Annual Energy Outlook 20011 (AEO2001),  including general features of the model structure, assumptions concerning energy markets, and the key input data and parameters that are most significant in formulating the model results.  Detailed documentation of the modeling system is available in a series of documentation reports.2 A synopsis of NEMS, the model components, and the interrelationships of the modules is presented in The National Energy Modeling System: An Overview.3

The National Energy Modeling System

The projections in the AEO2001 were produced with the National Energy Modeling System. NEMS is developed and maintained by the Office of Integrated Analysis and Forecasting of the Energy Information Administration (EIA) to provide projections of domestic energy-economy markets in the midterm time period and perform policy analyses requested by decisionmakers and analysts in the U.S. Congress, the Department of Energy’s Office of Policy, other DOE offices, and other government agencies.

The time horizon of NEMS is approximately 20 years, the midterm period in which the structure of the economy and the nature of energy markets are sufficiently understood that it is possible to represent considerable structural and regional detail.  Because of the diverse nature of energy supply, demand, and conversion in the United States, NEMS supports regional modeling and analysis in order to represent the regional differences in energy markets, to provide policy impacts at the regional level, and to portray transportation flows. The level of regional detail for the end-use demand modules is the nine Census divisions. Other regional structures include production and consumption regions specific to oil, gas, and coal supply and distribution, the North American Electric Reliability Council regions and subregions for electricity, and aggregations of the Petroleum Administration for Defense Districts (PADD) for refineries. Only national results are presented in the AEO2001, with the regional and other detailed results available on the EIA CD-ROM and EIA Home Page.  (

For each fuel and consuming sector, NEMS balances the energy supply and demand, accounting for the economic competition between the various energy fuels and sources. NEMS is organized and implemented as a modular system (Figure 1).  The modules represent each of the fuel supply markets, conversion sectors, and end-use consumption sectors of the energy system. NEMS also includes macroeconomic and international modules.  The primary flows of information among each of these modules are the delivered prices of energy to the end user and the quantities consumed by product, region, and sector.  The delivered prices of fuel encompass all the activities necessary to produce, import, and transport fuels to the end user. The information flows also include other data such as economic activity, domestic production activity, and international petroleum supply availability.

The integrating module of NEMS controls the execution of each of the component modules. To facilitate modularity, the components do not pass information to each other directly but communicate through a central data storage location.  This modular design provides the capability to execute modules individually, thus allowing decentralized development of the system and independent analysis and testing of individual modules.  This modularity allows use of the methodology and level of detail most appropriate for each energy sector.  NEMS solves by calling each supply, conversion, and end-use demand module in sequence until the delivered prices of energy and the quantities demanded have converged within tolerance, thus achieving an economic equilibrium of supply and demand in the consuming sectors. Solution is reached annually through the midterm horizon.  Other variables are also evaluated for convergence such as petroleum product imports, crude oil imports, and several macroeconomic indicators.

Each NEMS component also represents the impact and cost of legislation and environmental regulations that affect that sector. NEMS reflects all current legislation and environmental regulations, such as the Clean Air Act Amendments of 1990 (CAAA90), and the costs of compliance with other regulations.  NEMS also includes an analysis of the impacts of voluntary programs to reduce energy demand and carbon dioxide emissions, which are separately described under each module.

Component Modules

The component modules of NEMS represent the individual supply, demand, and conversion sectors of domestic energy markets and also include international and macroeconomic modules.  In general, the modules interact through values representing the prices of energy delivered to the consuming sectors and the quantities of end-use energy consumption.  This section provides brief summaries of each of the modules.

Macroeconomic Activity Module

The Macroeconomic Activity Module provides a set of essential macroeconomic drivers to the energy modules, and a macroeconomic feedback mechanism within NEMS.  Key macroeconomic variables include gross domestic product (GDP), interest rates, disposable income, and employment.  Industrial drivers are calculated for thirty-five industrial sectors.  This module is a kernel regression representation of the Standard and Poor’s DRI  U.S. Macroeconomic Model of the U.S. Economy.

International Energy Module

The International Module represents the world oil markets, calculating the average world oil price and computing supply curves for five categories of imported crude oil for the Petroleum Market Module (PMM) of NEMS, in response to changes in U.S. import requirements.  International petroleum product supply curves, including curves for oxygenates, are also calculated.

Household Expenditures Module

The Household Expenditures Module provides estimates of average household direct expenditures for energy used in the home and in private motor vehicle transportation.  The forecasts of expenditures reflect the projections from NEMS for the residential and transportation sectors.  The projected household energy expenditures incorporate the changes in residential energy prices and motor gasoline price determined in NEMS, as well as the changes in the efficiency of energy use for residential end-uses and in light-duty vehicle fuel efficiency.  Average expenditures estimates are provided for households by income group and Census division.

Figure 1.  National Energy Modeling System.

Residential and Commercial Demand Modules

The Residential Demand Module forecasts consumption of residential sector energy by housing type and end use, subject to delivered energy prices, availability of renewable sources of energy,  and housing starts.  The Commercial Demand Module forecasts consumption of commercial sector energy by building types and nonbuilding uses of energy and by category of end use, subject to delivered prices of energy, availability of renewable sources of energy, and macroeconomic variables representing interest rates and floorspace construction.  Both modules estimate the equipment stock for the major end-use services, incorporating assessments of advanced technologies, including representations of renewable energy technologies, and analyses of both building shell and appliance standards.  Both modules include a representation of distributed generation.

Industrial Demand Module

The Industrial Demand Module forecasts the consumption of energy for heat and power and for feedstocks and raw materials in each of sixteen industry groups subject to the delivered prices of energy and macroeconomic variables representing employment and the value of output for each industry.  The industries are classified into three groups—energy intensive, nonenergy intensive, and nonmanufacturing. Of the eight energy-intensive industries, seven are modeled in the Industrial Demand Module with components for boiler/steam/cogeneration (BSC), buildings, and process/assembly (PA) use of energy.  A representation of cogeneration and a recycling component are also included.  The use of energy for petroleum refining is modeled in the Petroleum Market Module, and the projected consumption is included in the industrial totals.

Transportation Demand Module

The Transportation Demand Module forecasts consumption of transportation sector fuels, including petroleum products, electricity, methanol, ethanol, compressed natural gas, and hydrogen by transportation mode, vehicle vintage, and size class, subject to delivered prices of energy fuels and macroeconomic variables representing disposable personal income, GDP, population, interest rates, and the value of output for industries in the freight sector.  Fleet vehicles are represented separately to allow analysis of the CAAA90 and other legislative proposals, and the module includes a component to explicitly assess the penetration of alternative-fuel vehicles.

Electricity Market Module

The Electricity Market Module (EMM) represents generation, transmission, and pricing of electricity, subject to delivered prices for coal, petroleum products, and natural gas, costs of generation by centralized renewables, macroeconomic variables for costs of capital and domestic investment, and electricity load shapes and demand.  There are three primary submodules—capacity planning, fuel dispatching, finance and pricing.  Nonutility generation, distributed generation, and transmission and trade are represented in the planning and dispatching submodules.  The levelized fuel cost of uranium fuel for nuclear generation is directly incorporated into the EMM.  All CAAA90 compliance options are explicitly represented in the capacity expansion and dispatch decisions.  Both new generating technologies and renewable technologies compete directly in these decisions.

Renewable Fuels Module

The Renewable Fuels Module (RFM) includes submodules that provide the representation of the supply response for biomass (including wood, energy crops, and biomass co-firing), geothermal, municipal solid waste (including landfill gas), solar thermal, solar photovoltaics, and wind energy.  The RFM contains natural resource supply estimates representing the regional opportunities for renewable energy development.

Oil and Gas Supply Module

The Oil and Gas Supply Module represents domestic crude oil (including lease condensate), natural gas liquids, and natural gas supply within an integrated framework that captures the interrelationships among the various sources of supply—onshore, offshore, and Alaska—using both conventional and nonconventional techniques, including enhanced oil recovery and unconventional gas recovery from coalbeds and low permeability formations of sandstone and shale.  This framework analyzes cash flow and profitability to compute investment and drilling in each of the supply sources, subject to the prices for crude oil and natural gas, the domestic recoverable resource base, and technology.  Oil and gas production functions are computed at a level of twelve supply regions, including three offshore and three Alaskan regions.  This module also represents foreign sources of natural gas, including pipeline imports and exports with Canada and Mexico, and liquefied natural gas imports and exports.  Crude oil production quantities are input to the Petroleum Market Module in NEMS for conversion and blending into refined petroleum products.  The supply curves for natural gas are input to the Natural Gas Transmission and Distribution Module for use in determining prices and quantities.

Natural Gas Transmission and Distribution Module

The Natural Gas Transmission and Distribution Module represents the transmission, distribution, and pricing of natural gas, subject to end-use demand for natural gas, the supply of domestic natural gas, and the availability of natural gas traded on the international market, on a seasonal basis.  The module tracks the flow of natural gas in an aggregate, domestic pipeline network, connecting the domestic and foreign supply sources with twelve demand regions. This capability allows the analysis of impacts of interregional constraints in the interstate natural gas pipeline network and the identification of pipeline and storage capacity expansion requirements.  Peak and off-peak periods are represented for natural gas transmission, and core and noncore markets are represented at the burner tip.  The key components of pipeline and distributor tariffs are included in the pricing algorithms.

Petroleum Market Module

The Petroleum Market Module forecasts prices of petroleum products, crude oil and product import activity, and domestic refinery operations, including fuel consumption, subject to the demand for petroleum products,  availability and price of imported petroleum, and domestic production of crude oil, natural gas liquids, and alcohol fuels. The module represents refining activities for three regions— Petroleum Administration for Defense District (PADD) 1, PADD 5, and an aggregate of PADDs 2, 3, and 4. The module uses the same crude oil types as the International Module. It explicitly models the requirements of CAAA90 and the costs of automotive fuels, such as oxygenated and reformulated gasoline, and includes oxygenate production and blending for reformulated gasoline. AEO2001 reflects a ban or limit on the gasoline blending component methyl tertiary butyl ether(MTBE) in the eight states that have passed legislation. Because the AEO2001 reference case assumes current laws and regulations, it assumes that the Federal oxygen requirement for reformulated gasoline in Federal nonattainment areas will remain intact. A new regulation that requires the sulfur content of all gasoline in the United States to  be reduced to an annual average of 30 parts per million (ppm) between the years 2004 and 2007 is also explicitly modeled.  Costs include capacity expansion for refinery processing units based on a 15-percent hurdle rate and a 15-percent return on investment. End-use prices are based on  the marginal costs of production, plus markups representing product distribution costs, State and Federal taxes, and environmental costs.

Coal Market Module

The Coal Market Module represents mining, transportation, and pricing of coal, subject to the end-use demand for coal differentiated by physical characteristics, such as the heat and sulfur content.  The coal supply curves include a response to fuel costs,  labor productivity, and factor input costs.  Twelve coal types are represented, differentiated by coal rank, sulfur content, and mining process.  Production and distribution are computed for eleven supply and thirteen demand regions, using imputed coal transportation costs and trends in factor input costs.  The Coal Market Module also forecasts the requirements for U.S. coal exports and imports.  The international coal market component of the module computes trade in three types of coal for twenty import and sixteen export regions. Both the domestic and international coal markets are represented in a linear program.

Cases for the Annual Energy Outlook 2001

The AEO2001 presents five cases which differ from each other due to fundamental assumptions concerning the domestic economy and world oil market conditions.  Three alternative assumptions are specified for each of these two factors, with the reference case using the midlevel assumption for each.

  • Economic Growth - In the reference case, productivity grows at an average annual rate of 2.1 percent from 1999 through 2020 and the labor force at 0.9 percent per year, yielding a growth in real GDP of 3.0 percent per year.  In the high economic growth case, productivity and the labor force grow at 2.3 and 1.2 percent per year, respectively, resulting in GDP growth of 3.5 percent annually.  The average annual growth in productivity, the labor force, and GDP is 1.8, 0.7 and 2.5 percent, respectively, in the low economic growth case.

  • World Oil Markets - In the reference case, the average world oil price increases to $22.41 per barrel (in real 1999 dollars) in 2020.  Reflecting uncertainty in world markets, the price in 2020 reaches $15.10 per barrel in the low oil price case and $28.42 per barrel in the high oil price case.  

In addition to these five cases, additional cases presented in Table 1 explore the impacts of changing key assumptions in individual sectors.

Table 1.  Summary of AEO2001 Cases

Many of the side cases were designed to examine the impacts of varying key assumptions for individual modules or a subset of the NEMS modules, and thus the full market consequences, such as the consumption or price impacts, are not captured. In a fully integrated run, the impacts would tend to narrow the range of the differences from the reference case.  For example, the best available technology side case in the residential demand assumed that all future equipment purchases are made from a selection of the most efficient technologies available in a particular year.  In a fully integrated NEMS run, the lower resulting fuel consumption would have the effect of lowering slightly the market prices of those fuels with the concomitant impact of increasing economic growth, thus stimulating some additional consumption.  As another example, the higher electricity demand side case results in higher electricity prices.  If the end-use demand modules were executed in a full run, the demand for electricity would be reduced slightly as a result of the higher prices and resulting lower economic growth, thus moderating somewhat the input assumptions. The results of these cases should be considered the maximum range of the impacts that could occur with the assumptions defined for the case.

All projections are based on Federal, State, and local laws and regulations in effect on July 1, 2000, including the additional fuels taxes in the Omnibus Budget Reconciliation Act of 1993, the CAAA90, the Energy Policy Act of 1992, the Outer Continental Shelf Deep Water Royalty Relief Act of 1995,  the Tax Payer Relief Act of 1997, the Federal Highway Bill of 1998, and new standards for the sulfur content of gasoline.  Pending legislation and sections of existing legislation for which funds have not been appropriated are not reflected in these forecasts.


Carbon dioxide emissions from energy use are dependent on the carbon dioxide content of the fuel and the fraction of the fuel consumed in combustion. The product of the carbon dioxide content at full combustion and the combustion fraction yields an adjusted carbon dioxide emission factor for each fuel.  The emissions factors are expressed in millions of metric tons carbon equivalent of carbon dioxide emitted per quadrillion Btu of energy use, or equivalently, in kilograms carbon equivalent of carbon dioxide per million Btu.  The adjusted emissions factors are multiplied by energy consumption to arrive at the carbon dioxide emissions projections.

For fuel uses of energy, the combustion fractions are assumed to be 0.99 for liquid fuels and 0.995 for gaseous fuels. The carbon dioxide in nonfuel use of energy, such as for asphalt and petrochemical feedstocks, is assumed to be sequestered in the product and not released to the atmosphere.  For energy categories that are mixes of fuel and nonfuel uses, the combustion fractions are based on the proportion of fuel use. Any carbon dioxide emitted by renewable sources is considered balanced by the carbon dioxide sequestration that occurred in its creation. Therefore, following convention, net emissions of carbon dioxide from renewable sources are taken as zero, and no emission coefficient is reported. Renewable fuels include hydroelectric power, biomass, photovoltaic, geothermal, ethanol, and wind energy.

Table 2 presents the carbon dioxide coefficients at full combustion, the combustion fractions, and the adjusted carbon dioxide emission factors used for AEO2001.

Table 2.  Carbon Dioxide Emission Factors

Methane emissions from energy-related activities are now estimated in NEMS.  Most of these emissions occur as methane is released in various phases of the production and transportation of coal, oil, and natural gas.  Additional emissions occur as a result of incomplete combustion of fossil fuels and  wood.  The methane emissions from each category are calculated as a function of energy production or consumption variables projected in NEMS. The emission factors and coefficients for these calculations are displayed in Tables 3, 4, and 5.

Table 3.  Coal-Related Methane Assumptions

Table 4.  Coefficients of Linear Equations for Natural Gas- and Oil-Related Methane Emissions

Table 5.  Methane Emissions Factors for Energy Combustion

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