Adams and Reese Annual Energy
New Orleans, LA
Jay E. Hakes
Energy Information Administration
November 20, 1998
World Oil Price in Two Cases, 1979-2020
--Expanding our perspective, both forward and backward, we see that todays oil prices are some of the lowest since the early 1970's, and that even by 2020 we expect oil prices in real 1997 dollars to reach only $22.73.
--These projections are from the reference case of the Annual Energy Outlook 1999, which was just released on the internet 3 days ago, and can be found at www.eia.gov. The full document, including stand-alone and side cases, will be released in mid-December.
--In current, or nominal, dollars (which include inflation) that $22.73 translates into $43.30 in 2020. All of our long-term forecasts are stated in terms on constant dollars, so that we can see trends across time.
--The prices shown here are imported refiner acquisition costs, rather than West Texas Intermediate, just as on the first slide.
--The most recent historical high price was $62.62 a barrel in 1980, more than 2½ times what we expect prices to be in 2020.
--In addition to a reference case, we also have a high and a low world oil price case to cover a reasonable range of uncertainty about what prices might be over the forecast. In 2020 prices range $6 or $8 or either side of the reference case.
--The range represents alternative assumptions about oil production levels in the Organization of Petroleum Exporting Countries. OPEC production is higher in the low price case and lower in the high price case.
--Here you can see how much different--and how much the same--our outlook is as last year. In 2000, we expect world oil prices to be as much as $5.50 lower than we expected last year, but in 2020 prices are virtually the same.
--Over the past 2 years, crude oil prices have dropped by more than 40 percent, reflecting a significant world oil surplus. Abundant supply and weak worldwide demand, especially among the struggling economies of the Pacific Rim, have combined to produce the lowest world oil prices since the early 1970's.
--The reference case assumes that real oil prices rise at an annual rate of almost 6 percent from 1999 to 2007. After that, the reference case oil prices are similar to those in AEO98, rising at an annual rate of less than 1 percent.
--We expect the price rebound to be delayed until 2007 because of the difficulty OPEC has had in maintaining production cutbacks, the expected return of Iraq to the world market, the continued growth of non-OPEC production, and the bleak outlook for several Southeast Asian economies.
--The relatively low growth in prices, even as worldwide demand increases, reflects continued optimism about the potential growth of production in both OPEC and the non-OPEC nations. Contributing to the growth are a near doubling of production in the former Soviet Union by 2020, new fields in the North Sea and increases in the offshore regions of West Africa.Lower-48 Natural Gas Wellhead Prices, 1970-2020
--Natural gas wellhead prices are expected to grow moderately over the forecast period from $2.23 per thousand cubic feet in 1997 to $2.68 in 2020, although they are 15 percent lower than last year for the first 7 months of 1998.
--Even at $2.68 cents per thousand cubic feet in 2020, natural gas prices do not approach the 1983 peak of $3.95.
--$2.68 in 1997 dollars is equivalent to $5.11 in nominal 2020 dollars.
--Like oil prices, natural gas prices are lower this year than last. However, because gas prices declined only half as much as oil prices, they are expected to return to the levels foreseen last year by 2001.
--After that, natural gas prices are expected to be higher than in AEO98 because of a lower assessment of the recoverable offshore resource base. Lower drilling, resulting from low oil and gas prices early in the period also contributes to lower reserve additions, and higher prices.
--Increasing prices reflect rising demand and its impact on the natural progression of the discovery process from larger and more profitable fields, to smaller, less economical ones. Price increases also reflect more productionCrude Oil Production by Source, 1970-2020 --Domestic crude oil production is projected to continue its historic decline throughout the forecast, declining from 6.5 million barrels per day in 1997 to 5.0 million barrels per day in 2020.
--More than half of the decline is from falling Alaskan crude oil production. Alaska production is expected to decline rapidly--at 4.1 percent annually--as Prudhoe Bay and most other oil fields decline.
--Conventional onshore production, which accounted for nearly half of total U.S. production in 1997, is expected to fall at nearly 1 percent annually.
--Offshore production generally increases in the forecast through 2008, then drops below current levels in 2020, resulting in an overall decrease of 0.7 percent a year.
--The only major oil production category that increases over the forecast is enhanced oil recovery. However, in the near term EOR production is actually slowed by low crude oil prices, falling through 2003 to 440,000 barrels per day. By the end of the forecast EOR production increases sharply to 710,000 barrels per day.
--Future U.S. crude oil production is expected to be slightly higher than in AEO98, because of higher reserves through 2003 and higher drilling after that. Reserves are higher in the near term because of more recent data showing that oil reserve additions exceeded production in 1997 for the first time in a decade.
--The forecast for Gulf Coast production is influenced significantly by the offshore forecast. Gulf coast production, both onshore and offshore, is currently at 2 million barrels per day. Production is expected to rise through 2006 and then fall to 1.4 million barrels per day in 2020.Natural Gas Production by Source, 1995-2020 --Unlike oil production natural gas production is expected to rise throughout the forecast. Gas production is expected to be 27.4 trillion cubic feet in 2020, nearly 8.5 trillion cubic feet higher than it was in 1997.
--The increase in the forecast comes primarily from onshore, nonassociated sources, both conventional and unconventional.
--Conventional onshore production accounted for 39 percent of total U.S. domestic production in 1997, but is expected to account for 45 percent in 2020.
--Unconventional onshore production, including coalbed methane, gas from shales, and gas from tight sands, is expected to increase even faster than conventional production, though not as much. Higher prices after 2001 and more optimism about technological improvements are responsible for higher unconventional production.
--Offshore natural gas production is expected to be higher in 2020 than in 1997, but the pattern is not expected to be smooth. In the near term offshore gas production, beset by low demand, is expected to decline through 2000. After that, it rises through 2014, and like offshore oil, begins to decline.
--Gas production is lower than AEO98 through most of the forecast, but still reaches the same level by 2020. Lower production reflects lower consumption throughout most of the forecast, particularly in the electricity, residential, and industrial sectors. Higher equipment efficiencies and higher natural gas prices are the principal reasons for lower consumption.
--Combining both onshore and offshore production, Gulf Coast natural gas production was 56 percent of the U.S. total in 1997. By 2020, that share is expected to slip to 49 percent.
--Unlike total U.S. production, Gulf Coast gas production is expected to decline through 2000, another victim of low demand. After 2000, production rises steadily through 2018 to 13 trillion cubic feet, when it begins to tail off.Net Petroleum Product Imports, 1970-2020
--Lower world oil prices also affect petroleum product imports, increasing them until crude oil prices return to more "normal" levels.
--Net product imports are expected to rise from 1 million barrels per day in 1997 to 4 million barrels per day in 2020, because U.S. refinery capacity expansion is expected to be limited to existing sites by environmental considerations.
--This year and next year petroleum product imports are expected to be lower than forecast last year, because of lower demand for gasoline and jet fuel.
--From 2000 to 2008 higher product imports are expected than last year, because cheaper product imports are expected to be made available by slack world demand. After 2008, U.S. refinery capacity expansion at existing sites is less expensive than product imports; that makes crude oil imports more attractive than last year.Ethanol Used in Gasoline Blending, 1995-2020
--One of the effects of lower world oil prices is to make alternative fuels like ethanol less competitive with gasoline.
--Less than ½ of 1 percent of transportation is fueled with ethanol, but a comparison of the two forecasts indicates the effect the world oil price can have.
--Because of projected lower oil prices, not until 2006 is ethanol blended directly into gasoline and ethanol converted into an ether expected to exceed last years forecast.
--By the end of the forecast period, ethanol used in blending is significantly higher than in AEO98, because cellulose-based ethanol was introduced into AEO99 for the first time. (The tax credit for ethanol was also assumed to continue after its expiration in 2007.)
--Another effect of lower oil prices is to increase consumption by electric utilities. When AEO99 oil prices are the most different from AEO98, oil consumption by electric generators is nearly twice the size, or more than 200,000 barrels per day larger.U.S. Monthly Crude Oil Prices, 1995-1999
World Oil Prices
The general trend now in world oil prices is up, but most likely at a gradual rate at best. High stock levels worldwide are likely to restrain prices from moving up sharply, especially if anticipated increases in winter demand fail to materialize.
By the end of 1998 we will have completed a two-year period during which world petroleum inventories will probably have increased a cumulative 650 million barrels (about 8 or 9 days of world supply).
The main cause of this development has been weak worldwide demand generated by mild winter weather and the economic crises in East Asian countries.
So far, production cutbacks by major producing countries have proved to be inadequate to move oil prices upward significantly.
Despite the expectation of substantial increases in worldwide heating-related petroleum demand this coming winter, excess inventories may not be trimmed next year. This is largely because U.S. and world economic growth is expected to slow in 1999.
Thus, following an expected decline of about $6 per barrel in 1998, we see an increase of perhaps a little more than $1 per barrel likely in 1999.
However, mild weather this winter could sustain low oil prices for many additional months.Change in World Oil Demand from Previous Year, 1997-1999
World Oil Demand
World oil demand is expected to increase by only 0.8 million barrels per day in 1998, before increasing by about 1.5 million barrels per day in 1999.
Due to the recent economic slowdown in several Asian countries, this forecast has an average annual oil demand growth rate of 5.6 percent for China and a barely noticeable growth of 0.3 percent for Other Asian oil demand between 1997 and 1999. Between 1991-1997, these countries grew, on average, by 7.6 percent per year.
Oil demand in countries of the OECD (not including the Czech Republic, Hungary, Mexico, Poland, and South Korea) is expected to increase by about 200,000 barrels per day in 1998 and another 800,000 barrels per day in 1999, an average annual rate of 1.2 percent. Japan's current recession is expected to be the main reason for a decline in Japanese oil demand in 1998 while remaining relatively flat in 1999. Partly because of this, the United States' oil demand growth represents about half of OECD oil demand growth in 1998 and 1999.
After showing some growth in oil demand in 1997 for the first time since the collapse of the Soviet Union, oil demand in the former Soviet Union (FSU) is projected to stay relatively flat in 1998 and 1999, as Russia experiences an economic slowdown.
Excluding demand in the Former Soviet Union, oil demand in 1998 is expected to increase by less than 1 million barrels per day, the first time this will have happened since 1990.Change in World Oil Supply from Previous Year, 1996-1999
World Oil Supply
World oil supply is expected to increase by only 0.9 million barrels per day in 1998, and by only 0.65 million barrels per day in 1999. This follows an increase of nearly 2.3 million barrels per day in 1997.
The reason for the large decline in the growth of world oil supply is that in late June, OPEC and some major non-OPEC countries announced cuts in production that, in combination with earlier pledged cutbacks this year, would reduce output by 3.1 million barrels per day from February 1998, with 2.6 million barrels per day of production cuts coming from OPEC.
Even with an assumption that compliance with the production cuts would reach 100 percent and that they would diminish over time, EIA is estimating only a slight increase in OPEC production in 1998 (0.5 million barrels per day) and a decline in 1999 (0.2 million barrels per day).
Due to the recent economic situation in Russia, EIA is forecasting that oil supply from the Former Soviet Union (FSU) republics will be relatively flat in 1998 and 1999. The reason we are estimating any increase is the importance oil exports have on generating hard currency in the FSU republics, especially Russia.
The non-OPEC growth story is depicted by the "Other" group in this chart. Increments from this group are accelerating due to increases from Latin America, Africa, Other Asia, and some slight increases from the Middle East. Privatization efforts are beginning to accelerate growth, particularly in Latin America. Together, the non-OECD, non-OPEC countries, excluding the FSU republics, are expected to increase production by 0.8 million barrels per day between 1997 and 1999, including 0.2 million barrels per day from the North Sea during this time period.
For the purposes of this forecast we have assumed Iraqi oil exports to average about 2.0 to 2.1 million barrels per day for the fourth quarter of 1998 and all of 1999. This is merely an assumption for this forecast and does not reflect any official U.S. government view on the future of Iraqi oil exports. Any increase in Iraqi oil beyond this will lessen the impact on prices from the oil supply cutback agreements in 1998.Average World Oil Stock Build Rate, 1996-1999
World Oil Stocks
EIA is forecasting world oil supply to exceed world oil demand (a stock build) by over 900 thousand barrels per day (nearly 350 million barrels) in 1998.
This follows 1997, a year in which EIA estimates a stock build of over 800 thousand barrels per day (300 million barrels over the course of the year).
This is a result of increased oil supply from OPEC, particularly Iraq in 1997/98, and less oil demand growth as a result of the 2 warmer than normal winters (1996/97 and 1997/98) and the economic slowdown in Asia.
In late June, OPEC and some major non-OPEC countries announced cuts in production that, in combination with earlier pledged cutbacks this year, could reduce output by 3.1 million barrels per day from February 1998, with 2.6 million barrels per day of production cuts coming from OPEC. Even with EIA's assumption that the compliance rate would decline over time, the cuts are expected to bring supply back in line with demand. EIA's latest forecast shows a "typical" stock build/draw pattern beginning in the 3rd quarter of 1998. However, the stock build that occurred in 1997 and the first half of 1998 is not expected to be significantly drawn down until after 1999, thus keeping a lid on any major price increase (barring any supply disruptions, of course).
A return to a more "typical" global stock build/draw pattern (builds of about 1 million bbl/d in the 2nd and 3rd quarters and draws of about 1 million bbl/d in the first and fourth quarters) should result in a very slight build in oil inventories in 1999.West Texas Intermediate Crude Oil Price and Gulf of Mexico Total Rig Count, 1996-1998
Gulf of Mexico Federal Offshore Crude Oil Proved Reserves, 1992-1997
- Rig counts have declined substantially since March of 1998.
- However, Offshore oil production will still increase in 1998 and 1999.
- Marginal and less productive drilling will be curtailed first.
- Many of the fields with large reserves in deep water are not producing yet or have not reached their peak production level.
- The URSA platform is scheduled to come onstream in the 2nd half of 1999 and reach 150,000 barrels per day in 2000 (about 15 percent of average Gulf oil production in 1997).
- URSA wells will be capable of producing 30,000 barrels per day. These are "World Class" wells.
- Up until it became obvious that oil prices were in a substantial decline, there were personnel and equipment shortages that restricted offshore rig counts.
Gulf of Mexico Federal Offshore Wet Natural Gas Proved Reserves after Lease Separation, 1992-1997
- Proved Oil Reserves increased substantially since 1992.
- Deepwater Oil Reserves tripled between 1992 and 1997, leading to the overall Gulf increases.
- Proved Oil Reserves in shallow water less than 200 meters (655 feet) were roughly unchanged from 1992 through 1997.
- This is a real accomplishment in a maturing oil producing region.
- The oil resources were there, and technological advances provided the necessary capability, and lowered development costs. Oil prices were adequate, and royalty relief probably helped.
- Proved Reserves of Natural Gas also increased between 1992 and 1997.
- The shallow Gulf is the single most critical natural gas supply region in the United States -- However, Natural Gas Reserves in the shallow Gulf steadily declined between 1992 and 1997.
- Fortunately, Deepwater Natural Gas Reserves more than doubled between 1992 and 1997, leading to an overall increase in Natural Gas Reserves in the Gulf of Mexico Federal Offshore.
Successful Lower-48 Natural Gas and Oil Wells, 1970-2020
--Both exploratory and developmental drilling increase in the forecast at a rate of 3 percent annually, as more drilling is required each year to find the same amount of oil and gas.
--Discoveries per well for natural gas drilling does not decline as much as that of oil drilling, in part because total recoverable resources are more abundant than oil resources.
--Compared to last years forecast, lower oil and gas prices are expected to depress total U.S. drilling until 2004, when natural gas wellhead prices push drilling back to AEO98 levels.
--After 2004, in addition to higher natural gas prices, drilling is higher than last year for three more reasons. First, new disaggregations of wells have led us to forecast more shallow wells with lower finding rates than in AEO98. Second, new data on the number of wells have shown that more wells were drilled in that past few years than we thought last year, and that increased drilling in the forecast. And third, a new unconventional gas model has forecast more wells, particularly for tight sands.
--Gulf coast onshore and offshore drilling is expected to rise throughout the forecast, but be lower than predicted last year. Drilling costs are now expected to be higher than we estimated last year, and not fall as quickly as we expected last year. So, Gulf Coast drilling is lower than in AEO98.
--Neither total nor Gulf Coast drilling is expected to reach the high levels of the early 1980's during the forecast.Expected Temporary Effects of Low Oil Prices
--Low world oil prices have variety of positive and negative effects.
--On the positive side consumer prices are lower and inflation is held in check.
--On the negative side the oil and gas industry suffers, all the way from oil producing countries to the smallest independent operator. That certainly affects geopolitical stability, but as oil producers Im sure youre more concerned about loan payments and return on equity.
--High cost activity, like EOR and offshore operations, are affected first.
--Market shifts start to occur, such as those away from ethanol and natural gas. Some shifting in the import slate can also be expected.Gulf of Mexico OCS Dry Gas Monthly Production Rate and Wellhead Productive Capacity, 1986-1998
- This is true even in a relatively low natural gas price scenario. The "Low" Case is about what will happen in 1998.
- There is plenty of productive capacity to supply the projected demand for Natural Gas from the Gulf. However, gas production may fall in 1999 because of lower demand.
- However, natural gas productive capacity in the Gulf of Mexico is exceptionally dependent on continued drilling and development.
- Complacency is almost never justified when considering the natural gas supply from the Gulf, because the capacity can drop very fast in the absence of adequate development and exploratory drilling. We expect adequate drilling through 1999.
- The natural gas reserves-to-production ratio for the Gulf is only 5.4. Texas is 7.6, New Mexicos is 10.
- The capacity to produce natural gas is expected to increase through 1998.
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File Last Modified: November 20, 1998