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‹ Analysis & Projections

Annual Energy Outlook 2020

Release date: January 29, 2020   |  Next release date:  January 2021   |  full report

Trends and Expectations Surrounding the Outlook for Energy Markets

Release date: August 13, 2020

Introduction and Overview

Creating energy market forecasts and projections for the short term, medium term, and long term is always a challenging task, and the current events caused by the global response to the COVID-19 pandemic are having broad impacts on macroeconomic activity, in general, and energy markets, in particular, that make creating these forecasts and projections all the more challenging. Some uncertainties are unavoidable in any forecast or projection, but the current environment heightens these uncertainties and creates additional issues that greatly complicate the analytic landscape.

To address these elevated challenges facing the upcoming Annual Energy Outlook 2021 (AEO2021) cycle, the U.S. Energy Information Administration (EIA) conducted an intensive internal review to identify key issues to consider when developing the AEO2021 Reference case. One key aspect of this review was reconciling current and near-term market conditions, which directly affect EIA’s Short-Term Energy Outlook (STEO) results, with the related uncertainty and modeling limitations in the long-term National Energy Modeling System (NEMS). This EIA document summarizes the issues identified in each time frame, and it places them into the context of energy sector analysis requirements. This framework forms the basis of EIA’s developing analytic view of the potential impact that COVID-19 and its mitigation efforts may have on energy markets, and it represents a jumping-off point for upcoming EIA activities. It also serves to inform the public and EIA stakeholders and establish a common basis for analysis, discussion, and risk management.

COVID-19 and its mitigation efforts are significantly affecting energy demand in the short term and could continue to do so in the medium and even long term. Although many of the effects stem from a rapidly shifting economic situation, other non-macroeconomic energy sector specific factors are also changing. EIA assesses the impact and uncertainty of macroeconomic drivers on future energy market behavior, as well as mid- and long-term expectations of energy supply and demand in a post-pandemic world. Macroeconomic drivers do not always capture these expectations adequately, so specific NEMS modules may have to be modified to more fully represent longer-term energy market changes induced by COVID-19.

Macroeconomic activity is a critical driver of energy market dynamics; one of the largest sources of uncertainty in EIA’s forecasts and projections is always related to the underlying macroeconomic assumptions that underpin EIA’s energy market modeling efforts. Reconciling macroeconomic drivers with the deterministic behavior of the NEMS modules is often challenging even in normal business cycles, but the current economic impacts of the COVID-19 pandemic and the global response to it make this challenge far more pronounced. Since first-quarter 2020, when COVID-19 cases began spreading globally and governments began crafting various mitigation efforts to contain the pandemic, the understanding of how responses to the pandemic would impact global economic activity was changing far more rapidly than normal. This unprecedented volatility in macroeconomic activity and related forecasts is likely to continue. Further complicating matters is the issue of possible resurgences of the pandemic if a vaccine remains elusive or containment efforts prove inadequate.

In addition to the underlying macroeconomic outlook’s impact on energy market developments, questions are emerging about changing energy use patterns in reaction to COVID-19 in the short, medium, and long term. The behavior of energy market participants during a transient market disruption is quite different than their response to a longer-run set of changes. Expectations play a crucial role in determining whether and to what degree energy market trends might change in the wake of the pandemic and recovery. EIA modeling and analysis in the longer term is structured around observed data on historic relationships between factors such as prices and income and the decisions that consumers and producers make. A disruption on the scale of the COVID-19 pandemic has no modern precedent. This factor renders energy market projections more vulnerable to unforeseen behavior changes than has ever been the case. Although scenario analysis can offer range estimates for behavioral change, EIA’s AEO2021 Reference case remains dependent on assumptions rooted in experience to date. Use of the full range of AEO2021 scenarios has become more important than ever.

In conducting this intensive review of critical issues related to the impact of COVID-19 and its mitigation efforts on energy systems, EIA has worked to identify, categorize, and sort issues among both time frames and energy system elements. The data and assumptions required to quantify potential changes, formulate scenarios, and assess a range of outcomes remain in flux. The current set of key issues may continue to undergo changes as the next months and years play out. Nonetheless, at this juncture, an issue summary, including how the issues affect the energy sector and why they are important, provides a point of departure for EIA and others to evaluate analytic needs. Some of the key issues we considered include:

  • Pandemic control measures, especially lockdowns; their duration; and their potential to extend the employment and demand impacts of the current situation
  • Pace and level of economic recovery, both domestic and globally
  • Effects of governmental stimulus and corporate-sector wage support on investment patterns
  • Sector- and activity-specific demand changes across the entire energy system
  • Potential persistence of people’s behavioral changes, along with acceleration or deceleration of trends in employment, travel, trade, and consumption of goods and services
  • Market pricing, from short-run shocks and disruptions through medium-term equilibration and long-term implications
  • Changes to the U.S. energy import/export balance, including petroleum, other liquids, natural gas, electric power, and coal trade
  • Impacts on the developing global and U.S. liquefied natural gas (LNG) markets
  • Production responses, capital investment, and production trends for upstream oil and natural gas firms
  • Changing refinery product demands and responses
  • Electric power system operations, shifts in timing and levels of demand, and impacts on markets and rates
  • Electric power generation decisions, including unit additions and retirements
  • Environmental implications for system inputs, outputs, and regulatory requirements

The body of this report evaluates issues facing the major elements of the energy system through a short-, medium- and long-term lens, acknowledging the uncertainty for the outlook of these elements given the current environment.