U.S. Liquid Fuels

Consumption. Although U.S. liquid fuels consumption has increased since reaching a recent low in 2Q20, lingering effects from COVID-19 continue to limit consumption. We estimate that in 1H21, U.S. consumption of liquids fuels averaged 19.1 million b/d, down 1.3 million b/d (6%) from 1H19. We expect the effects of the COVID-19 pandemic on liquid fuels consumption will continue to abate and liquids consumption will increase through the forecast period. Although we expect the direct effects from the pandemic on U.S. petroleum consumption to decrease, some consumption patterns may be more lasting, including increased working from home and changes in travel behavior, which could limit growth in gasoline and jet fuel consumption.

In 2021, we forecast that total U.S. liquids consumption will average 19.6 million b/d, down from 20.5 million b/d in 2019. Although we expect consumption of distillate fuel to be approximately equal to 2019 levels, we expect consumption of gasoline and jet fuel to remain below 2019 levels. We expect consumption of hydrocarbon gas liquids (HGL) to remain above 2019 levels in 2021, offsetting some of the declines in gasoline and jet fuel consumption.

In 2022, we expect distillate and HGL consumption to rise above 2019 levels, while gasoline and jet consumption will remain below 2019 levels. In the forecast, distillate and HGL consumption drive 2022 total liquids consumption to an average of 20.7 million b/d, surpassing 2019 consumption by about 0.1 million b/d.

In 1H21, we estimate U.S. gasoline consumption averaged 8.5 million b/d, down from 9.3 million b/d in 1H19 and the lowest level for the first half of a year since 2001 (except in 2020). Consumption in 1Q21 averaged 8.0 million b/d and increased to an estimated 9.0 million b/d in 2Q21 as the effects of COVID-19 decreased (driven by falling COVID-19 infections and increased vaccinations) and seasonal driving increased. We expect the effects of COVID-19 will continue to decrease and gasoline consumption will increase to an average of 8.9 million b/d in 2H21, up from 8.3 million b/d from 2H20, but still lower than the 9.3 million b/d consumed in the same period during 2019. For all of 2021, we forecast U.S. gasoline consumption to average 8.7 million b/d and increase to 9.0 million b/d in 2022, compared with 9.3 million b/d in 2019.

We do not expect U.S. gasoline consumption to exceed 2019 levels in the forecast period. In 2021, we forecast that U.S. vehicle miles traveled (VMT) will average 8.6 million miles per day, up from 7.7 million miles per day in 2020 but below the average of 8.9 million miles per day in 2019. In 2022, however, we expect VMT to average 9.0 million miles per day, slightly above the level seen in 2019. Increased vehicle efficiency, however, partly offsets the increases in VMT, keeping gasoline consumption below 2019 levels. We assume that work-from-home options in the future will remain more available than before the pandemic, limiting gasoline demand growth.

Responses to the COVID-19 pandemic affected distillate consumption in the United States in 2020 less than gasoline and jet fuel because it is driven more by economic activity and freight movement and less by reduced travel. In weekly data, distillate consumption recently returned to 2019 levels, and we estimate that distillate consumption in June 2021 surpassed distillate consumption in June 2019 by 70,000 b/d. For 1H21, distillate consumption averaged an estimated 4.0 million b/d, which is below the 1H19 average of 4.2 million b/d. However, we forecast distillate consumption to average 4.2 million b/d in 4Q21, surpassing the 4Q19 average by 0.1 million b/d. We forecast distillate consumption to average almost 4.3 million b/d in 2022, the highest level on record in our data, which dates back to 1945.

In 1H21, jet fuel consumption averaged 1.2 million b/d, up from 1.1 million b/d in 2020 but below 2019 consumption of 1.7 million b/d. We expect jet fuel consumption will average 1.4 million b/d in 2021, down from 1.7 million b/d in 2019. In 2022, forecast jet fuel consumption almost returns to 2019 levels, averaging 1.7 million b/d.

U.S. consumption of HGLs in our forecast increases by 0.1 million b/d to an average 3.3 million b/d in 2021 and then increase by 0.3 million b/d to 3.6 million b/d in 2022. The growth in HGL consumption in 2021 and 2022 reflects more demand for ethane as a petrochemical feedstock in the United States. We forecast ethane consumption will increase by 30,000 b/d in 2021 and by a further 300,000 b/d in 2022 with new demand coming from additional ethylene cracking capacity.

Crude Oil Supply. We forecast that annual U.S. crude oil production will average 11.1 million b/d in 2021, which is a 0.2 million b/d decrease from 2020 levels. However, annual average numbers somewhat obscure production trends. Production in 1Q21 was down by more than 2.0 million b/d from 1Q20, the quarter before 2Q20 when production fell sharply in response to falling oil prices. However, from 2Q21 through 4Q21, we forecast U.S. crude oil production will be up 0.4 million b/d on average year over year. We forecast U.S. crude oil production will rise to an average of 11.9 million b/d in 2022.

Most crude oil production in the Lower 48 (L48) states, excluding the Federal Offshore Gulf of Mexico (GOM), is tight oil production, and we expect trends in L48 production to drive overall U.S. crude oil production levels. Our forecast crude oil production growth is based on WTI prices that indicate a favorable environment for drilling activity. In June, WTI prices averaged more than $70/b for the first time since October 2018, and we expect that through the end of 2022, WTI prices will remain above $60/b—a price that has signaled robust activity among U.S. operators in the past. Because changes in rig counts typically lag changes in the WTI price by three to six months and production changes typically occur about two months after rig deployment, current crude oil price levels will not likely affect production until late 2021. We forecast U.S. crude oil production to average about 11.2 million b/d in both 2Q21 and 3Q21 before beginning to rise more steadily. Forecast U.S. crude oil production reaches 11.3 million b/d in 4Q21 and increases to 12.2 million b/d by 4Q22.

Assuming that other factors remain constant, recent and forecast crude oil price levels will likely continue to drive rig deployments through the end of 2022. However, this forecast depends on the capital decisions of operators. The recent pace of rig deployment indicates that operators are adding rigs more slowly than during past periods when prices reached similar levels. If operators take a more cautious approach to rig deployment than we are expecting, crude oil production could be lower than in our forecast.

In the GOM, we expect crude oil production to average 1.8 million b/d in both 2021 and 2022. Ten new projects that will likely begin operations during the forecast period will help offset declines at existing GOM projects.

We expect little change in Alaska’s crude oil production, which will average more than 0.4 million b/d in both 2021 and 2022, down slightly from 2020 levels. We do not expect the U.S. federal moratorium on new federal oil and natural gas leases that occurred earlier this year to affect the short-term outlook for the GOM or Alaska.

Hydrocarbon Gas Liquids Supply. We forecast natural gas plant production of HGLs to increase by 0.1 million b/d in 2021 and by almost 0.5 million b/d in 2022. Rising HGL production in the forecast is mostly driven by increased ethane production. Higher rates of ethane recovery at natural gas processing plants occur in the forecast to meet growing demand for ethane as a petrochemical feedstock in the United States and abroad during both 2021 and 2022.

Liquid Biofuels. COVID-19-related reductions in economic activity in general, and decreased demand for liquid fuels in particular, significantly affected U.S. biofuels markets in 2020, and we expect some of these impacts to persist through the forecast period. The current forecast reflects the most recent 2020 targets in the Renewable Fuel Standard (RFS) program, and given the delays in finalizing 2021 RFS targets, we assume those 2020 target levels to remain unchanged throughout the forecast period. In the forecast, these RFS targets primarily affect biomass-based diesel production and net imports, which help meet multiple RFS targets for biomass-based diesel, advanced biofuel, and total renewable fuel.

Because of sharp reductions in motor gasoline demand resulting from responses to COVID-19, U.S. fuel ethanol production was significantly lower in 2020 than in previous years. U.S. fuel ethanol production fell by 12% from 2019 to an average of 0.91 million b/d in 2020. As a result, we forecast that persistent reductions in domestic gasoline demand and limited higher-blend fuel ethanol growth potential will result in fuel ethanol production remaining lower than 2019 levels throughout the STEO forecast. We expect fuel ethanol production to average 0.97 million b/d in 2021, 7% more than in 2020, and to average 1.00 million b/d in 2022, 4% more than 2021, but still slightly below the 2019 level.

U.S. fuel ethanol consumption averaged 949,000 b/d in 2019, and we estimate fuel ethanol consumption fell by 13% to an average of 822,000 b/d in 2020. We forecast that fuel ethanol consumption will gradually rise during the forecast period, largely following the growth in domestic motor gasoline consumption with limited growth in any higher blending levels. In our forecast, U.S. fuel ethanol consumption averages 896,000 b/d in 2021 and 917,000 b/d in 2022. This level of consumption results in the fuel ethanol share of total gasoline, which was an estimated 10.2% in both 2019 and 2020, remaining near this level during 2021 and 2022. This stable fuel ethanol share assumes that growth in higher-level fuel ethanol blends is limited by a lack in consumer demand for higher levels of fuel ethanol blending beyond 10% of gasoline (E10) despite significantly elevated renewable identification number (RIN) prices which could incentivize increased fuel ethanol blending by some gasoline blenders and retailers.

We estimate that U.S. biodiesel production increased in 2020 and was less affected by COVID-19-related restrictions than many other fuels, despite production capacity that declined slightly. U.S. biodiesel production increased by an estimated 5% from 2019 to 2020, averaging an estimated 118,000 b/d last year. We expect biodiesel production will fall slightly to 117,000 b/d in 2021 before increasing by 10% to 129,000 b/d in 2022, driven largely by biodiesel’s role in meeting multiple RFS targets and the existence of the biodiesel production tax credit through 2022. Despite RIN prices that have recently been at all-time highs, record-high feedstock costs are expected to limit biodiesel production growth over the forecast period.

U.S. net imports of biomass-based diesel increased by an estimated 6% to an average of 22,000 b/d in 2020, and we expect net imports to increase to an average of 29,000 b/d in 2021 and 44,000 b/d in 2022. Increased net imports of biomass-based diesel primarily reflect increased volumes of renewable diesel imported to meet both California Low Carbon Fuel Standard requirements and RFS targets for biomass-based diesel and advanced biofuels.

Product Prices. Changes in travel patterns in response to COVID-19 resulted in significant reductions in crude oil prices and demand for liquid fuels in the United States during 2020, which significantly reduced prices for gasoline and diesel fuel during the same period. In 2021, as vaccination levels have increased and general economic activity has begun to recover, personal mobility and seasonal driving demand has grown sharply year-over-year, leading to increasing prices for crude oil, gasoline, and diesel fuel compared with the same time last year.

Although much of the increase in U.S. gasoline and diesel prices so far in 2021 reflects rising crude oil prices, higher refinery margins have also contributed. Refinery margins (the difference between the wholesale price of gasoline and the price of Brent crude oil), which fell significantly along with gasoline and diesel demand in March and April 2020, returned to levels within their seasonal ranges in 4Q20. Since then, margins have increased significantly beyond their recent five-year averages, driven in part by significant increases in RIN prices, which are embedded to some degree in wholesale product prices. So, although refinery margins have increased beyond seasonal averages for both gasoline and diesel fuel, RIN costs have likely limited actual refinery profitability to some degree. This dynamic is reflected in refinery production of gasoline, which has not increased in line with growing gasoline demand, resulting in U.S. gasoline inventories that have been lower than in recent years and in upward pressure on prices.

The U.S. refinery wholesale gasoline margin averaged 30 cents/gal in February 2021. It then increased to an average of 52 cents/gal in June, which was 17 cents/gal higher than at the same time last year and 11 cents/gal higher than the recent five-year average. We expect the U.S. refinery wholesale gasoline margin will average 42 cents/gal in 2021 and 36 cents/gal in 2022, compared with a five-year (2016–20) average of 35 cents/gal. Because some of the strength in margins is attributable to elevated RIN costs, the margins remain uncertain throughout the year because RIN markets can be highly volatile and are currently driven by both agricultural commodity markets as well as uncertainty around future RFS rulemakings. Our forecast assumes current elevated agricultural commodity prices will not persist to the same degree, and future RFS rulemakings will add clarity and reduce some tightness in RIN markets.

In addition to elevated refinery margins, supply disruptions as a result of the Colonial Pipeline Cyberattack added upward retail gasoline price pressure in May, when the U.S. weekly average gasoline retail prices surpassed $3.00/gal for the first time since late 2014. Since then, U.S. regular gasoline retail prices have remained above $3.00/gal, averaging $3.06/gal in June. We expect that gradual reductions in U.S. refinery margins, driven partially by increased refinery output along with falling crude oil prices, will result in lower retail gasoline prices for the remainder of the year. We forecast the retail price of regular gasoline in the United States will average $3.04/gal during 3Q21, 85 cents/gal higher than at the same time last year. We expect the U.S. monthly regular retail gasoline price will fall from an average of $3.11/gal in July 2021 to $2.93/gal in September before falling to $2.76/gal in December 2021. We forecast the U.S. regular gasoline retail price, which averaged $2.18/gal in 2020, to average $2.85/gal in 2021 and $2.74/gal in 2022.

Regional annual average forecast prices for 2021 range from a low of $2.56/gal in the Gulf Coast region (PADD 3) to a high of $3.51/gal in the West Coast region (PADD 5).

The retail price of diesel fuel in the United States averaged $2.55/gal in 2020, which was 50 cents/gal lower than in 2019. We forecast that the diesel price will average $3.16/gal in 2021 and $3.09/gal in 2022. We expect that global economic activity returning to pre-pandemic levels will help drive diesel refinery margins higher during the forecast period than their multiyear lows in 2020. Diesel refinery margins based on the Brent crude oil price averaged 30 cents/gal in 2020, which was 11 cents/gal lower than the 2015–19 average and the lowest annual average since 2009. We expect diesel refinery margins will average 40 cents/gal in 2021 and 44 cents/gal in 2022.