Released on June 3, 2009
(Next Release on June 10, 2009)

EIA “Stimulated” to Revise the Annual Energy Outlook 2009

Every year, typically in the first quarter, EIA releases its Annual Energy Outlook, which provides projections and analyses of U.S. energy supply, demand, and prices through the next 20 to 25 years. The projections are based on results from the EIA’s National Energy Modeling System and include a reference case, plus numerous additional cases examining factors impacting energy markets, and complete documentation. The reference case is widely used by policy analysts, decision makers, and other energy analysts as a starting point for examining proposed energy and environmental legislation.

In April 2009, EIA updated the Annual Energy Outlook 2009, (AEO2009) reference case to include provisions contained in the American Recovery and Reinvestment Act (ARRA) that was passed in February 2009 and improve the representation of the rapidly changing macroeconomic outlook. The ARRA provides significant new Federal funding, loan guarantees, and tax credits to stimulate investments in energy efficiency and renewable energy, so it was important to make sure our customers had the most-up-to-date reference case.

In some cases, the modeling changes necessary to reflect the specific energy-related provisions of ARRA were relatively straightforward. For example, the extension of production tax credits for eligible renewables was easily accommodated. In other cases, where ARRA provisions fund initiatives that break new ground, such as investment in “smart grid” technologies, modeling changes are more speculative. For some ARRA policies, the nature of the investments to be made, the implementation strategy for making those investments, and the effectiveness of the program in increasing energy efficiency or promoting greater use of renewable energy are highly uncertain. In all cases, the modeling changes reflect the understanding of EIA analysts of the intended level and implementation of funding, and their estimates of impacts based on available literature and/or expert judgment. The energy-specific provisions of ARRA that were represented in some fashion include:

Weatherization     Energy efficiency and conservation block grant programs     State energy programs     Plug-in hybrid vehicle tax credit     Electric vehicle tax credit     Updated tax credits for renewables     Loan guarantees for renewables and biofuels     Support for carbon capture and storage (CCS)     Smart grid expenditures.

Other major changes to reflect changes in energy markets, laws, and regulations since the development of the earlier reference case included updates to the macroeconomic assumptions and near-term fuel price projections.

The remainder of this TWIP focuses on some of the key updates to the reference case that are projected to affect vehicle fuel economy, sale of alternative-fueled vehicles, and use of ethanol. A more thorough review of the impact of these changes, including the non-petroleum changes is available from EIA at Updated AEO2009 Reference Case Service Report.

GDP. In the updated reference case, gross domestic product (GDP) growth rates are substantially lower in the short term, although the long-run growth rate is only lower by 0.1 percentage points over the 23 years from 2007 to 2030. Both investment and exports show the largest downward revisions due to higher projected inflation and interest rates and lower expected foreign growth.

Crude Oil Prices. Possibly the most significant change from the TWIP reader’s perspective involve projections for near- and mid-term world oil prices in the updated reference case. Specifically, increased pessimism regarding the depth, duration, and scope of the current global recession, the substantial decline in labor and material costs in the oil industry, which will lower the costs of developing new oil production capacity, and the expectation that certain provisions of the ARRA will lower petroleum product demand in the United States, all point to lower oil prices over the next decade than previously expected. However, the global economy is expected to begin recovering in 2010 and return to long-term trend growth in subsequent years. Therefore, the oil price assumptions over the last 12 years of the projections are the same as those in the previously published AEO2009 reference case, as shown in the figure.

CAFE Standards. The updated reference case incorporates fuel economy standards for light-duty vehicles as recently enacted for model year 2011, and assumes updated standards for model years 2012 through 2020 that reflect adjustments based on revisions in energy prices. However, the updated reference case does not reflect the planned acceleration of CAFE standards that was announced by the White House on May 19, 2009.

Plug-in Hybrid and Electric Vehicle Tax Credits. The ARRA contains several changes to the plug-in hybrid electric vehicle (PHEV) tax credit that have been included in the updated reference case. For example, the ARRA allows a $2,500 tax credit for the purchase of qualified PHEVs with a battery capacity of at least 4 kilowatthours (kWh); the credit increases with additional kWh, up to a cap of $7,500 per vehicle. The ARRA also allows a tax credit of 10 percent against the cost of a qualified plug-in all-electric vehicle. Both of these credits affect projections of electric vehicle use, and therefore, gasoline consumption.

Ethanol. The ARRA provides $6 billion to pay the cost of guarantees for loans authorized by the Energy Policy Act of 2005. One of the purposes of these loan guarantees is to stimulate innovative biofuels technologies. The revised baseline includes the assumption that the availability of loan guarantees would allow certain identified projects to be built that would otherwise not have proceeded under the current financial climate facing the industry. Specifically, under the initial AEO2009, domestic cellulosic ethanol production was projected to reach 150 million gallons in 2012. However, a review of the projects proceeding towards construction suggests that, without assistance, only about 74 million gallons of production capacity will be built by 2012, because financing for these developers has become extremely difficult to obtain and some projects have been canceled. With the loan guarantees in the ARRA, it is now assumed that 2012 production will be in the range of about 110 to 170 million gallons.

U.S. Gasoline Price Soars Above $2.50 Per Gallon
For the first time since October 27, 2008, the national average price for regular gasoline exceeded $2.50 a gallon. Gaining nearly nine cents, the average price jumped to $2.52 per gallon. Nonetheless, even with a cumulative increase of nearly 48 cents over the past five weeks, the price remained $1.45 below a year ago. Prices increased in all regions of the country. The East Coast price gained 7 cents to reach $2.46 per gallon while the Midwest price rose the most of any region for the second week in a row, jumping nearly 12 cents to hit $2.59 per gallon. At $2.39 per gallon, the average price on the Gulf Coast was not only the lowest of any region, but was the only regional price remaining below $2.40 per gallon. In the Rocky Mountains, the price rose 6 cents to $2.42 per gallon. The price on the West Coast shot up nearly 11 cents to $2.68 per gallon. In California, the average price surged 12 cents to $2.76 per gallon.

The national average price of diesel fuel rose for the fourth week in a row, jumping eight cents to $2.35 per gallon, $2.36 below last year. Prices in all regions of the country increased. On the East Coast, the price rose six cents to $2.37 per gallon. Shooting up more than nine cents, the average price in the Midwest price rose more than any other region, settling at $2.32 per gallon. The average price for the Gulf Coast moved eight cents higher to also reach $2.32 per gallon. In the Rocky Mountains, the price increased four cents to $2.34 per gallon. The West Coast price moved up more than seven cents to $2.46, while the price in California increased to $2.50 per gallon.

May Propane Build Falls Short of Average
The May build in primary inventories of propane totaled 5.8 million barrels, short of the most recent 5-year average of 7.4 million barrels for this month. Despite the shortfall, the Nation’s supply of propane reached an estimated 51.3 million barrels last week, reaching its highest level for this time of year since 1982. Last week, inventories climbed higher by nearly 2.0 million barrels. Regional activity saw inventory gains in all regions, leading off with the Midwest with 1.2 million barrels. Gulf Coast inventories posted a 0.5 million barrels gain last week while the East Coast region and the combined Rocky Mountain/West Coast region had similar gains of 0.1 million barrels during this same period. Propylene non-fuel use inventories lost 0.2 million barrels last week and reported a lower 4.2 percent share of total propane/propylene inventories, compared with the prior week’s 4.8 percent share.

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