The Fuse

EIA Forecast Prompts More Confusion than Clarity

by Matt Piotrowski | January 11, 2017

Last week after the Energy Information Administration (EIA) released its latest long-term outlook, news headlines and tweets blared that the U.S. is poised to become a net energy exporter in the middle of next decade and the country would achieve its ever-elusive goal of “energy independence.” At the launch of the Annual Energy Outlook (AEO), EIA Administrator Adam Sieminski said, “The U.S. could be completely, [to use] the phrase that was used at one time, energy independent.” This is obviously good news should it come to realization, but as with any projections looking into the distant future, one should hold a healthy dose of skepticism. The U.S. government agency, along with all other forecasters, has been woefully off the mark in the past, and will be again this time around.

There is no guarantee the U.S. will turn into a net exporter by the mid-2020s, particularly given worrisome trends seen during the past couple of years of low prices, with demand rebounding and domestic supply getting hit.

There is no guarantee the U.S. will turn into a net exporter by the mid-2020s, particularly given worrisome trends seen during the past couple of years of low prices, with demand rebounding and domestic supply getting hit. What’s more, the goal of “energy independence” is not, and should not be, the main priority for the U.S. The idea of “energy independence” is appealing, but it doesn’t take into account the nature of the global oil market and its influence on the U.S. economy and national security. Rather, seeking true energy security and interdependence in an open and fair global oil market is more viable and constructive for the longer term.

U.S. to remain reliant on petroleum imports

The headlines surrounding the AEO launch were misleading and told only part of the story. The EIA projects the U.S., in its reference case and several other scenarios, for the country to become net energy exporter, which is partly due to the explosion in natural gas supplies. For the transportation sector, which relies on petroleum for more than 90 percent of its needs, the outlook is not as rosy, although there are encouraging signs. Under its reference scenario, the EIA sees petroleum imports declining over time. However, even under the assumption oil demand stagnates and falls in the next two and a half decades due to rising fuel economy and a modest increase in electric vehicles, the U.S. will still be importing crude oil to meet about 10 percent of its supply needs.

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By contrast, in a “low oil price” scenario, imports rise and reach close to 40 percent of total petroleum needs. Demand, in this case, grows over time and breaks previous records set last decade, while domestic supply underperforms. In fact, in a majority of EIA’s scenarios, the U.S. remains a net importer of petroleum, keeping the country highly vulnerable to whims of the global oil market.

In a majority of EIA’s scenarios, the U.S. remains a net importer of petroleum, keeping the country highly vulnerable to whims of the global oil market.

There are a couple of scenarios that see the U.S. becoming a net exporter of petroleum. Under the “high oil price” projection, demand craters and domestic supply undergoes a vast expansion. The “high oil and gas resource” scenario sees a massive flip from the U.S. being a major importer to being a big exporter. Given that shale has surprised and performed beyond expectations this decade, this outlook cannot be ruled out. In fact, technology could ultimately alter the long-term outlook, as it has does in the past. Forecasting errors “point to the key role that changing technology—and specifically supply-side technology—has played in the energy landscape in recent years,” wrote Thomas Covert of Energy Policy Institute at the University of Chicago recently in Forbes.

The EIA putting together a number of scenarios with massive price ranges reflects the high level of uncertainty facing the global oil market. The agency says oil could average anywhere from $38 to $220 in 2040, and U.S. oil output anywhere from 7 mbd to 17 mbd. The country’s demand could range from 15 mbd to 21.5 mbd. To some, such a wide-ranging array of outlooks is unhelpful.

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With so many different projections, there is no clarity where government forecasters see the oil market headed. Critics can cherry-pick through the scenarios to justify almost any outlook that suits their bias. The lack of clarity matters because industry, analysts, policy makers, and consumers look to the agency for a rigorous examination on where markets are headed in order for them to make decisions.

Critics can cherry-pick through the different EIA scenarios to justify almost any outlook that suits their bias.

To be fair, as noted above, predicting the future is a grim endeavor: the oil market is complicated and impacted by many different variables. If one changes dramatically, the outlooks for other factors see drastic revisions. Still, an outlook that says “anything can happen” is too ambiguous for decision-makers to make sound analyses.

Energy security needed, not energy independence

Even with the massive resources in the U.S. and changes in the transportation sector—increases in fuel economy and growth in EVs—the goal of improving energy security is and will continue to be challenging. This gets lost in the EIA outlook amid talk of “energy independence” and the wide range of scenarios. The higher the price, the better the chance domestic resources will be exploited, but the elevated price levels bring about economic pain. On the flip side, when prices are low, motorists enjoy benefits of cost savings while macro indicators tend to be positive, but at the same time consumption rises, domestic production doesn’t reach its full potential, and dependence on unstable foreign suppliers looms. Either way, energy security takes a hit.

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