The Fuse

EIA’s Projections for US Oil Market to Face Skepticism

by Matt Piotrowski | May 17, 2016

On the heels of its latest International Energy Outlook (IEO), the Energy Information Administration (EIA) put out its long-term projections for U.S. domestic oil, natural gas and electricity markets Tuesday. While most of the attention will likely be paid to the impact of the Clean Power Plan on coal, natural gas, and carbon dioxide emissions, there’s a lot to chew on regarding U.S. oil fundamentals.

It’s important to note that, like the IEO, the scenarios presented by the EIA in the Annual Energy Outlook (AEO) are not forecasts but rather what might occur in the future under certain assumptions and conditions. In its reference case published Tuesday, the projections are based upon existing laws and policies. “EIA’s approach to addressing the inherent uncertainty surrounding the country’s energy future is to develop multiple cases that reflect different sets of internally consistent assumptions about key sources of uncertainty such as future world oil prices, macroeconomic growth, energy resources, technology costs, and policies,” the agency noted, adding that certain assumptions show how sensitive the market is to changes and various conditions.

The EIA’s projections in the reference case are rosy with regards to supply and demand patterns given what has occurred over the past year or so during the current low price environment.

That said, the EIA’s projections in the reference case are rather rosy with regards to supply and demand patterns given what has occurred over the past year or so during the current low price environment. The EIA sees U.S. shale output recovering next year along with a rebound in the oil price, with total U.S. production reaching 11.3 mbd by 2040. Growth is marginal through the middle of next decade, but then takes off.

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At the same time, overall oil demand will decline and level off while gasoline consumption is set to plummet by some 26 percent throughout the outlook period. Against the backdrop of demand plateauing and supply rising, imports of should drop considerably, falling to just 7 percent of total consumption.

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This scenario is based on oil prices rising to $77 by 2020, and continuing to move higher for the next two decades.

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Business as usual?

The latest projections, based upon “business-as-usual” conditions, are certainly plausible, but they are challenged by how both supply and demand have reacted in the past year. The current environment shows how demand has been stimulated by low prices—and will likely hit a record this year—and consumers moving back to less efficient vehicles. On the supply side, although shale has held up better than expected, output has fallen by .9 mbd in the past year alone, and it’s uncertain what long-term damage has occurred during the current downturn. If the oil market remains depressed, the more uncertain shale’s potential is for the longer term.

The latest projections, based upon “business-as-usual” conditions, are certainly plausible, but they are challenged by how both supply and demand have reacted in the past year.

At the same time, the EIA sees a dramatic drop in gasoline demand as a result of improved fuel economy for light-duty vehicles. But this decline may not come to realization. Fuel economy standards, which mandate vehicles to have 54.5 mpg by 2025, are complicated for a number of reasons and will not likely reach their targets, not least of all consumers preferring bigger cars. The 54.5 mpg is a largely symbolic number, rather than a realistic fuel economy goal. With the standard not being reached, the U.S. won’t see the full benefits of the mandate. There’s also the paradox of greater fuel economy—the cost savings drivers see from the improved efficiency eventually leads to greater consumption. That’s exactly what occurred during the first round of CAFE standards passed in the 1970s, which eventually, along with weak prices, spurred a massive rebound effect in the 1980s and 1990s.

Conflicting signals

With the IEO, the reference case was a wake-up against complacency as it showed how OPEC would gain market share over time, but its long-term outlook for the U.S. market shows the country heading in the right direction, with significant energy security gains through 2040. These two scenarios are not mutually exclusive, but they do reflect the ongoing uncertainty and conflicting signals the market will wade through in the coming days, months, years and decades.

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