Lessons from the Annual Energy Outlook

The US Energy Information Administration (EIA) released its Annual Energy Outlook (AEO2011) which is a summary of the finding and insight from its simulation analysis of US energy supply and demand fundamentals and their resulting wholesale expected prices.  This is my take on the insight and lessons from the latest AEO release.

Forecasting is the science of estimating how things may change in the future.  Forecasts are really the outputs of simulation modeling.  Good results depend on good data and consistent methodologies applied using experience and judgment.  No forecast is perfect and no forecaster worth his stochastic stripes would ever claim it so.

At Global Energy Decisions, we specialized in producing long term expected price forecasts of energy supply and demand fundamental twice yearly for every North American region across 76 price zones for eight years. We provided the same service for markets across Europe. Our work was market tested thousands of times each year by hundreds of clients using them in utility rate cases, integrated resource plans, fuel risk hedging decisions, in valuing power generation and fuel contracts and assets in structured project finance energy transactions.  We compared our simulation results to EIA forecasts and made sure we understood why our results differed from EIA to explain that FAQ to our clients.  Unlike the government, we also provided a regular report card on how our forecasts actually performed against the actual market results.

The US EIA is a professional and highly regarded energy data and analytics research agency whose mission is to collect and analyze data and use it to tell policymakers what they need to know about changing energy fundamentals.

US EIA Annual Energy Outlook 2011

The headlines from the Annual Energy Outlook are:

Total energy consumption grows by 21% over the forecast period from 94.8 quadrillion Btu in 2009 to 114.3 quads in 2035, about the same level as in AEO2010 last year. Fossil fuel market share of energy consumption falls from 84% of total U.S. energy demand in 2009 to 78% in 2035 assuming improved CAFÉ standards in vehicles and more renewable energy use. The net import share of total U.S. energy consumption in 2035 is 18 percent, compared with 24 percent in 2009 due largely to expanding domestic oil and gas production from unconventional sources.

World oil prices gradually rise from current levels ($88/barrel on 12/16/2010) to $125/barrel in 2035 (2009$) as global GDP recovers and demand grows. Global oil supply diversifies with more coming from unconventional and non-OPEC sources as higher prices and better technology make more resources production economic. Canadian oil sands production is forecast to grow to 5.1 million barrels/ day in 2035.  Horizontal drilling and hydraulic fracturing are dramatically improving production potential for unconventional oil and gas supplies in the US and elsewhere.

Domestic US natural gas supply forecast increased 474 tcf from last year’s AEO2010 due to the rapid growth of recoverable unproved shale gas resource to 827 trillion cubic feet (as of January 1, 2009) in the AEO2011.  Natural gas consumption rises from 22.7 tcf in 2009 to 26.5 tcf in 2035 because more supply and lower natural prices grow gas market share to 1.6 trillion cubic feet more than AEO2010 a year ago due to lower natural gas prices. The market share of generation from natural gas increases from 23 percent in 2009 to 25 percent in 2035.

Coal consumption still grows from 19.7 quads (1,000 million short tons) in 2009 to 25.2 quads (1,302 million short tons) through the forecast as baseload becomes more valuable and thus existing plants are used more intensively because few new coal plants are built. Coal market share for electric power generation in 2035 is about 1.3 quads (53 million short tons) lower than AEO2010 levels because of lower natural gas prices and tougher emissions regulation.

Total consumption of marketed renewable fuels grows by 2.9% per year in the AEO2011 Reference case.  While this is a substantial, sustained year over year growth rate the US will remain dependent upon fossil fuels for the majority of power generation through 2035. The generation share from renewable resources increases from 11 percent in 2009 to 14 percent in 2035 in response to Federal tax credits in the near term and State requirements in the long term.

Total electricity consumption growth returns to historic levels including purchases from merchant generators and on-site generation, growing from 3,745 billion kWh in 2009 to 4,880 billion kWh in 2035 in the AEO2011 Reference case which is the historic average pre-recession annual rate of 1.0 percent.

At current emissions policies and slow steady economic recovery GHG emissions do not return to 2005 levels until 2027 after falling 3% in 2008 and 7% in 2009. Assuming no new policies to force reductions greenhouse gases, CO2 emissions then grow by 5% from 2027 to 2035 to 6,315 million metric tons in 2035 in the EIA forecast.

So what?

  • The lessons from this annual exercise tell us once again that we will be dependent upon fossil fuels for a long time to meet our future energy needs despite our drive to build market share for clean, renewable energy sources in our overall fuel mix.
  • The return to historic average electric load growth is good news for the economy but is also a signpost that we could see regional energy supply tightness in coming years if we don’t step up construction of more than just renewable energy sources.
  • Given the uncertainty over US EPA actions on new emissions reduction regulations combined with lower natural gas prices it is logical to assume we will see more gas-fired combined generation than new coal plants as demand picks up continuing the trend toward larger gas market share.
  • There is plenty of good news in this AEO confirmation about the spectacular growth in domestic oil and gas production from unconventional sources made possible by new technologies like horizontal drilling and hydraulic fracturing.
  • More domestic production reduces oil and gas imports, recycles more money in our own economy rather than sending it to OPEC, moderates inflation and natural gas prices to help our economy grow while gradually eats away at coal market share reducing emissions—-all without cap and trade legislation or any new EPA regulations if we can encourage our government to get out of the way and let us get back to business.