EIA predicts US oil imports to play increasing role in consumption mix

ogj.pennnet.com By OGJ editors

WASHINGTON, DC, Jan. 10 -- Depending on the path of world oil prices, imports may supply 65-70% of total US petroleum demand by 2025, up from 55% in 2001, the Energy Information Administration said Thursday.

The agency noted that world oil prices are influenced by many factors, including the ability of members of the Organization of Petroleum Exporting Countries to control their own oil production. Other considerations include economic growth rates among countries and the economic viability of alternative energy sources such as natural gas-to-liquids and oil sands.

By 2025, world oil prices (adjusted to 2001 values) could be $19-33/bbl, a range leading to variations in US dependence on oil imports, EIA said. The agency's predictions were part of its annual snapshot of long-term energy trends.

Consumption Total US energy consumption could vary significantly, depending on the rate of economic growth. EIA projects that the US Gross Domestic Product (GDP) could grow 2.5-3.5%/year during 2001-25. By 2025, energy consumption may be 129-149 quadrillion btu, EIA said. Even with that growth, EIA forecasts that the US will continue to use energy more efficiently.

"This will help to hold the rate of growth in consumption to about 50% of the rate of growth in economic output," EIA officials said.

Gas picture Continued growth in natural gas demand and depletion of conventional natural gas resources in the lower 48 states will mean that future natural gas supplies would likely come from both new domestic and foreign supplies, EIA said. These projects include the Alaskan natural gas pipeline, the Mackenzie Delta pipeline in Canada, and new LNG facilities, both domestic and outside the country, to serve US markets (e.g., Baja California, Mexico or the Bahamas).

EIA assumes that the Alaskan natural gas pipeline will come online in 2021 (excluding consideration of any potential loan guarantees by the federal government that accelerates construction), and that the Mackenzie Delta pipeline will be operational in 2016. Total LNG imports are projected to grow to 1.6 tcf by 2020 and 2.3 tcf by 2025, with facilities online in the Gulf of Mexico region, serving Florida (via the Bahamas), and California (via Baja California, Mexico).

But EIA stressed that the timing and demand for these supplies vary, depending on the rate of technological improvement. If drilling costs, success rates, and finding rates improve at a slower rate than in the reference case, the Alaskan natural gas pipeline and Mackenzie Delta pipeline are projected to come online earlier in 2019 and 2015, respectively. In this scenario, total net LNG imports grow to 2.3 tcf by 2020 and 3.2 tcf by 2025. Conversely, if more-rapid technology improvements hold down natural gas prices longer, it will delay construction of these facilities.

In an EIA scenario with rapid technology improvement, the Alaskan natural gas pipeline would not be economically viable until 2024 and the Mackenzie Delta pipeline would be delayed due to economics until 2020. Net LNG imports would grow more slowly with greater domestic production, and LNG imports would reach 1.2 tcf by 2020 and 2.1 tcf by 2025.

Short-term predictions In a separate analysis, EIA noted that political situations in both Venezuela and Iraq might create price shocks in coming months.

"The combination of a sustained loss of most of Venezuela's exports, risk of increased tensions in the Middle East, and low (US) oil inventories could cause oil prices to spike, at least temporarily, above our base case," EIA said in its monthly short-term outlook published Jan. 8. "If the Venezuelan strike is prolonged and tensions in the Middle East continue, then the chance of a price spike is high. The magnitude of upward price pressure will depend on the duration of supply loss and on the willingness and ability of other suppliers to make up for the shortfall," EIA said.

Although risks remain high for price volatility and an oil price spike, EIA's forecasts for the next few months are more optimistic that the market will be relatively balanced, although the agency admitted its assumptions were "fragile," given the current state of international oil markets.

"We assume that the turmoil in Venezuela is resolved by the end of this month and that Iraq maintains recent export levels and that other producers step up production to keep markets stable, leaving the WTI price near current levels through February," EIA said. "Gradual movement toward full capacity output in Venezuela over the next 3-4 months, coupled with supplementary output from other OPEC countries, should result in a return to gradual price declines through the forecast horizon."

Gasoline predictions As events in Venezuela and Iraq continue to unfold, it appears that pump prices may rise even further in the near term, EIA suggested.

"We currently expect average regular motor gasoline prices to exceed $1.50/gal in February. These would represent year-to-year increases of about 40¢/gal. Our base case assumptions lead us to expect prices near $1.54/gal by mid-spring.

"Additional increases and possible regional price spikes before mid-year would be likely if the Venezuelan situation is not resolved this month, or if conflict arises in Iraq and disrupts oil flows there," EIA said.

The agency also said that refiner margins are expected to strengthen over the next 2 years, as demand for gasoline rises and the cost of producing gasoline increases. That is due in part to the likely substitution of the more costly ethanol for methyl tertiary butyl ether in California in 2004, EIA said.

"Given our base case crude oil price projections, 2003 pump prices for regular gasoline are expected to increase by 16¢/gal on an annual basis to $1.50/gal," Similarly, refiner margins are expected to rebound from their relatively weak levels of last year. In 2004, the annual average pump price is projected to decline by about 5¢/gal, falling in line with the expected decline in crude oil prices. However, because crude oil prices are assumed to decrease by 9¢/gal ($4.20/bbl in 2004), this forecast assumes a continued strengthening of refiner margins, EIA said.