Short-Term Energy Outlook

March 11, 2008

WASHINGTON, DC – March 11, 2008 – The slowing economy combined with high petroleum prices is expected to constrain growth in U.S. consumption of liquid fuels and other petroleum products to just 40,000 barrels per day (bbl/d) in 2008.  After accounting for increased ethanol use, U.S. petroleum consumption falls by 90,000 bbl/d.   U.S. real gross domestic product is expected to decline slightly in the first half of the year and then start growing again, with growth for 2008 as a whole at 1.3 percent, the slowest annual rate since 2001. 

§         Tight fundamentals, reflected by low available crude oil surplus production capacity, combined with supply concerns in several oil exporting countries, have continued to put upward pressure on world crude oil prices.  The outlook over the next 2 years points to some easing of the oil market balance due to increased production outside of the Organization of the Petroleum Exporting Countries (OPEC) and planned additions to OPEC capacity.  However, delays to capacity additions in both OPEC and non-OPEC nations could alter the outlook, as could OPEC production decisions.

§         WTI averaged $95 per barrel in February and is expected to average $102 in March (the spot price of WTI closed at nearly $108 per barrel on March 10, 2008 but is expected to decrease over the second half of the month).  The annual average WTI price, which was $72 per barrel in 2007, is projected to average $94 per barrel in 2008, but ease somewhat to about $86 per barrel in 2009.

The projected higher costs for crude oil in 2008 are likely to be passed on to all petroleum products.  Retail prices for motor gasoline are expected to average $3.21 per gallon or 40 cents above the 2007 price.  The monthly average gasoline price is projected to peak near $3.50 per gallon this spring.  It is important to note, however, that even if the national average monthly gasoline price peaks near that level, there is a significant possibility that prices during some shorter time period, or in some region or sub-region, will cross the $4 per gallon threshold.  Retail prices for motor gasoline are expected to average $3.21 per gallon, 40 cents above the 2007 price.

Diesel prices are projected to show larger gains in 2008, averaging $3.45 per gallon, or 57 cents above the 2007 average price.  The monthly average gasoline price is projected to peak near $3.50 per gallon this spring, while diesel prices are expected average close to $3.70 per gallon for March and April.

The Henry Hub natural gas spot price averaged $7.17 per thousand cubic feet (Mcf) in 2007 and is expected to average $8.18 per Mcf in 2008 and $7.95 per Mcf in 2009.

Global Petroleum

Tight fundamentals, evidenced by low available surplus capacity and Organization for Economic Cooperation and Development (OECD) inventories that are below 5-year average levels, continue to put upward pressure on oil prices.  In addition, recent events such as Turkey’s incursion into northern Iraq against Kurdish rebels, militant attacks against Nigeria’s oil infrastructure, and Venezuela’s threat to disrupt exports to the United States over its dispute with ExxonMobil have contributed to upward price pressure.  Despite high prices, OPEC left production targets unchanged at its March 5 meeting. 

Looking beyond 2008, market conditions will depend on trends in consumption and production capacity.  If, as EIA projects, planned increases in non-OPEC production capacity outpace oil consumption growth and OPEC countries complete planned expansion projects on time, global surplus capacity could reach 4 million bbl/d or higher by the end of 2009, so prices should ease.  EIA recognizes, however, the possibility that prices would be higher if the economic slowdown is short-lived and consumption remains robust, or if oil production capacity expansion levels turn out to be lower than expected. 

Consumption – World oil consumption is expected to grow by 1.3 million bbl/d in both 2008 and 2009, slightly lower than projected in last month’s report, in response to higher projected oil prices and increased risks of a global economic slowdown.  Non-OECD countries are expected to account for 1.1 million bbl/d of world consumption growth in 2008, with gains concentrated in China, the Middle East oil-producing countries, India, and other Asian countries.  OECD countries are expected to register a gain of over 0.2 million bbl/d in consumption in 2008, compared with a decline of 0.2 million bbl/d in 2007, reflecting both weather factors and increased demand for oil in Japan for power generation caused by nuclear facility outages.  Japan’s oil input at electric utilities in January 2008 was up by 225,000 bbl/d compared with year-earlier levels.


Non-OPEC Supply  – About 0.7 million bbl/d of non-OPEC supply growth is projected in 2008, revised down by 0.2 million bbl/d from the last Outlook.  This change represents a revision to expected project schedules as well as a re-evaluation of decline rates at existing fields.  Brazil is expected to account for about half of the expected gain in non-OPEC supply in 2008.  Azerbaijan, Sudan, and Russia are also expected to record net additions to capacity, while the United Kingdom, Mexico, and Norway are among countries expected to experience declines.  The pace and timing of non-OPEC supply growth will continue to be subject to possible delays in key projects.  EIA’s Outlook incorporates an expectation of some further delays.  As a result, uncertainty about non-OPEC supply growth introduces both upside and downside risk to our price outlook.

OPEC Supply – EIA projects that OPEC crude oil production will average about 32.2 million bbl/d during the first quarter of 2008, or about 0.6 million bbl/d above fourth quarter 2007 levels.  The increase mainly reflects higher production from Saudi Arabia, Angola, and the United Arab Emirates.  Based on EIA projections of consumption and non-OPEC supply, OPEC crude production is expected to average slightly above first quarter levels for the remainder of the year.  If consumption rises more slowly than expected and OECD inventories climb relative to the 5-year average, OPEC members would be likely to consider holding their output below our projected level.  Based on country plans, EIA expects OPEC crude production capacity to rise in 2008 by 1.2 million bbl/d and by 0.8 million bbl/d in 2009.  OPEC’s non-crude liquids production is also expected to increase by about 0.3 million bbl/d in 2008 and by 0.8 million bbl/d in 2009.


OECD commercial inventories declined by 136 million barrels in 2007, an average of 0.4 million bbl/d, in response to higher consumption and OPEC production restraint.  OECD commercial inventories stood at 2.54 billion barrels at the end of 2007, 20 million barrels below the previous 5-year average, compared with 127 million barrels above the 5-year average at the end of 2006.  Preliminary 2008 data for the U.S. and Japan indicate current inventory trends are mixed, improving in the United States but declining relative to the 5-year average in Japan.  Expected oil production and oil consumption levels should keep total OECD inventories below the 5-year average at the end of March, before rising to the 5-year average by the end of the year.

U.S. Petroleum

Consumption.  Total petroleum consumption of liquid fuels and other petroleum products averaged 20.7 million bbl/d in 2007, up only 10,000 bbl/d from 2006.  Consumption of liquid fuels and other petroleum products is projected to grow by 40,000 bbl/d in 2008, a downward revision of 100,000 bbl/d from the previous Outlook.  After accounting for projected incre
ases in ethanol use, U.S. petroleum consumption falls by 90,000 bbl/d.  Based on the forecast of declining real GDP during the first half of this year as well as record high motor gasoline prices, gasoline consumption, having increased only 0.4 percent last year, is projected to increase only 0.3 percent this year and 0.7 percent in 2009.  Distillate fuel consumption growth is projected to slow from 1.2 percent in 2007 to 0.7 percent this year before rising slightly to 1.0 percent in 2009.      

Production – In 2007, domestic crude oil output is estimated to have averaged 5.1 million bbl/d, unchanged from 2006, but is projected to decline slightly in 2008.  Output in the Federal Gulf of Mexico, where the Atlantis deepwater platform began production in late 2007, is projected to grow this year, but Alaska and the Lower-48 States are expected to see declines.  In 2009, output is projected to grow by 5.1 percent, or about 260,000 bbl/d, mainly because of the start-up of the Thunder Horse and Tahiti platforms in the Gulf of Mexico.

Prices – WTI crude oil prices, which averaged $72.32 per barrel in 2007, are projected to average $94.11 and $85.92 per barrel, respectively, in 2008 and 2009.  Regular grade gasoline retail prices, which averaged $2.81 per gallon in 2007, are projected to average $3.21 and $3.06 per gallon, respectively, in 2008 and 2009.   Diesel fuel prices, which averaged $2.88 per gallon last year, are projected to average $3.45 and $3.22 per gallon, respectively, in 2008 and 2009.  The monthly average gasoline price is projected to peak at just under $3.50 per gallon this spring, while diesel prices are expected to average around $3.70 per gallon in March and April.

Inventories – At the onset of the peak driving season (April 1), total gasoline stocks are projected to be 224 million barrels, 22.3 million barrels above last year and 18.6 million barrels above the 5-year average.  Although distillate fuel (diesel fuel and heating oil) inventories ended February about 6 million barrels below the same time last year, they are at the 5-year average and are projected to stay close to the average over the forecast period.


Natural Gas

Consumption – Growth in total natural gas consumption is expected to slow from 6.4 percent in 2007 to 0.7 percent in 2008 and 0.8 percent in 2009.  In 2009 total natural gas consumption is expected to reach a record 23.4 trillion cubic feet.  Natural gas consumption in the electric power sector, which makes up about 30 percent of total natural gas consumption, grew by over 10 percent in 2007 but is expected to decline slightly in 2008 because of the projected milder summer temperatures.  Natural gas consumption in the industrial sector is also projected to decline by 0.2 percent in 2008 because of slowing economic growth.

Production and Imports – Total U.S. marketed natural gas production is expected to increase by 2.9 percent in 2008 and by 0.3 percent in 2009.   New deepwater supply infrastructure, which came online at the end of 2007, is expected to drive growth of 5.8 percent in the Gulf of Mexico in 2008.  In addition, production from the Lower-48 onshore region is expected to increase by 2.5 percent in 2008 led by the development of unconventional supply sources. 

Imports of liquefied natural gas (LNG) are projected to be about 770 billion cubic feet (Bcf) for 2008, or about the same amount imported in 2007.  Trinidad and Tobago is expected to remain the primary source of U.S. LNG imports through the forecast period.  New liquefaction capacity under construction in Qatar and recent startups in Equatorial Guinea, Nigeria, and Norway are expected to boost the global supply of LNG and contribute to an increase in LNG shipments to the United States later this year and in 2009.  Next year, volumes are projected to total 995 Bcf.

Inventories – On February 29, 2007, working natural gas in storage was 1,484 Bcf.  Current inventories are now 63 Bcf above the 5-year average (2003-2007) and 169 Bcf below the level during the corresponding week last year.

Prices – The Henry Hub spot price averaged $8.76 per Mcf in February, $0.51 per Mcf more than the average January spot price.  Cold weather so far in the first quarter has kept pressure on prices, which are expected to decline as space heating demand begins to wane in April.  On an annual basis, the Henry Hub spot price is expected to average about $8.18 per Mcf in 2008 and $7.95 per Mcf in 2009.



Consumption – Total electricity consumption is expected to grow by only 0.4 percent in 2008, then return to a growth rate of 1.5 percent in 2009.  Growth in natural-gas-fired generation is expected to be relatively flat this year due to the assumption that summer temperatures will fall back to near- normal levels.  On the other hand, generation by wind power is expected to grow by 37 percent in 2008. Power generators have responded to renewable portfolio standards by rapidly installing wind turbines, which accounted for 25 percent of new electric generating capacity in 2007.

Prices – Residential electricity prices are expected to increase by 2.4 percent this year, slightly higher than the 2008 growth projection in last month’s Outlook, and then grow by 2.9 percent in 2009.



Consumption – Electric-power-sector coal consumption grew by 1.9 percent in 2007.  Slow growth in electricity consumption, combined with increases in hydroelectric generation, will dampen growth in electric-power-sector coal consumption to 0.3 percent in 2008.  Electric-power-sector coal consumption is projected to increase by an additional 0.4 percent in 2009. 


Production and Inventories – U.S. coal production is estimated to have fallen by 1.3 percent in 2007.  Projected weak demand for coal in 2008 and 2009 will result in only a 0.1-percent increase in coal production in 2008 followed by   0.2-percent growth in 2009.  In the Western region, the Nation’s largest coal-producing region, production is expected to increase by 0.7 percent in 2008, but decrease by 0.6 percent in 2009.  Total coal stocks are estimated to have grown by 1.6 percent in 2007 to 190 million short tons.  Total coal stocks are expected to rise by 1.1 percent in 2008 and remain at that level (192 million short tons) in 2009.


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