U.S. Department of Energy Short-Term Energy Outlook

July 8, 2008

WASHINGTON, DC – July 8, 2008  – U.S. Department of Energy –  Energy Information Administration Highlights


* The spot price of West Texas Intermediate (WTI) crude oil increased from $122 per barrel on June 4 to $145 per barrel on July 3. Global supply uncertainties, combined with significant demand growth in China, the Middle East, and Latin America are expected to continue to pressure oil markets.  WTI prices, which averaged $72 per barrel in 2007, are projected to average $127 per barrel in 2008 and $133 per barrel in 2009.

* Regular-grade gasoline is expected to average $3.84 per gallon in 2008, more than $1 per gallon above the 2007 average price.  The U.S. average regular-grade gasoline price, about $4.10 per gallon on June 30, is projected to remain over $4 per gallon until the fourth quarter of 2009.  Retail diesel fuel prices, which averaged $2.88 in 2007, are projected to average $4.35 per gallon in 2008 and $4.48 per gallon in 2009.

* World consumption of liquid fuels and other petroleum is projected to grow by almost 900,000 barrels per day (bbl/d) in 2008 and by an additional 1.4 million bbl/d in 2009, while U.S. consumption is expected to decline by about 400,000 bbl/d in 2008.  Adjusting for increased ethanol use, U.S. petroleum consumption is projected to fall by 530,000 bbl/d in 2008.

* The Henry Hub natural gas spot price averaged $7.17 per thousand cubic feet (Mcf) in 2007 and is expected to average $11.86 per Mcf in 2008 and $11.62 per Mcf in 2009.

* Rapidly increasing delivered fuel costs for power generation, particularly for natural gas, are pushing up electricity prices. Residential electricity prices are projected to increase by an annual average of about 5.2 percent in 2008 and 9.8 percent in 2009 compared with an increase of 2.2 percent in 2007.  

Global Petroleum

The oil market remains tight, evidenced by rising prices, low surplus production capacity, and the concern that global supply growth may not keep pace with demand growth over the near term.  Preliminary estimates indicate that higher oil consumption in the second quarter and a modest increase in production left Organization for Economic Cooperation and Development (OECD) commercial inventories below the 5-year average at the end of June.

Saudi plans to raise production from 9.4 million bbl/d in June to 9.7 million bbl/d in July, a 27-year high for the nation, have not resulted in an easing of prices.  Supply losses in Nigeria and heightened tensions between Iran and Israel raised new concerns about future supplies.  Moreover, while the Saudi action adds supplies to the market, remaining available surplus production capacity during the third quarter is at the low level of about 1.2 million bbl/d, all concentrated in Saudi Arabia.

Consumption. World oil consumption continues to grow despite 7 consecutive years of rising prices.  Preliminary data indicate that world oil consumption during the first half of 2008 rose by roughly 520,000 bbl/d compared with year-earlier levels.  Compared to year-ago levels, this increase reflects a 170,000-bbl/d gain in the first quarter, followed by an 870,000-bbl/d increase in the second quarter.  A 760,000-bbl/d decline in consumption in OECD countries during the first half of 2008, mainly concentrated in the United States, was more than offset by a 1.3-million-bbl/d increase in consumption in non-OECD nations led by China and the Middle East (World Oil Consumption <http://www.eia.doe.gov/emeu/steo/pub/gifs/Fig5.gif> ).  World oil consumption is projected to rise by almost 1.2 million bbl/d during the second half of the year, reflecting the impact of higher expected prices, lower economic growth, and growing pressure in some countries (such as India, Malaysia, Indonesia, and China) to ease price subsidies, which could dampen consumption growth.  Global consumption in 2009 is expected to increase by 1.4 million bbl/d because of upward revisions in projected 2009 economic growth in some regions, such as Latin America.
If financial strains in the United States spread to foreign nations, depressing economic growth, consumption growth would also slow.

Non-OPEC Supply. The pace of supply growth in non-Organization of the Petroleum Exporting Countries (OPEC) is another key determinant of future market conditions.  Despite higher prices and recent past projections of substantial growth in non-OPEC supplies that matched or exceeded consumption growth, actual non-OPEC production fell far short of both expectations and consumption growth.  Faster declines in older fields and delays in expansion projects have limited supply growth.  At the beginning of this year, non-OPEC supply growth was projected to rise by 860,000 bbl/d in 2008 and by over 1.5 million bbl/d in 2009.

Production is now expected to rise by only 230,000 bbl/d in 2008 and by 830,000 bbl/d in 2009.  Lower-than-expected production from Russia and the North Sea, along with lowered expectations for Brazil, are the principal reasons for lower non-OPEC supply levels.  Second-half 2008 non-OPEC supply is expected to increase by about 700,000 bbl/d, driven by growth in Brazil and Azerbaijan.  Given recent history, possible additional delays in key projects as well as accelerating production declines in some older fields cannot be ruled out.  As a result, net non-OPEC production gains could be less than the current forecast, leading to both higher demand for OPEC oil and higher prices than currently projected.

OPEC Supply. OPEC crude production in the second quarter of 2008 averaged an estimated 32.3 million bbl/d, up only slightly from 32.2 million bbl/d in the first quarter.  Higher production in Iraq and Angola more than offset lower production in Nigeria caused by security problems and worker strikes.  Assuming that Saudi Arabia’s announcement of raising July output to 9.7 million bbl/d results in a higher sustained rate of production through at least September, OPEC crude production is projected to average 32.7 million bbl/d during the third quarter.  At these production levels, available surplus production capacity during the third quarter would be only 1.2 million bbl/d, marking the third consecutive quarter that surplus capacity stood at or below 1.5 million bbl/d.  All of this capacity is held by Saudi Arabia.

Any industry operating at close to 99 percent of capacity will remain vulnerable to surprises that either boost consumption or disrupt production.  Such surprises would place additional upward pressure on prices and contribute to oil price volatility.  In this tight global oil market, OPEC countries have also faced delays in adding new production capacity, notably in Algeria and in Saudi Arabia, whose 500,000 bbl/d Khursaniyah project has been pushed back to the end of 2008.

Inventories. OECD commercial inventories declined during the first quarter of 2008 by 39 million barrels.  During the second quarter, inventories increased by only 36 million barrels, well below the average build of 83 million barrels during this time of year.  At the end of the second quarter, estimated OECD commercial inventories stood at 2.57 billion barrels, 26 million barrels below the 5-year average and equal to 53 days of forward consumption.

U.S. Petroleum

Production.  In 2008, total domestic crude oil output is projected to average 5.14 million bbl/d, up slightly from the 2007 average of 5.10 million bbl/d.  Production growth in the Lower-48 region is expected to more than offset declines in Alaskan output.  In 2009, total production is projected to increase to 5.27 million bbl/d, due mostly to the Thunder Horse and Tahiti
platforms coming on-stream in late 2008 and 2009, respectively.  This projection includes an expectation of hurricane-induced outages of an estimated 11 million barrels for the offshore region in 2008.  Fuel ethanol production is projected to increase from an annual average of 420,000 bbl/d in 2007 to 560,000 bbl/d in 2008 and to 640,000 bbl/d in 2009.

Consumption.  Total petroleum consumption is projected to shrink by 400,000 bbl/d in 2008, a sharper drop than the nearly 300,000 bbl/d projected in the previous Outlook, based on prospects for a weak economy and record high crude oil and product prices extending into 2009.  In 2009, total consumption is projected to remain almost flat at the 2008 level.

Prices.   WTI crude oil prices, which averaged $72 per barrel in 2007,
are projected to average $127 per barrel in 2008 and $133 per barrel in 2009.

Regular-grade motor gasoline retail prices, which averaged $2.81 per gallon in 2007, are projected to rise to an average of $3.84 per gallon this year and $4.06 per gallon in 2009.  These prices hit a record of $4.10 per gallon on June 30.  For the remainder of 2008, pump prices are projected to remain well above $4.00 per gallon. This forecast reflects very weak gasoline margins because of the decline in gasoline consumption and growth in ethanol supply. 

Diesel fuel retail prices in 2008 are projected to average $4.35 per gallon, up from $2.88 per gallon last year, and increase to an average of $4.48 per gallon in 2009.  These higher prices reflect strength in diesel demand, particularly in emerging markets, which has significantly increased the margins between diesel prices and crude oil costs from those of last year.  Over the next few months, these prices are projected to remain near the June 30 price of $4.65 per gallon as refiner margins begin to weaken slightly, offsetting the projected rise in crude oil costs.

Natural Gas

Consumption.  Total natural gas consumption is expected to increase by
2.1 percent in 2008 and by 1.1 percent in 2009.  Year-over-year increases are expected in every sector in 2008 and have been largely weather-driven thus far.  In 2009, residential and commercial sector consumption is expected to be relatively unchanged while natural gas consumption for electricity generation is expected to increase by 3.2 percent.  Growth in the industrial sector continues its recent upward trend, while demand for natural-gas-based fertilizers is expected to increase in the near-term as growers begin to replant following floods in the Midwest.  Consumption in the industrial sector is expected to increase by 1.6 percent in 2008 and by 0.6 percent in 2009.

Production and Imports.  Total U.S. marketed natural gas production is expected to increase by 6.4 percent in 2008 and by 1.6 percent in 2009.
Production from the Federal Gulf of Mexico, which is now expected to decline by 1.3 percent in 2008, has been limited due to unplanned repairs on key infrastructure in the region.  Production in the Lower-48 onshore region is expected to increase by 7.9 percent in 2008, more than offsetting declining production in the Gulf.  In 2009, marketed natural gas production from the Federal Gulf of Mexico is projected to increase by 2.5 percent while the Lower-48 onshore region is expected to increase by 1.4 percent.

Import volumes of liquefied natural gas (LNG) to the United States continue to sag.  Through the first half of 2008, LNG imports were roughly 60 percent below the amount received during the corresponding period last year.  While demand for LNG supplies remains strong in Asia-Pacific and Europe, prices in the United States are becoming more competitive and may attract additional shipments in the coming months.
LNG imports in 2007 totaled about 770 billion cubic feet (Bcf), however, delays in new liquefaction projects and persistent world demand are expected to result in a 290-Bcf decline in U.S. LNG imports in 2008 compared with 2007.  In 2009, LNG imports are expected to reach nearly 790 Bcf as new supply enters the global market.

Inventories. On June 27, 2008, working natural gas in storage was 2,118 Bcf.  Current inventories are now 57 Bcf below the 5-year average
(2003-2007) and 381 Bcf below the level during the corresponding week last year. 

Prices.  The Henry Hub spot price averaged $13.07 per Mcf in June, $1.42 per Mcf above the average spot price in May.  Despite significant onshore production growth, the natural gas market continues to be pressured by high oil prices, low LNG imports, and a widening year-over-year storage deficit.  In addition, summer cooling demand was strong in June (cooling degree-days in June were 15.7 percent more than last year and 23.5 percent more than normal), which increases the amount of natural gas used in the electric power sector.   On an annual basis, the Henry Hub spot price is expected to average about $11.86 per Mcf in 2008 and $11.62 per Mcf in 2009.


Prices.  Within the past few weeks, a number of utilities have requested permission from State regulators to raise electricity rates in response to rapidly increasing delivered fuel costs for power generation.  It is likely that most other utilities will soon need to pass through these increased costs to retail customers as well.  As a result, the forecast for growth in electricity prices is significantly higher than it was in last month’s Outlook.  Average U.S. residential electricity prices are expected to increase by 5.2 percent in 2008 and by 9.8 percent in 2009.

Consumption.  This summer began with June about 20 percent warmer than the 30-year average.  However, the National Oceanic and Atmospheric Administration projects temperatures for the rest of the summer will be slightly cooler than normal.  The reduced need for air conditioning and slow economic growth for the remainder of the year should keep electricity consumption during 2008 at about the same level as last year.  Consumption is expected to grow by 1.4 percent in 2009.


Consumption.  Electric-power-sector coal consumption grew by 1.9 percent in 2007.  Slow growth in total electricity consumption is expected to limit growth in electric-power-sector coal consumption to 0.6 percent in 2008.  Projected increases from other generation sources (nuclear, natural gas, hydroelectric, and wind) in 2009 will continue to dampen electric-power-sector coal consumption growth, projected to be 0.4 percent in 2009. 

Production and Inventories.  U.S. coal production fell by 1.5 percent in 2007.  Growth in domestic consumption and exports will contribute to a 2.9-percent increase in coal production in 2008.  Secondary (consumer-held) coal stocks are estimated to have grown by 5.5 percent in 2007 to 159 million short tons.  Consumer stocks are expected to remain stable in 2008 and grow by an average of 2.8 percent in 2009. Primary stocks, held by coal producers/distributors, are projected to decline by more than 6 million short tons between the end of 2007 and the end of 2009.

To see details of this forecast update, go to the following World Wide Web site on the Internet: 



Tancred Lidderdale

[email protected]
   ph: (202)586-7321 


Neil Gamson  
   [email protected]
   ph: (202)586-2418