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Government issues favorable energy report

By Brooke C. Stoddard

The U. S. Energy Department’s Energy Information Agency (EIA) issued an early release of its Annual Energy Outlook 2013 (AEO2013), which projects moderate energy prices in the coming years. The early-release AEO2013 presents AEO’s Reference Cases*; the more comprehensive version of AEO2013, which includes alternative scenarios, will be published early in 2013. Below are section summaries of the early release.

Crude Oil

The AEO2013 Reference Case projects a Brent crude oils spot price decline from $111 per barrel in 2011 to $96 per barrel in 2015 (in 2011 dollars). EIA assumes OPEC share of world production remaining about 40-45% and liquid fuels declining in consumption per unit of GDP. EIA sees increasing production from U.S. wells, reaching 7.5 million barrels a day. It admits that predicting oil prices is considerably speculative and will set forth a discussion of factors in the full AEO2013 report.

Liquid Products

For motor gasoline and diesel delivered to the transportation sector, the early release AEO2013 Reference Case publishes prices of $3.45 and $3.58 a gallon respectively (in 2011 dollars). It projects a modest decline in these prices for several years before a gradual increase thereafter; gasoline prices are not expected to reach $4.32 generally until 2040.

Natural Gas

The AEO2013 Reference Case predicts Henry Hub natural gas spot prices to remain below $4 per million BTU (in 2011 dollars) through 2018. This optimistic forecast reflects EIA’s projection that gas from shale formations will be increasingly tapped, that producers will also be stimulated by selling some petroleum discovered in their wells, and that drilling will become increasing efficient. After 2018, the early-release AEO2013 forecasts a gradual rise in natural gas prices, to $5.40 per million BTU by 2030 because of shifts to more difficult drilling.

Coal

AEO2013 sees the mine-mouth price of coal rising 1.4% yearly from $2.04 per million BTU in 2011 to $3.08 per million BTU in 2040 in 2011 dollars. It sees technology improvements in mining being slightly outweighed by the need to mine coal more difficult to reach than at present. It also sees a decline in the percentage of coal coming from lower-cost mines in Western states and a higher price for coking coal used by the steel industry.

Electricity

The early-release AEO2013 projection for electricity is a decline from 9.9 cents per kilowatt-hour in 2011 to 9.2 cents in 2015, the main reason being the low price of natural gas used by electric generation plants. EIA is quick to point out, however, that the relationship between the price of natural gas and the price of retail electricity is far from simple. Factors include available natural gas in a region, the cost of electricity transmission, the number of customers purchasing electricity from wholesalers, and the mix of competitive versus cost-of-service pricing. The AEO2013 forecast for electricity is for prices lower than ones it had forecast in the AEO2012 Reference Case. Again, it is the lower cost of natural gas that is the main determinant, and natural gas taking some market share from coal, whose price rises. Nevertheless, EIA sees electricity prices rising slowly. By 2035 it sees electricity at 10.1 cents per kilowatt-hour in 2011 dollars.

*An AEO Reference Case is the one that presumes current law and regulation into the future, as well as currently presumed GDP growth rates. An AEO generally also presents scenarios displaying higher and lower prices under different assumptions, especially GDP growth rates in varying countries.

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