The U.S. Energy Information Administration (EIA) recently released its Annual Energy Outlook (AEO) 2016 (with projections to 2040). The EIA’s forecasting record has been spotty, so I always take their predictions with a grain of salt. But many energy companies use these projections in making decisions, so it’s important to at least be aware of the EIA’s outlook.

The report is 256 pages long, and covers the energy sector in depth. With each AEO, the EIA evaluates “a wide range of trends and issues that could have major implications for U.S. energy markets” and uses this information to create its reference cases. With those as the baseline, the report often analyzes how proposed energy legislation might affect supply, demand and prices.

Today I will distill the latest outlook and provide the highlights.

The report starts out by discussing major developments likely to influence the electricity generation fuel mix. These include lower natural gas prices, an extension of tax credits for wind and solar energy as well as the U.S. Environmental Protection Agency’s (EPA) Clean Power Plan (CPP), which requires states to reduce carbon dioxide emissions from fossil fuel plants.

The CPP would boost the natural gas and renewable energy sectors, primarily at the expense of coal. In the AEO2016 reference case, which includes the CPP (on hold presently amid legal challenges), 92 gigawatts (GW) of coal-fired capacity is retired by 2030. Without the CPP, 60 GW of coal would be retired, according to the EIA. In the reference case, coal-fired generation in 2040 is down 32% from 2015.

Natural gas consumption by power plants is expected to decline until 2020 after increasing sharply in recent years as a result of a surge in renewable energy output. I think the EIA is overestimating the short-term potential of renewables to displace natural gas.

However, the reference case projects that, despite that initial decline, natural gas generation will increase by 26% (relative to 2015) by 2030 and 44% by 2040. Electricity generation from natural gas is expected to increase steadily from 2020 to 2040 even in the absence of the Clean Power Plan, and is projected in both cases to become the leading power fuel source.

Generation from renewables is projected to double by 2030 and to be up 152% in 2040 from 2015 levels. Without the CPP, electricity generation from renewables is not expected to overtake coal-fired generation by 2040.

The EIA projects U.S. natural gas production to increase from 27.2 trillion cubic feet (Tcf) in 2015 to 42.1 Tcf in 2040 in the reference case. This increase would be driven by growing shale gas production, which is expected to rise from 13.6 Tcf to 29 Tcf over the same timeframe.

But growing natural gas demand in the industrial and power sectors and increasing exports of liquefied natural gas (LNG) are expected to keep consumption growing as well, and the EIA expects higher prices. By 2020 natural gas prices are expected to rise more than 50% from current levels, hitting about $5 per million British thermal units (MMBtu). But the price is then expected to stabilize and remain around $5/MMBtu through 2040 as shale gas production keeps pace with demand. If you are familiar with the volatile history of natural gas prices, you know that such a scenario would be unprecedented.

The EIA has great expectations for oil production. Its reference case has U.S. output declining from 9.4 million barrels per day (bpd) in 2015 to 8.6 million bpd in 2017, but then recovering as prices strengthen. By 2040 production is expected to grow to 11.3 million bpd, which would surpass the previous U.S. oil output peak set in 1970. Oil prices are still expected to average below $50/barrel in 2017 (I feel strongly that they will in fact be higher), but to rise to more than $130 per barrel (in 2016 dollars) by 2040.

On the demand side, consumption of petroleum and other liquids is expected to rise through 2020 before flattening and remaining relatively level through 2040. Expected decreases in transportation consumption are expected to be offset by increases in industrial demand.

Total motor gasoline consumption is projected to decrease by 2.3 million bpd by 2040, while diesel fuel consumption is forecast to grow by 0.7 million bpd. The expected decline in gasoline consumption is primarily the result of higher  corporate average fuel economy (CAFE) standards for vehicles.

As a result of growing output and declining demand, U.S. exports of diesel and gasoline are expected to continue to grow. The U.S. became a net exporter of fuel products in 2011, and is projected to remain so through 2040. Fuel exports  are projected to increase from 3.2 million bpd in 2015 to 5.2 million bpd in 2040.

Conclusions

While I think the EIA got some of the small stuff wrong, I generally agree with its take on the longer-term trends. Coal is going to struggle with or without the CPP, while natural gas production and demand will rise as prices rebound to a more sustainable level. Likewise, oil prices are expected to bounce back from recent lows. The EIA projects a strong medium-term movement in the price of natural gas, but a much larger long-term increase in the price of oil. The short-term prospects for renewables will hinge on the outcome of the court challenges to the CPP, but their long-term future looks bright in any case.  

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