Robert J. Beck
Economics Editor
Rotary Rig Activity by States (16816 bytes)
Refinery Runs by District (19391 bytes)
Continuing U.S. economic growth coupled with low energy prices will stimulate demand for petroleum and natural gas in 1995. Although the economic growth rate may slip from that of 1994, it will remain high enough to require further gains in energy consumption.
Demand for petroleum products and natural gas should increase despite competition from other fuels and improving consumption efficiency. Boosting consumption of fossil fuel energy will be low output from the major renewable energy sources, nuclear and hydroelectric power.
Growth in total energy consumption will lag that of economic activity due to continuing improvement in energy efficiency. But the rate of improvement will decline in the absence of rising prices.
The composite economic growth rate for members of the Organisation for Economic Cooperation and Development (OECD) is projected to increase in 1995, following several sluggish years. In addition, the economic boom in non-OECD Southeast Asia is expected to continue. This worldwide improvement in economic activity will boost total world oil demand.
Growth in oil demand in those areas will be partially offset by sliding consumption in the Former Soviet Union (FSU), still struggling with economic transformation.
The expected improvement in world oil demand will be matched by increased production. Gains will occur in and out of the Organization of Petroleum Exporting Countries, excluding the FSU.
Iraqi oil production capacity, all but shut in due to the United Nations embargo on exports in effect since Iraq's invasion of Kuwait in 1990, remains a major uncertainty. Iraq's movement of troops to the Kuwait border last October is believed to have diminished the likelihood that the embargo might be lifted soon.
Transformation of the FSU economies is the other political event with a major impact on the oil market. To date the slide in oil production has been matched by the slide in consumption, leaving FSU exports relatively stable and market effects of the region's political turmoil fairly small.
The key to oil prices will continue to be the ability of OPEC to adjust quotas to balance supply and demand. Balancing the market became more difficult last year as non-OPEC output outside the FSU moved up significantly. OPEC will be faced with that challenge again in 1995.
Despite modest improvement in oil prices, U.S. crude oil output will fall by 2.4% this year after a decline of 3% in 1994. U.S. production has been falling since 1985, except for a modest increase in 1991, when prices rose in the wake of Iraq's invasion of Kuwait. U.S. crude oil production has been falling at an average rate of 260,000 b/d/year since 1985.
U.S. drilling activity, which lingers close to record low rates, provides little hope that the production decline can be slowed. To compound the problem, most drilling in the U.S. now focuses on natural gas. Last year, of an average total active rotary rig count of 775, the number of rigs drilling for gas averaged 427.
The year's total rig count compared with 757 in 1993 and a modern low of 717 in 1992.
Falling U.S. oil production and rising demand mean increased petroleum imports again in 1995. OGJ is projecting a 4.9% increase in imports in 1995, following a 3.8% increase last year. Imports are expected to fill a record high 52.1% of domestic demand this year, following 50.2% in 1994.
There are potential problems in U.S. product supply. Refining capacity is being stretched as product demand moves up and capacity expansion remains limited by environmental regulations and costs. That makes product supply vulnerable to accidents or unforeseen shutdowns.
And although supplies of reformulated gasoline were adequate when mandates for the new fuel took effect Jan. 1, requirements for segregation of reformulated gasoline streams may yet cause logistical problems and, possibly, spot shortages.
THE ECONOMY
Growth in U.S. real gross domestic product (GDP) is estimated at 3.8% for 1994, compared to 3.1% for 1993 and 2.3% in 1992. GDP growth in 1995 is projected at 2.7%. This will be the fourth consecutive year of economic growth.
The latest recession lasted from the first half of 1990 through the first half of 1992. GDP fell 0.7% in 1991, ending a string of 8 years of growth. Demand for total energy and petroleum products fell in both of the recent recession years.
Economic improvement led to marginal increases in energy and petroleum consumption in 1992 and more significant increases in 1993 and 1994 as the economy gathered momentum.
OGJ expects rising interest rates to slow the economic growth rate this year.
However, improvement is expected in 1995 for a number of the major economic indicators. Industrial production, a key component of both economic activity and energy demand, moved up an estimated 5.1% in 1994 and helped to boost economic growth and consumption of energy. Industrial output is projected to increase another 3.7% in 1995.
New car sales moved up in 1994 to an estimated 9.2 million units from 8.7 million in 1993. Car sales are expected to increase to 9.4 million units in 1995.
Housing starts increased to an estimated 1.42 million units in 1994 from 1.29 million in 1993 and a recent low of I million units in 1991. Higher interest rates this year are expected to push down housing starts to 1.36 million units.
The unemployment rate fell to 6.2% in 1994 and is expected to drop to 6% in 1995 as economic expansion continues.
Inflation has been modest. The GDP price deflator indicated an inflation rate of only 2.2% in 1994, compared with 2.6% in 1993 and 2.9% in 1992. The rate is projected at 2.8% this year. Growth in the consumer price index (CPI)-another indicator of inflation-followed a similar path, falling from 5.4% in 1990 to 3% in 1993 and an estimated 2.8% in 1994. CPI growth is forecast at 3% in 1995.
TOTAL ENERGY CONSUMPTION
U.S. Energy Demand (10198 bytes)
U.S. Energy Consuption and Efficiency (26456 bytes)
The projected increase in economic activity in 1995 is expected to boost both total U.S. energy consumption and demand for petroleum and natural gas energy. Increased manufacturing activity and electricity consumption will be major factors pushing up energy demand.
The efficiency of U.S. energy consumption will continue its long run improvement. But the increase in energy consumption required to support expanding economic activity will more than offset the decline in energy consumption due to the improved efficiency.
Energy efficiency, measured in terms of energy consumption per constant dollar of GDP, has been improving steadily since 1970. During periods of lower energy prices improvement slows due to the reduced financial incentive for investment in efficiency and conservation. The rate of improvement in energy efficiency is also affected by the increased cost of major efficiency improvements. In general the easy and less costly improvements were done first.
In 1994 the U.S. economy consumed an estimated 16,200 BTU of energy for every dollar of GDP, compared with 23,400 BTU/$ in 1970. Over that period GDP increased 86%, while energy consumption increased 28%. In 1995, energy consumption is projected at 16,000 BTU/$ of GDP.
Improvements in energy efficiency and conservation will continue. Increased environmental costs will tend to boost the cost of energy and stimulate investment in energy efficiency. But the rate of improvement will be influenced by the cost of energy.
ENERGY SOURCES
Crude Output Will Fall (6505 bytes)
Gasoline Demand Will Rise (6370 bytes)
Crude Imports Will Rise (6200 bytes)
Distillate Demand Will Increase (6315 bytes)
Rig Activity Will Increase Slightly (6560 bytes)
Product Demand Will Move Up (6324 bytes)
U.S. Natuarl Gas Supply and Demand (10891 bytes)
All of the primary energy sources will contribute to the increase in consumption in 1995. But growth rates for individual fuels will vary, and market shares will shift.
One of the slower rates of growth is projected for energy from petroleum: 1.4% to 35.29 quadrillion BTU (quads). This follows an increase of 2.8% last year. Oil energy consumption has moved up for 3 consecutive years following 3 consecutive years of decline. Consumption of oil energy slipped from 34.222 quads in 1988 to 32.845 quads in 1991. Since then, oil energy consumption has increased 5.9%, rising to 34.79 quads last year.
Petroleum's share of the U.S. energy market will slip to 40.3% in 1995 from 40.4% in 1994, returning to its level of 1993. Over the past 15 years oil's share of the market has gyrated with changes in oil prices, falling from 48.7% in 1977 to 41.8% in 1985 as prices rose. The subsequent fall in oil prices helped boost oil consumption, and market share moved up to 43.4% in 1986. More recently, environmental regulations and consumption efficiencies have eroded the share again.
Natural gas energy is expected to post one of the higher growth rates in 1995, moving up 2% to 22.06 quads. This follows increases of 3.7% in 1994 and 3.5% in 1993. Energy from natural gas will be at its highest level since 1973, boosted especially by industrial and utility demand.
Deregulation has increased competition and efficiency in the natural gas industry and has helped to boost consumption. Federal and state governments also are trying to raise consumption of gas for environmental reasons.
The natural gas share of the energy market is expected to increase to 25.2% in 1995 from 25.1% last year and 24.8% in 1993.
Energy from petroleum and natural gas will continue to dominate the energy market with a combined market share of 65.5% in 1995. This is the same as 1994 and up from 65.1% in 1993. The market share has dropped only marginally from the 65.9%, in 1985.
Petroleum and natural gas together contributed a peak of 77.7% of U.S. energy in 1972. Their market share fell sharply to 65.9% in 1985, but in recent years the slide has been slowed.
Increased demand for electrical power is the major reason for the expected rise in energy consumption. All of the major energy sources contribute to power generation, so this trend influences demand for all fuels as well as interfuel competition.
The major renewable fuel, hydroelectric power, will increase ii the weather is favorable but is not expected to come close to capacity. And in the long run capacity is physically limited to near existing levels.
Nuclear power growth will slow since capacity has peaked. Increased output will be limited to improvements in utilization rates.
Coal energy consumption, mainly for power generation, will continue to move up with growing demand for electricity. However, environmental concerns and the related cost of clean air regulations could slow the rate of increase in coal consumption.
For the immediate future, natural gas is expected to be the fuel of choice for incremental increases in electrical power generation capacity. The window of opportunity for natural gas is expected to last through the 1990s, after which new technologies will help restore competitiveness of new coal-fired capacity.
Safety and environmental concerns have curtailed the expansion of nuclear power generation. Nuclear power was once considered the fuel of the future. The Tennessee Valley Authority (TVA) recently stopped work on the last three nuclear reactors under construction in the U.S. Increased power output from nuclear facilities is now dependent upon increasing the utilization rate of existing facilities. And that will be partially offset by shutdown of old facilities.
The number of operable nuclear power units peaked at 112 in the summer of 1990 and is now down to 109. Nuclear power capacity also peaked in August 1990 at 100.497 million kw. Capacity slipped to 97.881 million kw for the first quarter of 1993 but moved back up to 99.041 million kw in 1994.
Energy from nuclear power generation is expected to move up only 0.3% this year to 6.67 quads. This follows a 2% increase in nuclear power production in 1994. Increased utilization of existing facilities boosted output in 1994. The nuclear plant average annual utilization rate reached a recent high of 70.9% in 1992, but early estimates indicate that the average utilization could be higher in 1994.
The growth in nuclear power output in 1995 will also come from increased capacity utilization. The 1995 output will be a record high for nuclear power, but the rate of growth has slowed to a crawl.
Nuclear's share of the energy market will slip to 7.6% in 1995, down from 7.7% last year and 7.8% in 1993. Nuclear's share was as high as 8.1% in 1991. Nuclear power produced 22.2% of total electrical generation in 1993, the latest annual data available.
Increased electricity consumption and competitive prices have helped to boost demand for coal. Coal energy consumption increased 2.3% in 1994 to 19.89 quads. The cost of coal consumed by electric utilities has been drifting downward in recent years.
This has helped the fuel maintain a competitive advantage over natural gas and oil.
Coal demand is projected to increase an additional 1.5% in 1995, moving up to 20.19 quads. Coal's share of the total energy market is expected to remain at 23.1% in 1995. It was 23.2% in 1993.
Energy from hydro, geothermal, and other miscellaneous power sources is projected to increase 5% in 1995 to 3.35 quads. This follows a decline of 1.9% in 1994 to 3.19 quads.
The level of hydroelectric output slipped again in 1994 because of weather. A gain had been expected after several years during which output was depressed by a lack of rain and snowfall. Energy from hydropower and other miscellaneous sources was as high as 4.04 quads in 1983, 5.7% of the energy market. The market share for this group is projected to increase slightly to 3.8% in 1995 from 3.7% last year. It was 3.9% in 1993.
U.S. PRODUCTION
U.S. Production of Crude Oil and Lease Condensate (12708 bytes)
The expected decline in U.S. production of crude oil and condensate will be 160,000 b/d, taking average output to 6.48 million b/d. This follows a decline of 207,000 b/d last year, when output averaged an estimated 6.64 million b/d.
The recent high for U.S. crude oil and condensate production was 8.971 million b/d in 1985. Domestic production increased 419,000 b/d in the early 1980's, when drilling boomed. However, slumping oil prices, costly environmental regulations, and legal efforts aimed at denying access to promising areas have depressed exploration and drilling activity and, consequently, production.
Output has fallen each year since 1985 except for a slight increase in 1991 related to efforts to make up for supplies lost during Iraq's occupation of Kuwait.
The OGJ production projection for 1995 represents a decline of 2.124 million b/d from 1985 output. This is a drop of 23.7% in only 10 years.
Drilling activity moved up in 1993 and 1994 but remains depressed by historic standards, offering little hope for a reversal of the production slide.
OGJ forecasts a slight improvement in rig activity in 1995 to 790 active rigs.
With new computer-assisted technology, exploration and drilling are more efficient than in the past. But the increased output per new well drilled is more than offset by the low level of total oil wells drilled.
Natural gas liquids (NGL) output is expected to move up by 40,000 b/d in 1995 to average 1.76 million b/d. NGL output has been trending upward since 1989, when it averaged only 1.546 million b/d.
Other hydrocarbon liquids are making an increasing contribution to total domestic supply, In 1993 the Energy Information Administration (EIA) started including the gasoline additives fuel ethanol and methyl tertiary butyl ether in its figures for total liquids production. Therefore, production of liquids other than crude oil, condensate, and NGL moved up from only 92,000 b/d in 1991 to 250,000 b/d in 1994. It is expected to remain at about that level in 1995.
Production of NGL and other hydrocarbons not included in the crude and condensate numbers fell 1% in 1994 to an estimated 1.97 million b/d. The addition of these other liquids has somewhat slowed the apparent decline of U.S. total liquids output.
OGJ projects total liquids production of 8.49 million b/d for 1995, down 1.4% from last year and 20.2% from the recent high of 10.636 million b/d in 1985.
One key to future U.S. production declines will be exploration and development in Alaska to compensate for the production decline now under way from the North Slope. Alaskan drilling is down this winter from its levels of the past several years. According to state permit applications, companies planned to drill only four exploration wells during the 1994-95 winter, compared with six last winter and nine the previous year.
Flat oil prices, recent exploratory disappointments, and competition for funds from other parts of the world have reduced interest in Alaskan exploration and drilling.
The start-up of new Alaskan fields will slow the production decline but not stop it. Average Alaskan production for last year is estimated at 1.55 million b/d, compared with 1.582 million b/d the year before. Alaskan output was 1.714 million b/d in 1992.
Alaskan output in 1995 is expected to average 1.54 million b/d.
Lower 48 production averaged an estimated 5.09 million b/d in 1994, compared with 5.264 million b/d in 1993. Production was lower in all the states with output of at least 100,000 b/d: Texas, Louisiana, California, Oklahoma, Wyoming, New Mexico, and Kansas.
Lower 48 production is projected to fall 150,000 b/d in 1995 to 4.94 million b/d.
At the end of the drilling boom in 1984, Lower 48 production had moved up to 7.157 million b/d. Output this year will be down 2.217 million b/d from that recent high-a 31% drop in 11 years.
Here are the 1994 production averages and changes from the previous year for key states: Texas 1.694 million b/d, down 63,000 b/d; Louisiana 1.122 million b/d, down 22,000 b/d; California 934,000 b/d, down 8,000 b/d; Oklahoma 251,000 b/d, down 14,000 b/d; and Wyoming 220,000 b/d, down 20,000 b/d.
IMPORTS
Crude Imports by Country of Origin (19747 bytes)
Total U.S. imports of crude oil and petroleum products will average 9.37 million b/d in 1995, OGJ projects, up 440,000 b/d. This will be a record high volume for petroleum imports.
Last year imports moved up 325,000 b/d to an estimated 8.93 million b/d.
The increase last year was primarily in industry crude oil imports, which exclude imports for the Strategic Petroleum Reserve (SPR). Crude oil imports moved up 248,000 b/d to 7.02 million b/d, a record high. Petroleum product imports rose by 77,000 b/d to average 1.91 million b/d, despite an increase in refinery runs.
Dependency on petroleum imports increased to a record 50.4% of demand in 1994 from the previous record of 49.9% in 1993. The previous high was 47.7% in 1977, the recent low 31.5% in 1985.
Dependency on imported oil will move up in 1995 to 52.1%
Industry crude oil imports are projected to move up 250,000 b/d to 7.27 million b/d. Product imports are forecast at 2.1 million b/d, an increase of 190,000 b/d.
Imports for the SPR last year are estimated at 14,000 b/d, making total SPR crude stocks an estimated 592 million bbl at yearend. No domestic crude was added to the SPR in 1994, in contrast to the 18,000 b/d added in 1993.
The rate of crude oil purchases for the SPR is linked to a variety of considerations, including the federal budget deficit, national security, and concerns for the environment. These are not all economic considerations, and it is difficult to predict political attitudes toward the SPR.
OGJ projects additions to the SPR this year averaging 14,000 b/d, and boosting the total reserve to 597 million bbl by yearend.
Industry stocks are estimated at 1.04 billion bbl at yearend 1994 vs. 1.06 billion bbl at yearend 1993. Refiners reduced stock levels to meet the sharp increase in demand last year.
OGJ expects industry stocks to rise to 1.05 billion bbl by yearend 1995 in response to rising demand. The increase will be in crude stocks, which are expected to move up to 340 million bbl from 330 million bbl at yearend 1994. It is expected that product stocks will remain at the 1994 level, 710 million bbl.
REFINING
Exports of Refined Products and Crude (11767 bytes)
Imports of Refined Products (10825 bytes)
Refining margins slipped during 1994 due to costs of preparing for the reformulated gasoline program and to shrinking gross margins as product prices fell faster than crude costs.
The increased cost offset the benefits of rising volumes from increased product demand, increased refinery throughput, and higher utilization rates.
Last year crude oil runs to stills moved up by 1.6% to an average 13.833 million b/d. Total input to stills moved up 1.2% to average 14.013 million b/d. Refining capacity remained at 15.14 million b/d.
In recent years refining capacity has been falling even though product demand has been rising. Marginally profitable refineries found the new environmental compliance requirements prohibitively costly, and capacity was shut-in. A major issue in the near future will be the need for additional refining capacity to meet rising demand.
Last year the increase in input to stills boosted the refinery utilization rate to 92.6%, close to full sustainable capacity.
Crude runs are projected to move up 0.6% in 1995 to 13.92 million b/d. Total input to stills will be up 0.7% to 14.11 million b/d. Refining capacity is expected to slip marginally, falling to 15.13 million b/d. This will push the utilization rate up to 93.3%.
In 1994 U.S. refiners processed more crude domestically but also boosted product imports. When the required domestic refining capacity is not available then product imports are used to fill the gap.
Product imports moved up 4.1% in 1994 to average 1.909 million b/d. This was the second year of rising product imports following 4 consecutive years of decline. Product imports had been falling since 1988, when they averaged 2.295 million b/d.
Product imports last year were still down 16.8%, or 386,000 b/d, from the 1988 level, mainly because of declining demand for residual fuel. Much of the U.S. supply of residual fuel oil is imported. Resid imports in 1994 averaged about 298,000 b/d and were down 346,000 b/d from 1988, accounting for the majority of the decline in product imports.
Boosting imports is the approach of capacity refinery operations. With little or no excess capacity, refiners no longer can meet rising demand by raising runs; they have to import more product.
Last year motor gasoline imports increased an estimated 132,000 b/d, and distillate imports moved up 21,000 b/d. This trend is expected to continue in 1995 as domestic refining capacity is unable to meet the increase in product demand.
Crude and product prices were down in 1994. The average U.S. wellhead price of crude fell for the fourth consecutive year to an estimated $13.30/bbl from $14.20/bbl in 1993, $15.99/bbl in 1992, $16.54/bbl in 1991, and $20.03/bbl in 1990. The average landed cost of crude oil imports fell to $15.20/bbl from $15.73/bbl in 1993, $17.75/bbl in 1992, $18.02/bbl in 1991, and $21.13/bbl in 1990.
The average pump price for unleaded gasoline rose 0.2% to an estimated $1.11/gal last year. However, the refiner wholesale price of unleaded motor gasoline fell about 2% to an estimated 61.2/gal. Increased demand helped to support the pump price. And total gasoline taxes averaged 37.5/gal, up from 34.1/gal last year, which helped raise the pump price despite falling wholesale prices.
The average wholesale price of No. 2 fuel oil also fell in 1994, by 7.2% to 50.6/gal. This followed a 5.9% drop the year before. The price drop came in spite of a significant increase in distillate demand last year.
Refining margins slipped last year despite the rises in demand, refinery throughput, and utilization rates. Preparations for production of reformulated gasoline were the main reasons. Operating costs rose, and many refiners exhausted stocks of conventional gasoline to meet product segregation requirements of the reformulated fuel program. The logistical inventory draw weakened wholesale prices and wiped out the margin gains that should have resulted from falling feedstock costs.
For the first 9 months of 1994 the Gulf Coast cash operating margin as calculated by Wright Killen & Co. averaged $1.10/bbl, compared with $1.40/bbl in the same period of 1993. The cash operating margin was 88/bbl in the same period of 1992, $2.07/bbl in 1991, and $2.11/bbl in 1990.
The average refining margin for the entire year is expected to be somewhat lower as refining activity generally slows in the latter months of the year. Refiners have substantial stocks to help satisfy demand during the fourth quarter.
Industry stocks are difficult to project. Despite steady demand gains, stocks have fluctuated, increasing by 37,000 b/d in 1991, falling 79,000 b/d in 1992, and increasing 136,000 b/d in 1993.
Last year's industry stock draw amounted to 57,000 b/d, or a total of 20 million bbl for the year. Crude oil stocks were down 5 million bbl at 330 million bbl, and product stocks were down 15 million bbl at 71 0 million bbl.
OGJ's projection for yearend industry stocks of 1.05 billion bbl represents a build of 30,000 b/d.
At yearend, industry stocks will represent 58.4 days of supply at projected 1995 average demand levels. This will be down from 58.7 days of supply at yearend 1994. Stocks at yearend 1993 represented 61.5 days of product supply. Stocks at yearend were as high as 78 days of supply in 1981, but the tendency in recent years has been to carry stocks at closer to minimum operating levels.
Over the past 5 years total stocks at yearend have represented only about 60 days of supply, compared to 76 days of supply in the 1960s and 67 days of supply in the 1970s and 1980s.
TOTAL PRODUCT DEMAND
OGJ Forecast of U.S. Supply and Demand (68984 bytes)
Crude and Products Prices (11132 bytes)
Supply and Demand for Crude in the U.S (8038 bytes)
Consumption will move up in all major product categories in 1995. Demand for naphtha jet fuel, now a minor product, will continue to fall as the military switches to kerosine jet fuel.
Last year demand moved up for all products except naphtha jet fuel and residual fuel oil.
OGJ is projecting total U.S. product demand, including exports, at 18.89 million b/d for 1995, up 1.4%. Last year total demand averaged 18.63 million b/d, a 2.1% gain from the year earlier.
Exports fell 9.3% last year to 910,000 b/d and are expected to average 920,000 b/d in 1995. The decline last year was mainly in product exports,
Net of exports, therefore, domestic petroleum product demand will score its fourth consecutive annual gain to 17.97 million b/d for 1995.
That will still be well below the record high of 18.847 million b/d in 1978, after which demand fell sharply for 5 years in response to price hikes, reaching 15.231 million b/d in 1983. As oil prices fell in the mid-1980s, demand rebounded to 17.325 million b/d in 1989, recapturing 58% of the decline. The price jump associated with the Persian Gulf crisis cut demand in 1990 and 1991.
Improvements in consumption efficiency and fuel switching have reduced the intensity of oil demand relative to economic growth. The amount of oil energy consumed per dollar of GDP has generally fallen since 1973, when it averaged 10,700 BTU/$. Last year's 6,500 BTU/$ of GDP reflects a drop of 39%.
Demand intensity for oil is expected to slip to 6,400 BTU/$ of GDP in 1995.
MOTOR GASOLINE DEMAND
Motor gasoline demand is projected to move up again in 1995 on the strength of the increase in economic activity, growth of the vehicle fleet, and an increase in miles driven per vehicle. Pump prices will probably average slightly higher due to the added cost of reformulated fuel, but this will only slow the rate of growth in motor gasoline demand.
Efficiency of the vehicle fleet continues to improve, the rate depending on replacement of old with new vehicles. Improvements in vehicle efficiency are becoming harder to attain as most of the low mileage vehicles have been replaced. Preliminary estimates indicate that improvements in vehicle efficiency have slowed considerably in recent years.
OGJ projects 1995 motor gasoline demand at a record high 7.65 million b/d, up 48,000 b/d from last year. This will be the fourth consecutive year of increased motor gasoline demand and the third consecutive record. Gasoline demand fell during 1989-91. Last year motor gasoline consumption set a record, averaging an estimated 7.602 million b/d, up 1.7%.
Motor gasoline consumption reached an earlier peak of 7.412 million b/d in 1978, then fell as prices rose and conservation efforts and improved vehicle efficiencies took effect, bottoming at 6.539 million b/d in 1983.
During 1984-88, lower gasoline prices and steady economic growth boosted demand, with vehicle fleet growth and steadily increasing driving mileages more than offsetting gains in vehicle efficiency.
Average miles driven per gallon of gasoline increased yearly from a modem low of 13.3 mpg in 1973 to 21.69 mpg in 1991, an increase of 63%.
EIA estimates fuel efficiency in 1992 at 21.68 mpg and in 1993 at 21.64 mpg.
The average fuel consumed per car per year fell from 771 gal in 1973 to 496 gal in 1991, a drop of 47%. However this moved up to 512 gal in 1992 and an estimated 513 gal in 1993. This partly reflects an increase in miles driven.
The average miles driven per vehicle was 10,256 in 1973. This fell to a recent low of 9,141 in 1980. The average then climbed steadily to 11,100 miles/car/year in 1993 and 1994.
The vehicle fleet has grown as well. The total number of automobile registrations increased from 121.6 million in 1980 to 143.8 million in 1992.
Motor gasoline pump prices showed very little change in 1994, but there was some seasonal fluctuation. Prices tended to move up during the peak driving season and to fall as driving levels declined. The effect of rising demand was offset by lower feedstock costs, and prices remained steady through the year.
The OGJ U.S. average pump price for self service unleaded motor gasoline was $1.06/gal the first week of 1994. The pump price moved up to a peak of $1.209/gal the first week of September. The price slipped to $1.13/gal at the end of the year.
For the year the pump price averaged $1.116/gal vs. $1.108/gal in 1993. The 1994 motor gasoline pump price adjusted for inflation was the lowest ever. This is in spite of rising taxes on gasoline. The low price is a major reason demand continues to rise in the face of efficiency gains.
Motor gasoline prices will probably be slightly higher in 1995 as the requirement to produce reformulated gasoline for certain areas boosts refining costs and demand increases. But the price rise should not be substantial as crude feedstock costs are not expected to rise significantly. Worldwide, there is substantial crude oil production capacity.
JET FUEL DEMAND
Total jet fuel demand moved up last year for the second consecutive year, following two consecutive years of decline, averaging 1.53 million b/d, 61,000 b/d more than a year earlier.
The increase was all in kerosine jet fuel which moved up 116,000 b/d, to 1.473 million b/d. That was offset by a sharp drop in naphtha jet fuel demand used by the military, which was down 55,000 b/d to average 57,000 b/d in 1994. The military is shifting to kerosine jet fuel to insure an adequate economical supply.
Part of the military decline has shown up in the sharp increase in 1994 demand for kerosine jet fuel. Kerosine jet fuel is used primarily by commercial aircraft, and changes in demand generally reflect economic conditions and shifts in commercial aircraft fuel efficiency.
Total jet fuel consumption moved up for 9 consecutive years from 1.007 million b/d in 1981 to 1.522 million b/d in 1990. The increase over the 1981-90 period was due to expanding commercial airline business. Military demand for naphtha jet fuel has been falling since 1988, when it averaged 213,000 b/d.
Demand then fell in 1991 and 1992 as the economy moved into recession and the military cut back consumption. But as the economy has recovered so has demand for jet fuel.
Key operating statistics showed significant improvement in airline activity in 1994. Total revenue passenger seat miles flown by U.S. scheduled airlines for the first 11 months of 1994 were up 4.5% from the year before. Total passenger enplanements moved up 6.4% over the same period . And total available seat-miles were off 0.1% for the 11 months. There was improvement in both domestic and international activity. Domestic revenue passenger-miles were up 5% through November. Passenger enplanements were up 6.9% and available seat-miles were up 0.4%. International revenue passenger-miles moved up 3%, passenger enplanements increased 1.5%, and available seat-miles fell 1.5%.
Air freight revenue-ton-miles flown for the first 10 months of 1994 were up 9.7% from the same period of 1993. Domestic freight operations posted an increase of 8.6%, and international operations increased 11.1%. The substantial increase in activity more than offset any improvement in fleet fuel efficiency.
The increase in economic activity is expected to boost jet fuel demand again this year, up 30,000 b/d to 1.56 million b/d. The increase will be in kerosine jet fuel, which will increase 47,000 b/d to 1.473 million b/d. Military demand for naphtha jet fuel is projected to fall again, down 17,000 b/d to average only 40,000 b/d for this year.
DISTILLATE FUEL DEMAND
The increase in economic activity will boost demand for distillate fuel oil again in 1995, the fourth consecutive year of increased consumption. Demand for distillate fuel oil is projected to increase another 1.9% this year, to 3.27 million b/d. Last year demand moved up 5.5% to 3.209 million b/d. The increase last year was due to the improvement in the economic climate and an increase in heating oil demand.
Demand for distillate hit its peak in 1978 at 3.432 million b/d. Higher prices then led to conservation and fuel switching, and demand fell to 2.671 million b/d in 1982. Lower oil prices in the following years resulted in steadily increasing demand, interrupted only by the economic recession in 1990-91.
Last year the improved level of economic activity boosted industrial, highway transport, and railroad demand for distillate. And the cool winter weather sustained residential and commercial demand.
That pattern is expected to be repeated this year with normal winter weather during the heating season and competitive fuel oil prices sustaining residential and commercial demand. Competitive fuel oil prices will slow fuel oil conservation and conversions to natural gas. And increased economic activity will result in an increase in the rail and highway transport of goods, and increased distillate demand. Moderate fuel oil prices will also help sustain and possibly boost industrial and electric utility demand in 1995.
The average wholesale price of No. 2 fuel oil fell 7.2% in 1994 to an estimated 50.6/gal. That was the fourth consecutive year of declining fuel oil prices. The average wholesale price of No. 2 fuel oil in 1994 was down 27.4% from the 69-70/gal average of 1990.
Lack of a significant increase in crude oil prices this year will keep refinery feedstock costs in check and prevent any major increase in fuel oil price.
RESIDUAL FUEL OIL DEMAND
The slide in demand for residual fuel oil is expected to be reversed in 1995. OGJ expects resid demand to move up 21,000 b/d to 1.03 million b/d due to increased consumption in the industrial and utility sectors.
Increased demand for electrical power could boost heavy fuel oil consumption by utilities. Some of the addition,al power requirements will have to be fueled by coal, natural gas, and petroleum. Additional output from nuclear or hydro facilities is limited.
Many utilities have fuel switching capabilities that enable them to switch to the lowest cost fuels for peak generating needs. Resid is generally used in most existing facilities when additional generating capacity is needed to meet peak demand or to meet small incremental increases in electrical power demand. New fuel-switchable generating capacity usually uses distillate.
Commercial and industrial demand for resid should move up slightly with improvement in the economy. Transportation demand for resid is also expected to move up this year due to the increase in shipping required to meet the rise in petroleum imports.
Demand for residual fuel oil is quite sensitive to the price level of natural gas and coal. So the projected increase is dependent upon resid prices remaining competitive.
Although the economy continued to grow in 1994 demand for resid fell, dropping 6.6% to 1.009 million b/d. That was the sixth consecutive year of falling demand for residual fuel. Declining demand by electric utilities was the primary reason for the steady drop during most of that period. Utility demand moved up in 1993 but then fell sharply in 1994 as lower prices led to natural gas displacing resid.
Demand for resid was as high as 3.071 million b/d in 1977. Demand last year was down 67% from that peak.
OTHER PETROLEUM PRODUCT DEMAND
OGJ is projecting demand for LPG and ethane to move up 1.6% in 1995 to 1.89 million b/d. Last year demand averaged 1.859 million b/d, up 7.2% from 1.734 million b/d in 1993.
Closer to normal winter weather, improvement in the overall economy, and improvement in the chemical industry have boosted demand for liquefied petroleum gases. With closer to normal weather the last few years residential and commercial consumption is back up. Chemical demand has also recovered as industry activity has improved.
Demand for all of the other petroleum products as a group is projected to increase 2.4% in 1995 to 2.57 million b/d. Last year demand increased 3% to 2.511 million b/d.
This miscellaneous category will include 14.3% of total domestic demand in 1995.
Demand for other petroleum products is sensitive to changes in the economy and in particular the chemical and construction industries. Increases are expected in demand for asphalt, petrochemical feedstocks, and lubricants as the economy expands and transportation increases.
NATURAL GAS
U.S. Refined Products, Natural Gas Liquids, and Crude Stocks (14495 bytes)
Marketed Natural Gas Production (10902 bytes)
Natural gas is expected to run into price competition from competing fuels in 1995, but OGJ is projecting that consumption will continue to increase.
Consumption is expected to move up in the industrial and electric utility sectors but may register small drops in the residential and commercial sectors.
The accelerated growth in the economy will be the major factor pushing up demand. Normal cold winter weather may actually result in a slight decline in residential and commercial demand since 1994 started with record low cold weather in some areas. Industrial demand will increase due to economic growth and increases in non-utility power generation. Electric utility consumption of natural gas is expected to increase this year due to the strong demand for electrical power. Natural gas is expected to fuel a greater share of the increased demand for electricity due to limited growth from nuclear and hydro power.
Total U.S. natural gas consumption is forecast to move up 1.6% in 1995 to 21.38 tcf. The economic expansion, lower natural gas prices, and cold winter weather helped to boost consumption last year by 3.7% to 21.04 tcf. There were increases in all of the major economic sectors.
Residential demand increased an estimated 3.8%, and commercial demand was up 6.3%. Industrial demand moved up 2.3%, and electric utility demand increased 3.7%. The industrial sector consumes the largest volume of natural gas, about 38.7% in 1994.
Consumption of natural gas fell from 20.241 tcf in 1979 to 16.221 tcf in 1986, due to price increases and competition from other fuels. However, natural gas demand has been on the rise since that recent low. Lower prices and industry restructuring have made natural gas more competitive. Demand in 1994 will be up 4.129 tcf from 1986, recovering all of the reduction that occurred during 197986.
Natural gas consumption is expected to rise late in the 1990s, largely due to the expected increase in demand for electrical power.
U.S. gas production is also expected to move up this year. The rate of increase will be less than for consumption, with marketed natural gas production projected to move up 1.1% to 19.96 tcf. Last year domestic natural gas production increased 2.5% to 19.74 tcf, highest level since 1981.
Last year imports of natural gas moved up 8.1% to 2.54 tcf. Imports from Canada increased 8.6% to 2.46 tcf. LNG imports from Algeria fell to an estimated 70 bcf, and imports from Mexico were about 10 bcf. LNG imports were 82 bcf in 1993, 44 bcf in 1992, 63 bcf in 1991, and 84 bcf in 1990.
In 1995 total gas imports are expected to move up 4.7% to 2.66 tcf. Canadian imports will increase 4.3% to 2.565 tcf. LNG imports are projected at 80 bcf and imports from Mexico at 15 bcf.
The price of natural gas fell last year after rising in 1992 and 1993. Prices were relatively steady during 1987-91.
The average U.S. wellhead price of natural gas fell 11.4% in 1994 to an estimated $1.78/Mcf. This followed an increase of 15.5% in 1993 to an average $2.01 /Mcf.
Annual average gas prices had been relatively constant for 6 years: $1.67/Mcf in 1987, $1.69/Mcf in 1988 and 1989, $1.71/Mcf in 1990, $1.64/Mcf in 1991, and $1.74/Mcf in 1992.
Over that period a sharp increase in imports coupled with slow growth in demand made excess supply available to the market and kept prices low.
Natural gas prices hit a peak in 1984 at $2.66/Mcf. But as crude oil prices fell, fuel oil became more competitive, and fuel switching reduced gas demand. That forced natural gas prices lower. The increased imports and slow growth in energy demand kept downward pressure on prices for an extended period.
Increased consumption is expected to help boost natural gas prices again this year. However, the rate of increase will probably be modest due to competition from fuel oil and coal.
Copyright 1995 Oil & Gas Journal. All Rights Reserved.
