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EIA Annual Energy Outlook: Takeaway #3

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This article is the third of a four-part series covering the 2018 Annual Energy Outlook from the United States Energy Information Administration (EIA). The 2018 edition covers predictions through 2050, offering insights for energy decision makers.

4 Takeaways 

The 2018 Energy Outlook offers four key takeaways:

  1. Net Exports

  2. Increased Efficiencies

  3. Production Growth

  4. Generation Capacity

In the first two, we covered how the United States will become a net energy exporter in the next few years, and what stagnant energy demand might mean for large businesses. Now, we’ll examine the third major takeaway from the report: how will the continued growth of liquids and natural gas production impact the U.S. energy economy in the years to come?

The Growth of Liquids and Natural Gas Production 

Having examined the demand side of the equation, our focus turns to supply. The EIA projects that liquids and natural gas production in the United States will not slow down anytime soon, accounting for almost 39 percent of U.S. energy production by 2050.

That total will be the largest share of total energy production among all sources. Meanwhile, liquids such as petroleum will not grow that fast or for that long, but still face an upswing in production until at least 2042.

Perhaps the most surprising part of this projection is that in an increasingly competitive environment, other sources have long been touted to have the upper hand. And yet, despite low gas prices and diminished petroleum demand in the United States, production will continue to flourish. 

Production of Petroleum and Other Liquids

Petroleum and other liquid fuels have long been a major cog in the machine of the global energy markets. And yet, in developed markets, that balance is beginning to tilt. U.S. demand of petroleum is almost stagnant, thanks to renewable alternatives that satisfy conscience and CSR policies alike at increasingly affordable rates. 

The United States also continues to be a liquid energy producing powerhouse. Earlier this year, the International Energy Agency published a forecast that showed the U.S. dominating the oil production industry until at least 2023. Likewise, this year's EIA report showed a drastic shift toward liquid exports, which is expected to continue in the near and long-term future.

While the U.S. remains a net importer thanks to strong crude oil demand, petroleum has become an important export, contributing to the country’s move to a net energy exporter by 2022. Leading crude oil producers in the United States are looking to international markets, where demand remains strong and is expected to continue rising.

In fact, by the end of this year, global oil demand may be satisfied by U.S. production alone, though that’s not sustained through 2050, when more efficient fuels may begin to take over. Still, global demand remains the major reason that U.S. production continues strong even as domestic demand declines.

The Natural Gas Boom

According to the EIA's outlook, there is little stopping the continued rise of natural gas. It's the fastest growing energy source due to expanding consumption in the domestic industrial sector.

And yet, like liquids, much of that production is exported. By 2050, the United States is projected to export almost 10 quadrillion BTUs more than it imports. 

Much of this gas will no longer move via pipeline to Canada and Mexico, but to a farther destination as LNG. The Institute for Energy Research showed that China has become an especially significant trading partner:

"The United States shipped $139 million of LNG (liquified natural gas) to China in the first seven months of this year. U.S. transport costs to Asia are low and Asian LNG prices have fallen to the weakest level in more than a decade. Chinese natural gas demand could grow from 206 billion cubic meters (7.27 trillion cubic feet) in 2016 to 330 billion cubic meters (11.65 trillion cubic feet) in 2020—an increase of 60 percent. The government wants to increase the role of natural gas within the country's energy mix from six percent in 2016 to 8 to 10 percent by 2020."

In addition to increased demand, the availability of natural gas in the United States plays an obvious role in the gas boom. Since 2007, discovery of shale resources have rapidly expanded the horizon of this industry. Global demand has sustained that production even as domestic and international gas prices drop.

What does this mean for energy prices?

The EIA report suggests that while U.S. resources and improved technology significantly affect oil and natural gas prices, global market conditions matter more, especially when it comes to projecting oil prices into the future. 

"Natural gas prices are highly sensitive to domestic resource and technology assumptions explored in the side cases. Across all cases, to satisfy the growing demand for natural gas, production expands into more expensive-to-produce areas, putting upward pressure on production costs and prices."

As a non-traditional source for natural gas, it can be difficult to estimate the ROI of shale extractions. Local environmental regulations can also significantly increase costs and decrease production opportunities.

Because of these variables, it can be difficult to project the future of shale gas extraction. Some experts, such as the World Bank, estimate a relatively steady increase to support greater production. Others predict a less certain future with significant fluctuation. The same is true for crude oil and petroleum forecasts, which are rising steadily but not without potential volatility.

What does it mean for your business?

Though potentially volatile, liquids and gas production is expected to rise due to international demand.

Above all, energy literacy is key at decision-making levels. Complex organizations must be strategic and look for tactics to protect their energy budgets while also taking advantage of good prices. 

The rise in natural gas extraction from shale deposits, for instance, has added created economic activity in several regions. At the same time, a decline in that production capacity due to dropping prices could have quite the opposite effect

Read the final installment of this year’s EIA series, where we examine renewable energy alternatives.

Read Takeaway #4

Posted: July 06, 2018