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Reports & Statistics ยป Supply & Demand Committee Forecasts

Report of the IPAA Supply and Demand Committee

Short-run Forecast Summary (2001-2002)

October, 2001

 

At the meeting on October 24, 2001, the IPAA Supply and Demand Committee reached the following conclusions about industry, energy and macroeconomic trends in 2001-02:

  • Economic activity, as measured by inflation-adjusted Gross Domestic Product (GDP), is projected to increase by 1.0 percent in 2001 and by 1.3 percent in 2002.
  • Energy consumption in 2001 is expected to decrease by 0.7 percent to 95.01 quadrillion BTUs (quads). A recovering economy absent weather surprises is expected to drive U.S. energy consumption in 2002 to an anticipated 96.24 quads, an increase of 1.3 percent.
  • U.S. natural gas consumption in 2001 is expected to decrease 1.9 percent to 22.13 trillion cubic feet (Tcf). Consumption in the electric utilities and industrial sectors will show the biggest drop with 7.4 percent and 4.8 percent declines, respectively.
  • In 2001, domestic natural gas production is projected to show an increase of 2.9 percent to 19.53 Tcf. Gas-directed drilling activity has dropped off significantly since mid-2001 but is expected to rebound in 2002 with growing demand and tightening supply.
  • Total gas imports will increase by 7.3 percent in 2001, and by a further 0.7 percent to 4.1 Tcf in 2002. Year-to-date Canadian pipeline imports are up almost 10 percent through August.
  • Domestic crude oil production holds steady, increasing by 0.2 percent to 5.83 MM b/d in 2001. Alaska production was stymied by pipeline vandalism and gains from Gulf of Mexico have been modest. With lower 48 production locked in a treadmill cycle, production is also expected to remain flat or slightly negative in 2002.
  • Total petroleum demand growth will decrease by 0.5 percent in 2001, despite strength in gasoline and heating fuels. In 2002, total petroleum demand is predicted to increase by 0.4 percent to 20.72 MM b/d.
  • Petroleum imports are projected to average 11.5 MM b/d in 2001, an increase of 0.5 percent, and drop slightly in 2002. Oil imports are expected to comprise almost 59 percent of domestic petroleum demand in 2001 and 58 percent in 2002.

GENERAL ECONOMY

The economy already grappled with contractionary pressures before the terrorist attack on America. The egregious events of 9/11 accelerated demand shortfalls and prompted emergency fiscal and monetary responses from the Administration and Federal Reserve to help assuage the shocks to business and consumer spending. The extent of the economic weakening has yet to be fully realized but indicators hint that the current 'air pocket' will probably last through mid-2002. For 2001, the Committee projects economic growth to significantly taper off from the torrid pace of the last eight years, with GDP increasing by 1 percent. Impressive productivity growth, low unemployment, and mild inflationary pressure through the first half of the year have helped cushion the slowdown, and thus far, prevent a full-scale 'meltdown.' The country has demonstrated its collective resolve in stabilizing vulnerable sectors but full recovery depends on consumer/business confidence, technology's resurgence, layoff trends, and manufacturing performance over the next few quarters.

During 2000, the U.S. economy's growth rate fell from 5.2 percent in the second quarter of the year to 2.8 percent in the fourth quarter. Productivity strength matched by historically low unemployment and inflation have insulated the economy from a worst case scenario or a deflationary spiral such as one being experienced by Japan over the last decade. Consumer spending, which represents two-thirds of economic activity, has helped to offset the slump in manufacturing and will continue to play a prominent role in the eventual recovery in demand. Given these economic trends and war-related developments, the Committee expects comparatively weak GDP growth in 2001 at 1 percent with a 1.3 percent increase in 2002.

Growth in first quarter 2001 has been revised to 2.6 percent while second quarter growth was reduced to 1.2 percent (vs. 1-2Q00). The third quarter brought a contraction of 0.3 percent (vs. 2Q01): the first negative quarter since the first quarter of 1993. The unemployment rate has risen from 4 percent to 5.7 percent in the last year through November. Business investment continues to be the primary negative. However, consumption growth has managed to maintain in the positive range at 1.2 percent for the third quarter. The interplay between these two factors will continue to dominate capital investment trends in the coming quarters.

Annual inflation rates have slowly been edging up in the past two years but their low range has helped shelter us from more extreme fallout. The implicit price deflator has posted 2.3 percent increases for the first three quarters of the year. Mild inflationary pressures over the past few years have played a large role in buying time for the economy.

Manufacturing growth, as measured by the Index of Industrial Production, is expected to be significantly lower than GDP in 2001, decreasing by 2.3 percent. Industrial production has fallen for 13 consecutive months. 'Just-in-time' inventories have helped prevent major overhangs but have taken their toll on new manufacturing orders. Lower energy prices, however, have softened the blows felt by industry throughout most of the year.

ENERGY CONSUMPTION

U.S. energy consumption is expected to decrease this year to 95.01 quadrillion BTUs (quads), down from 95.71 quads in 2000. (See Table III) This 0.74 percent decrease is markedly lower than the 1995-2000 average of 1.8 percent, reflecting a cooling economy. In 2002, the Committee sees a rebound with energy consumption growing by 1.3 percent.

Three mild seasons based on relative heating/cooling degree days have exacerbated demand weakness in padding storage inventories to record-high levels. Adjusting transportation patterns after September 11 have softened jet fuel demand while bolstering gasoline consumption. However, moderate weather has weakened natural gas and distillate heating demand despite the onset of a low price environment.

Most of the fossil fuels are expected to decrease in usage for 2001. Coal is an exception, increasing by 0.1 percent to 22.5 quads in 2001 and to 22.8 quads in 2002. Coal increases are driven largely by cheaper comparative costs, reduced contract volatility, and a national drive to open clean coal-fired plants to meet increased generation demand. Natural gas, as a percentage of total energy consumption, is expected to decrease by 1.1 percent in 2001 to 23.1 quads but rise by 2 percent in 2002 to 23.6 quads. Volatile price trends, bloated inventories, and weak industrial and electricity demand have sapped the momentum gained in 2000. Decreased oil prices will adversely affect gas demand this winter and fuel switching options towards residual fuel oil will temper demand further.

Nuclear energy consumption is expected to decrease in 2001 by 0.9 percent and gain 0.1 percent in 2002, after rising almost 12 percent between 1998 and 2000. It is noteworthy that U.S. nuclear plants established a record in generation for the year 2000, surpassing the previous world record, also held by the U.S. for 1999. The Committee believes 2001 will show a decrease in hydro-energy consumption of 5.5 percent before an increase of 4.2 percent in 2002. Weather patterns in the Northwest have led to considerable shortfalls in hydro-energy's relative supply-side contribution. Yet, weather aside, the paucity of available new sites for hydro projects in conjunction with growing environmental impact concerns will affect future hydro-energy potential.

Energy efficiency (intensity) is indicated by the declining amount of energy consumed per dollar of GDP. After significant improvement in energy efficiency from 1997 to 2000, the Committee expects energy efficiency to improve by an impressive 5.3 percent in 2001 and remain flat in 2002. The 2001 phenomenon is more generally attributable to lower prices and decreased demand than to major efficiency gains.

NATURAL GAS

Demand:

Natural gas demand will drop in 2001 but growth will recover in 2002 with a strong rebound in the industrial sector and more moderate build-up in electric utilities. In 2001, demand is projected to drop by 1.9 percent to 22.1 Tcf. Demand will grow by 3.4 percent in 2002 with the Committee's assumption of an economic recovery in the second half.

Increased utilization of electric utilities and colder temperatures in early 2001 helped lift residential demand by 1.8 percent in 2001 and commercial gas usage by 4.1 percent. In 2001, industrial gas demand will drop by 4.8 percent to 9.1 Tcf, reflecting the impact of decreased manufacturing activity, high prices in the first half of the year, and the increased role of fuel switching. Electric utility gas consumption is expected to decrease by 7.4 percent in 2001 due to the commingling of economic shocks, mild weather, and higher natural gas prices.

Assuming normal weather in 2002, residential and commercial gas consumption are forecast to each decrease by 0.8 and 2.3 percent respectively. Industrial gas demand is expected to increase 8.1 percent in 2002, well over the growth rate of the Industrial Production Index.

Gas consumption by regulated electric utilities is expected to continue to decrease. Electric utility gas usage is expected to regain some lost ground in 2002 to reach 2.86 Tcf. Natural gas non-utility consumption has been growing at a much faster rate than utility natural gas consumption.

Gas exports increased by almost 29 percent between 2000-2001 due to bloated inventories and reduced demand. The Committee expects gas exports, primarily to Canada and Mexico, to reach 293 Bcf in 2002-exceeding the 244 Bcf peak in 2000. Natural gas demand in Mexico continues to grow at rates approaching 10 percent, increasing its role as a net importer.

Supply:

U.S. natural gas production is expected to increase 2.9 percent in 2001 to 19.53 Tcf. The Committee believes that natural gas growth will continue to be focused on the shallow shelf of the Gulf of Mexico, supplemented by modest increases in lower 48 onshore drilling activity. With decline rates ranging between 21-23 percent, the marked increase in gas-directed drilling through mid-2001 has yielded a rather lukewarm production response. The drilling downturn in the second half of 2001 is omnipresent with rigs falling by almost 250 from the July high, affecting marginal projects onshore and in the Gulf of Mexico. Domestic gas production is expected to grow in 2002 by 0.1 percent, reaching 19.55 Tcf.

After growing at double-digit rates annually between 1986 and 1995 then slowing over the past few years, total gas imports will increase by 7.3 percent in 2001 to 4.1 Tcf (compared to 3.5 Tcf in 1998). Pipelines and spare capacity have increased Canadian imports by 7 percent compared to last year. Pipeline imports from Canada accounted for over 13 percent of total U.S. gas supply in 2000. LNG (liquefied natural gas) imports will continue to factor into the import matrix, supplementing Canadian imports and broadening U.S. supply alternatives as a peaking fuel. There are close to 20 LNG terminal proposals in deliberation offering capacity additions of approximately 9 Bcf/day. The Committee expects overall natural gas imports will increase 0.7 percent in 2002.

Inventories are bloated with record levels of natural gas as the injection season continues to be prolonged due to mild temperatures. Low electricity demand has further aggravated the situation, which is a reversal of 2000 storage trend, and implies an ample storage cushion through 2002. Low crude prices and the prevalence of cheap heating substitutions have kept natural gas on the defensive with price declines matched by reduced drilling activity.

PETROLEUM

Demand:

Domestic demand for petroleum products will decrease by 0.3 percent in 2001 dropping to 19.64 million barrels per day (MM b/d) or 20.65 MM b/d including exports. Assuming normal weather, the Committee foresees relatively paltry growth in 2002 with an anticipated rise in demand of 0.6 percent to 19.76 MM b/d, excluding exports.

Motor gasoline demand is forecast to increase 1 percent in 2001 to an average of 8.56 MM b/d. The Committee expects 2002 gasoline consumption to be 8.61 MM b/d, an increase of 0.7 percent. Steep price declines and transportation switching from flying to driving have helped buoy gasoline demand despite the beleaguered economy.

The air traffic industry has suffered dramatically in the wake of the attack on America with reduced capacities and flights. Demand had already been falling in the months before the attack: demand was down over 8 percent in August. The Committee estimates that demand for aviation fuel will decrease by 3.5 percent in 2001. Aviation fuel demand will slightly recover in 2002, increasing 0.2 percent to 1.67 MM b/d.

Demand for distillate fuel is expected to increase by 3.4 percent in 2001 and will be followed by a 0.2 percent decrease in 2002. Demand for 2001 of 3.85 MM b/d will drop to 3.84 MM b/d for 2002. Impressive first quarter 2001 consumption due to cold weather and fuel switching helped prop up distillate for the year.

The Committee expects residual fuel oil demand to increase 4.7 percent in 2001. In 2002, the Committee sees residual fuel decreasing by 6.3 percent, falling to 892,000 b/d. Residual fuel usage in early 2001 resulted from fuel switching (from higher priced natural gas). Since August, however, many industrial and utility users reverted back to natural gas as the price softened.

Deliveries of other petroleum products are expected to decrease by 5.3 percent in 2001 and increase by 2.8 percent in 2002. These products are generally more sensitive to economic fluctuations and include liquefied petroleum gas (LPG) and various petroleum feedstocks, still gas for fueling refineries, asphalt and road oil.

Supply:

The Committee forecast domestic crude oil production at 5.83 MM b/d in 2001, a 0.2 percent increase from 2000. A slight gain for lower 48 production was matched by declines in Alaska resulting from delays associated with the Trans-Alaska Pipeline vandalism. Since mid-2001, Alaska has produced between 0.97 MM b/d and 0.90 MM b/d, but the new Northstar field and increased output from the Alpine field should improve deliverability.

Gulf of Mexico production through mid-2001 showed a relatively modest daily average of 1.48 MM b/d compared to a 2000 yearly average of 1.53 MM b/d. Following June, Gulf output has trended up toward a 1.54 MMb/d level; significant as the Outer Continental Shelf constitutes 27 percent of our total production base. Oil-directed rotary rig activity, according to Baker Hughes, is down over 75 rigs from a year ago pointing towards weakness going into 2002. Workover rigs, which maintain current production, have dropped by almost 10 percent between August and October 2001 with significant losses in the Texas Gulf Coast, Southeastern, and Midcontinent regions. The Committee forecasts a production decline of 0.1 percent in 2002 despite recovery of Alaskan production.

Total petroleum imports will rise 0.5 percent in 2001, with crude oil imports increasing by 0.8 percent and petroleum product imports declining by 0.5 percent. September crude oil import figures show Iraq as the fourth largest supplier to the US with 1.2 MM b/d (compared to 765,000 b/d for the equivalent period in 2000). Products comprise approximately one-fifth of total imports. Weak imports of jet fuel and residual fuel have been balanced by greater imports of distillate and gasoline. Total imports will fall 0.1 percent in 2002 to 11.5 MM b/d, according to the Committee. The ratio of imports as a percent of domestic demand (excluding exports) will stand at 58.6 percent in 2001 and 58 percent in 2002.

INTERNATIONAL

Global demand has largely fallen in line with economic contraction and the Committee expects the increase in global oil demand in 2001 to be limited to just over 0.2 MM b/d, or 0.3 percent compared to 2000. This might be too generous. The Committee also expects oil demand to recover in 2002, especially in North America and to a smaller degree, in Asia. Total global oil demand in 2002 is projected to increase by 0.86 MM b/d or 1.1 percent. However, there exists considerable demand-side uncertainty associated with the attack on September 11 and the range of successive military action and potential exogenous shocks.

Third quarter global oil demand fell by approximately 750,000 b/d. In September alone, global oil demand fell by 1.6 MM b/d to 75.59 MM b/d. However, demand recovered 0.2 MM b/d in October and 0.6 MM b/d in November with growth in both OECD and non-OECD economies. OECD weakness was apparent before the attack and demand plunged following September 11, especially in North America and the Asia-Pacific region.

Despite the post-shock reverberations and mild weather, the fourth quarter numbers have proven more optimistic than anticipated. This has especially been the case with stronger marginal US demand seen in products such as gasoline and with early stockpiling of distillate in Europe. Anemic demand looks to continue through mid-2002 throughout the OECD countries but positive signals in the fourth quarter look to ease the downside in the first half of next year. Non-OECD demand, about a third of total demand in 2000, will grow in 2001 as a result of moderate growth in relatively insular markets in China and the Former Soviet Union (FSU).

The Committee predicts a 0.2 percent rise in supply with 76.83 MM b/d in 2001 and 0.3 percent growth in 2002 to 77.09 MM b/d. Rising non-Opec production and falling Opec market share have added new sensitivity to a market already bearing the liabilities of generous excess capacity, weak prices, and stalled demand. Following the inconclusive meeting in Vienna on 14 November, Opec is looking for cooperation from Russia, Norway, Oman, and Mexico for a concerted production cutback (1.5 MM b/d for Opec and 0.5 MM b/d for non-Opec) in January. An agreement looks likely but compliance issues amongst Opec-10, the growth of Russian product exports, and increased Iraqi production further complicate matters on the supply side.

Aside from the North Sea and West Africa supply increases, Russia has emerged as the producer of the year. Production in Russia has surpassed 7 MM b/d and looks to sustain these levels going into 2002. The Committee shows FSU production rising over 8 percent in 2001 to 8.58 MM b/d and by approximately 3 percent to 8.81 MM b/d in 2002. Only Saudi produces more crude than Russia.

Reconciliation between the various producing groups and handling of Iraqi machinations will challenge the supply side until demand returns in the next year. Conflicting political and national security interests often do not mesh with national and global economic imperatives making volatility a constant actor on the global oil market.