Energy Optimization Industry Review

Report Highlights

INTRODUCTION

U.S. petroleum demand in 2003 grew an estimated 1.4% to about 20 million barrels per day, partly on the strength of oil substitution for natural gas in electric power generation and in some industrial uses. In 2004, demand is expected to climb another 390,000 barrels per day, or 1.9%, to 20.4 million barrels per day as transportation- and industrial-related use offset some reversal in fuel switching. An additional 440,000 barrels per day of demand is anticipated for 2005, bringing the annual average consumption rate to 20.9 million barrels per day. This anticipated acceleration in growth is due to continued strong economic growth, high natural gas prices, and the continued use of fuel oil as a substitute in electricity production and industrial processes.

In 2004, natural gas prices are expected to average just under $5 per million Btu, falling somewhat along with oil prices. In 2005, natural gas spot prices are projected to fall again to average $4.83 per million Btu under the assumption that domestic and imported supply can continue to grow by about 1 to 1.5% per year. Natural gas demand is estimated to have declined 2.6% in 2003 largely due to high prices discouraging demand in the industrial and electric power sectors. However, expected growth in the economy, along with somewhat lower projected annual average natural gas prices, are expected to push 2004 demand up by about 1.2%. Demand in 2005 is expected to increase 1.8% as the economy continues to expand and prices ease slightly. Early estimates indicate that natural gas production increased approximately 2.0% in 2003. Natural gas production is expected to continue to expand modestly through 2005, as natural gas well completions, which totaled an estimated 20,000 in 2003, continue to grow to between 21,000 and 22,000 wells per year over the next 2 years.

Electricity demand in 2003 remained near its 2002 level. In 2004 and 2005, annual electricity demand is projected to grow by 2.2% and 2.3%, respectively, as the economic expansion accelerates. With regard to supply, nuclear generation declined 2.9% in 2003 compared to a year earlier. However, nuclear generation is likely to increase 3.6% in 2004 over 2003 levels when nuclear plants that experienced extended service outages come back online. Nuclear generation is expected to continue to grow in 2005. Hydroelectric generation is also projected to continue to increase in 2004 and 2005 due to the assumption of normal levels of precipitation. Other renewable sources for generation, led principally by wind power, are expected to continue to expand through 2005.

Electric sector coal consumption is estimated to have grown by about 1.6% in 2003. Coal-fired generation is expected to continue growing in 2004 and 2005, with coal demand in the power sector growing by 1.0% and 2.6%, respectively. While total U.S. coal production is estimated to have declined by 1.2% in 2003, expected growth in electric sector coal demand in 2004 and 2005 is projected to lead to increases in total coal production of 1.5% to 2.5% over the period.