Annual Energy Outlook 2006 with Projections to 2030 - Usinfo.org

Issues in FocusIntroductionThis section of the AEO provides in-depth discussionson topics of special interest that may affect the projections,including significant changes in assumptionsand recent developments in technologies for energyproduction, energy consumption, and emissions controls.With world oil prices escalating in recent years,this year’s discussions place special emphasis onworld oil prices, including a discussion of EIA’s worldoil price outlook, the impact of higher world oil priceson economic growth, and changing trends in the U.S.refinery industry.AEO2006 extends the AEO projections to 2030 for thefirst time. An important uncertainty with a longerprojection time horizon concerns the developmentand implementation of various technologies. Accordingly,this section includes a discussion of those technologiesthat, if successful, could affect the energysupply and demand projections in later years, focusingon energy technologies that could have theirgreatest impacts toward the end of the projectionperiod, those expected to have the greatest impact inthe automotive sector, and nonconventional liquidstechnologies that will play a growing role in meetingU.S. energy needs.World Oil Prices in AEO2006World oil prices in the AEO2006 reference case aresubstantially higher than those in the AEO2005 referencecase. In the AEO2006 reference case, worldcrude oil prices, in terms of the average price ofimported low-sulfur, light crude oil to U.S. refiners,decline from current levels to about $47 per barrel(2004 dollars) in 2014, then rise to $54 per barrel in2025 and $57 per barrel in 2030. The price in 2025 isapproximately $21 per barrel higher than the correspondingprice projection in the AEO2005 referencecase (Figure 10).The oil price path in the AEO2006 reference casereflects a reassessment of the willingness of oil-richcountries to expand production capacity as aggressivelyas envisioned last year. It does not represent achange in the assessment of the ultimate size of theworld’s petroleum resources but rather a lower levelof investment in oil development in key resource-richregions than was projected in AEO2005. Several factorscontribute to the expectation of lower investmentand oil production in key oil-rich producing regions,including continued strong worldwide economicgrowth despite high oil prices, and various restrictionson access and contracting that affect oil explorationand production companies.Although oil prices have stayed above $40 for the past2 years, world economies have continued to growstrongly: in 2004, global GDP registered the largestpercentage increase in 25 years. As a result, majoroil-exporting countries are likely to be less concernedthat oil prices will cause an economic downturn thatcould significantly reduce demand for their oil. Wheneconomies continue to grow despite higher oil prices,key suppliers have much less incentive to expand productionaggressively, because doing so could result insubstantially lower prices. Given the perceived lowresponsiveness of oil demand to price changes, suchan action could lower the revenues of oil exportersboth in the short term and over the long run.International oil companies, which normally areexpected to increase production in an environment ofhigh oil prices, lack access to resources in some keyoil-rich countries. There has been increased recognitionthat the situation is not likely to change over theprojection period. Furthermore, even in areas whereforeign investment by international oil companies ispermitted, the legal environment is often unreliableand complex and lacks clear and consistent rules ofoperation. For example, Venezuela is now attemptingto change existing contracts in ways that may makeoil company investments less attractive. In 2005, Russiaannounced a ban on majority foreign participationin many new natural resource projects and imposedhigh taxes on foreign oil companies. These changes,and others like them, make investment in oil explorationand development less attractive for foreign oilcompanies.The structure of many production-sharing agreementsalso increases the risk faced by major oil companiesin volatile oil price environments. Manycontracts guarantee a return to the host governmentat a fixed price, plus some percentage if the actualFigure 10. World oil prices in the AEO2005 andAEO2006 reference cases (2004 dollars per barrel)605040302010AEO2005HistoryProjections02000 2004 2010 2015 2020 2025 2030AEO200632 Energy Information Administration / Annual Energy Outlook 2006