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

Issues in Focusbase in the high price case. The Federal funds rate islower in the high price case than in the reference case,and the unemployment and CPI inflation rates arehigher.After 2015, as the differential in the oil price growthrates between the high price and reference casesshrinks, rebound effects from the lower employmentcosts and lower Federal funds rate in the high pricecase are stronger than the contractionary impacts ofhigher oil prices, leading to higher real GDP growthand lower CPI inflation than in the reference case. Asa result, in 2030, the real GDP growth rate and unemploymentrate in the high price case are nearly thesame as in the reference case, but the Federal fundsrate is lower.The assumptions behind the oil price cases are that:the price changes do not come as a shock and come tobe expected over time; the Federal Reserve is able tocarry out an activist monetary policy effectively,because core inflation remains low; exchange rates donot change from those in the reference case; andother countries experience impacts similar to those inthe United States. Changes in any of these assumptionscould increase the projected impacts on the U.S.economy.The economic impact of oil price changes is an issuethat continues to attract considerable attention, especiallyat this time, when oil prices have continued torise over the past 3 years. Over the past 30 years,much has been learned about the nature of the economicimpacts and the extent of damage possible.Empirical estimates based on history provide two setsof results. In the 1970s and 1980s the damages weresubstantial, and it is believed that recession followed—andmay have been caused by—the oil priceincreases. Current literature suggests that, in today’sU.S. economy, sustained higher oil prices can slowshort-term growth but are not likely to cause a recessionunless other factors are present that shock economicdecisionmakers or lead to inappropriateeconomic policies. The AEO2006 high and low pricecases provide estimates of the economic impacts onsuch an economy, and the projections in the pricecases are within the range that other macroeconomicmodels predict.Changing Trends in the Refining IndustryThere have been some major changes in the U.S.refining industry recently, prompted in part by a significantdecline in the quality of imported crude oiland by increasing restrictions on the quality offinished products. As a result, high-quality crudes,such as the WTI crude that serves as a benchmark foroil futures on the New York Mercantile Exchange(NYMEX), have been trading at record premiums tothe OPEC Basket price.WTI is a “light, sweet” crude: light because of its lowdensity and sweet because it has less than 0.5 percentsulfur content by weight. This combination of characteristicsmakes it an ideal crude oil to be refined in theUnited States, yielding a greater portion of its volumeas “light products,” including both gasoline and dieselfuel. Premium crudes like WTI yield almost 70 percentof their volume as light, high-value products,whereas heavier crudes like Mars (from the deepwaterGulf of Mexico) yield only about 50 percent oftheir volume as light products. The AEO2006 projectionsuse the average price of imported light, sweetcrudes as the benchmark world oil price [25].The average sulfur content of U.S. crude oil importsincreased from 0.9 percent in 1985 to 1.4 percent in2005 [26], and the slate of imports is expected to continue“souring” in coming years. Crude oils are alsobecoming heavier and more corrosive than they werein the past, largely because fields with higher qualityvarieties were the first to be developed, and refiners’preference for quality crudes has led to the depletionof those reserves over the past 100 years and reducedthe market share of the light, sweet crude thatremains.The industry standard measure for oil density is APIgravity; a lower gravity indicates higher density(heavy viscous oil), and a higher gravity indicateslower density (lighter, thinner oil). Over the past 20years, the API gravity of imported crude oil hassteadily declined, from 32.5 degrees to 30.2 degrees[27]. The standard measure for corrosiveness is thetotal acid number (TAN), indicating the number ofmilligrams of potassium hydroxide needed to neutralizethe acid in 1 gram of oil. The most corrosivecrudes, with TANs greater than 1, require significantaccommodation to be processed. Usually, their corrosivenessis mitigated by the addition of basic compoundsto neutralize the acid; however, some refinershave chosen instead to upgrade all their piping andunit materials to stainless steel. Whereas there werevirtually no high-TAN crudes processed in 1990, theynow make up about 2 percent of the crude oil slate,and a Purvin & Gertz forecast indicates that they willincrease to 5 percent or more in 2020 [28] (Figure 14).As refining inputs have declined in quality, demandfor high-quality refined products has increased. TheEnergy Information Administration / Annual Energy Outlook 2006 39