Report#:DOE/EIA-0554(99)

Introduction

Macroeconomic Activity

International Energy

Household Expenditure

Residential Demand

Commercial Demand

Industrial Demand

Transportation Demand

Electricity Market

Oil and Gas Supply

Natural Gas Transmission & Distribution

Petroleum Market

Coal Market

Renewable Fuels

The International Energy Module determines changes in the world oil price and the supply prices of petroleum products for import to the United States in response to changes in U.S. import requirements.  A market clearing method is used to determine the price at which worldwide demand for oil is equal to the worldwide supply.  The module determines new values for oil production and demand for regions outside the United States, along with a new world oil price that balances supply and demand in the international oil market.  A detailed description of the International Energy Module is provided in the EIA publication, Model Documentation Report:  The International Energy Module of the National Energy Modeling System, DOE/EIA-M071, (Washington, DC, April 1994).

Key Assumptions

The level of oil production by countries in the OPEC is a key factor influencing the world oil price projections incorporated into AEO99.  Non-OPEC production, worldwide regional economic growth rates and the associated regional demand for oil are additional factors affecting the world oil price.

OPEC oil production is assumed to increase throughout the forecast, making OPEC the source for the worldwide increase in oil consumption expected over the forecast period (Figure 2).  OPEC is assumed to be the source of additional production because its member nations hold a major portion of the world’s total reserves—reaching almost 800 billion barrels, over 78 percent of the world’s total, at the end of 1997.5 For the AEO99 forecasts, three different OPEC production paths are the principal assumptions leading to the three world oil price path cases examined:  the low oil price case, reference case, and high oil price case. The values assumed for OPEC production for the three world oil price cases are given in Figure 2. Non-OPEC oil production is expected to follow a gradually rising path—with an increase of more than 1.0 percent per year over the forecast period—as advances in both exploration and extraction technologies result in this upward trend (Figure 3).  One fixed path for non-OPEC oil production is initially input for all three world oil price case projections.  Non-OPEC production depends upon the values of world oil prices, so the final forecast solutions of the levels of non-OPEC production for the three oil prices cases diverge from the initial assumptions.  Production is higher in the high oil price case since more marginal wells are profitable at the higher prices.  Likewise, lower world oil prices are associated with lower production levels.  The final non-OPEC production paths for the three oil price cases are shown in Figure 3.

Figure 2.  OPEC Oil Production, 1970-2020 (Million Barrels per Day)

Figure 3.  Non-OPEC Oil Production, 1970-2020 (Million Barrels per Day)

The assumed growth rates for GDP for various regions in the world are shown in Table 4.  This set of growth rates for GDP was assumed for all three price cases.  The GDP growth rate assumptions are from selected issues of The WEFA Group, World Economic Outlook.  The WEFA GDP growth rates have been used for all regions of the world except for the developing countries, for which the GDP growth rates have been assumed to be about 1 percentage point per year lower than the WEFA values.

Table 4.   Average Annual Regional Gross Domestic Product Growth Rates, 1997-2020

The WEFA GDP forecasts are made with limited consideration of prospective energy market conditions. EIA’s analysis indicates that economic growth by the developing countries at the rates suggested by WEFA would put upward pressures on energy production and prices (particularly for oil) that could not be sustained by the market.  These high economic growth rates would lead to oil prices high enough to retard economic growth.  The 1-percentage-point reduction in economic growth rates for developing countries provides a better balance between sustainable economic growth rates and growth in energy production.

The values for growth in oil demand calculated in the International Energy Module, which depend upon the oil price levels as well as the GDP growth rates, are shown in Table 5 for the three oil price cases by regions of the world.  The different rates of growth for oil consumption in the three price cases reflect the different levels in consumption calculated for the different oil prices.

Table 5.   Average Annual Regional Growth Rates for Oil Demand, 1997-2020

Economic growth and oil consumption in the Former Soviet Union (FSU) are expected to reverse the downward trends exhibited over the past half-dozen years. After 1997, oil consumption in the FSU is expected to begin gradually rising and increase by almost 70% by the end of the forecast period. After 1997, oil production in the FSU also recovers and the FSU remains a net exporter through 2020.  In contrast, China is expected to remain a net importer of oil through 2020.  

Petroleum product imports are represented in the projections through a series of curves that present the quantity of each product that the world market is willing to supply to U.S. markets for each of the five Petroleum Administration for Defense Districts (PADDs).  Curves are provided for ten products: traditional gasoline (including aviation), reformulated gasoline, No. 2 heating oil, low-sulfur distillate oil, high- and low-sulfur residual oil, jet fuel (including naptha jet), liquefied petroleum gas, petrochemical feedstocks, and other. The curves are calculated using the World Oil Refining Logistics Demand (WORLD) Model.6 The WORLD model uses as inputs worldwide demand for crude oil and petroleum products for world oil prices that are in the range of prices assumed for AEO99, as well as values for worldwide petroleum production over this price range. The refinery technology incorporated in the model is updated using the most recently available Oil & Gas Journal Database.7