Energy Prices 

EIA has raised the reference case path for world oil prices in AEO2008 (although the upward adjustment is smaller than the last major adjustment, introduced in AEO2006). In developing its current oil price outlook, EIA explicitly considered four factors: (1) expected growth in world liquids consumption; (2) the outlook for conventional oil production in countries outside the Organization of the Petroleum Exporting Countries (non-OPEC producers); (3) growth in unconventional liquids production; and (4) OPEC behavior. Global economic growth has been strong over the past few years, despite high oil prices; and it now appears that, in the mid-term, the cost of non-OPEC conventional oil and unconventional liquids will be higher than previously assumed. As a result, in the AEO2008 reference case, OPEC and non-OPEC production volumes and total world liquids production are similar to those in the AEO2007 reference case, but the oil prices are higher.⁴ 

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In the AEO2008 reference case, real world crude oil prices (defined as the price of light, low-sulfur crude oil delivered in Cushing, Oklahoma, in 2006 dollars) decline gradually from current levels to $58 per barrel in 2016 ($70 per barrel in nominal dollars), as expanded investment in exploration and development brings new supplies to the world market. After 2016, real prices begin to rise (Figure 1), as demand continues to grow and higher cost supplies are brought to market. In 2030, the average real price of crude oil is $72 per barrel in 2006 dollars, or about $113 per barrel in nominal dollars. Alternative AEO2008 cases address higher and lower world crude oil prices. 

Oil prices currently are above EIA’s reference case estimate of the long-run equilibrium price. Temporary shortages of experienced personnel, equipment, and construction materials in the oil industry, political instability in some major producing regions, and recent strong economic growth in major consuming nations have combined to push oil prices well above sustainable levels. Although some analysts believe that current high oil prices signal an unanticipated scarcity of petroleum resources, EIA’s expectations regarding the ultimate size of both conventional and unconventional liquid resources have not changed since last year’s AEO. 

This year’s reference case anticipates substantial increases in conventional oil production in several OPEC and non-OPEC countries over the next 10 years, as well as substantial development of unconventional production over the next 25 years. The prices in the AEO2008 reference case are high enough to trigger entry into the market of some alternative energy supplies that are expected to become economically viable in the range of $30 to $60 per barrel (2006 dollars). They include oil sands, ultra-heavy oils, gas-to-liquids, and coal-to-liquids (CTL). 

The AEO2008 reference case represents EIA’s current judgment about the most likely behavior of key OPEC members in the mid-term. In the projection, OPEC countries increase production at a rate that keeps their market share of world liquids in the range of 40 to 44 percent through 2030. 

The AEO2008 reference case also projects significant long-term potential for supply from non-OPEC producers. In several resource-rich regions—including Brazil, Azerbaijan, and Kazakhstan—high oil prices, expanded infrastructure, and new exploration and drilling technologies permit additional non-OPEC oil production. Also, with the economic viability of Canada’s oil sands enhanced by higher world oil prices and advances in production technology, oil sands production is expected to reach 4 million barrels per day in 2030. 

The price of natural gas also is higher in the AEO2008 reference case. The real wellhead price of natural gas (in 2006 dollars) declines from current levels through 2017, as new supplies enter the market. After 2017, real natural gas prices rise to $6.60 per thousand cubic feet ($10.40 per thousand cubic feet in nominal dollars) in 2030. The higher prices in the AEO2008 reference case reflect an increase in production costs associated with recent trends that were discussed in AEO2007 but were not reflected fully in its reference case. The higher natural gas prices also are supported by higher oil prices. 

Minemouth coal prices in the AEO2008 reference case, both nationally and regionally, are generally similar to those projected in the AEO2007 reference case. The largest regional price difference relative to the AEO2007 reference case is in Wyoming’s Powder River Basin, where the average minemouth price in 2030 is $0.70 (2006 dollars) per million British thermal units (Btu)—18.0 percent above the price in AEO2007—reflecting a less optimistic outlook for improvements in coal mining productivity. Average real minemouth coal prices (in 2006 dollars) fall from $1.21 per million Btu ($24.63 per short ton) in 2006 to $1.15 per million Btu ($22.63 per short ton) in 2020 in the AEO2008 reference case, as prices moderate following a substantial run-up over the past few years. After 2020, the construction of new coal-fired power plants increases total coal demand, and prices rise to $1.21 per million Btu ($23.45 per short ton) in 2030. The 2020 and 2030 prices are 3.0 percent and 2.2 percent higher, respectively, than those in the AEO2007 reference case. Without adjustment for inflation, the average minemouth price of coal in the AEO2008 reference case is $1.90 per million Btu ($36.97 per ton) in 2030. 

AEO2008 projects higher energy prices to consumers for most delivered fuels. For example, in 2030, the average delivered price for natural gas (in 2006 dollars) is more than $1 higher in the AEO2008 reference case than was projected in AEO2007. In part, the higher prices are a result of higher prices paid to fossil fuel producers at the wellhead or minemouth; but they also result from updates made to assumptions about the costs to transport, distribute, and refine the fuels to make them more consistent with recent trends. For example, the margins between the delivered and wellhead prices of natural gas are higher than previously projected, as a result of declining use per customer and the cost of bringing supplies from new regions to market. Factors contributing to higher margins for liquid fuels include continued growth in the use of heavier and sourer crudes, growing demand for cleaner products, and the costs of refinery safety and emissions abatement. 

Increases in diesel fuel prices in recent years have led railroads to implement fuel adjustment surcharges on coal shipments, which are incorporated in the AEO2008 reference case. The average real delivered price of coal to power plants (in 2006 dollars) increases from $1.69 per million Btu ($33.85 per short ton) in 2006 to $1.82 per million Btu ($36.02 per short ton) in 2030, 4.6 percent higher than in the AEO2007 reference case. In nominal dollars, the average delivered price of coal to power plants is projected to reach $2.88 per million Btu ($56.79 per short ton) in 2030. 

Electricity prices follow trends in the delivered prices of fuels to power plants in the reference case, rising through 2009 and then declining for the next decade before, again, rising slowly. From a peak of 9.3 cents per kilowatthour (2006 dollars) in 2009, average delivered electricity prices decline to 8.5 cents per kilowatthour in 2019 and then increase to 8.8 cents per kilowatthour in 2030. In the AEO2007 reference case, with slightly lower expectations for delivered fuel prices and lower construction costs for all new technologies, electricity prices reached 8.3 cents per kilowatthour (2006 dollars) in 2030. In nominal dollars, the average delivered electricity price in the AEO2008 reference case reaches 13.9 cents per kilowatthour in 2030.

Notes and Sources