4. Other Key Changes in the Updated Reference Case

Update of Macroeconomic Assumptions

The published AEO2009 reference case used November 2008 macroeconomic projections from IHS Global Insight as a starting point. However, since November, all macroeconomic forecasts have reduced their short-run economic growth projections and delayed the beginning of the eventual economic recovery. For example, November’s forecast showed real GDP declining by 1.3 percent in 2009, before rebounding to 2.2 percent growth in 2010. In the same forecast, IHS Global Insight expected job losses between 350,000 and 400,000 per month for November and December. However, actual employment losses were much larger, exceeding 500,000 per month, with a total of 1.9 million jobs lost in the final 4 months of 2008. As a result, forecasts of real GDP growth in the first half of 2009 have worsened and the eventual economic recovery, i.e. first positive growth expected, is projected to starter in the last quarter of 2009 rather than the second quarter of 2009, as had been expected in earlier analyses.

The updated reference case discussed in this paper is based on a February 2009 macroeconomic projection through 2030 that was also provided by IHS Global Insight. This projection, which was developed before final enactment of ARRA, reflects a stimulus package that differs in minor respects from the package that was ultimately enacted, but the differences are not material for the purposes of this analysis. For example, the total stimulus package is $780 billion instead of $787 billion. In Global Insight’s February 2009 forecast, annual real GDP growth rates are -2.7 percent and 2.0 percent for 2009 and 2010, respectively.

The no-stimulus case presented in this paper was developed based on a contemporaneous simulation from IHS Global Insight under the counterfactual assumption that no economic stimulus program was enacted. The simulation provided by HIS Global Insight for this case runs through 2019 only. EIA staff extended that simulation through 2030 using the exogenous variables, such as population, exchange rates, trading countries’ GDP, marginal tax rates, full-employment unemployment rate, some categories of government expenditures and depreciation rates, from the simulation with ARRA that runs through 2030.

figure data

The March 2009 control forecast has reduced short-term growth considerably—2009 growth at -3.7 percent compared to the February 2009 estimate of -2.7; 2010 growth at 1.4 percent compared to the February estimate of 2.2 percent—although the difference in the lower growth was due to a sharp revision in fourth quarter 2008 growth as well as larger-than-expected employment losses and not due to the differences in the stimulus package. Global Insight’s monthly control’s forecast horizon is typically 10 years; however, four times per year the horizon is extended out 30 years. Since February’s forecast horizon is 30 years, EIA staff used the February forecast as a revised macroeconomic baseline.

Update of Near-Term Oil Price Projections

The global financial crisis and recession combined with the provisions of ARRA lead to lower expected world oil price assumptions in the near- and mid-term. Furthermore, increased pessimism regarding the depth, duration, and scope of the current global recession, the substantial decline in labor and material costs in the oil industry, which will lower the costs of developing new oil production capacity, and the expectation that certain provisions of the ARRA will lower petroleum product demand in the United States all point to lower oil prices over the next decade than previously expected. However, the global economy is expected to begin recovering in 2010 and return to longterm trend growth in subsequent years. Therefore, the oil price assumptions after 2020 are the same as those in the previously published AEO2009 reference case (Figure 4).

Update of CAFE Standards

Light-duty vehicle fuel economy standards assumed in the AEO2009 reference case reflect those proposed by the National Highway Traffic Safety Administration through model year 2015. For model years 2016 through 2020, fuel economy standards are assumed to increase in stringency to achieve 35 miles per gallon on average for the new light-duty vehicle fleet in 2020, after which the standards remain constant. The updated reference case incorporates the fuel economy standards enacted for model year 2011 and assumes updated standards for model years 2012 through 2020 that reflect adjustments based on revisions in energy prices. As a result, projected new vehicle fuel economy in the updated reference case is slightly lower (less than 1 mile per gallon) for model years 2011 through 2015.

Temporary Reinstatement of CAIR

The AEO2009 reference case did not include the sulfur dioxide and nitrogen oxide capand- trade programs for power plants called for in the Environmental Protection Agency’s CAIR. The Circuit Court for the District of Columbia had vacated CAIR in a ruling issued on July 11, 2008, and, as a result, it was not included in the AEO2009. However, the Court temporarily reinstated the rule in a December 23, 2008, ruling and it is represented in the updated reference case presented here.