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Changes in production in the alternative technology cases reflect the benefits of lower costs and higher finding rates for conventionally recoverable gas, as well as an array of technological enhancements for unconventional gas recovery. The changes in supply lead to price changes that affect new investment in all types of gas-fired technologies, especially in the industrial and electricity generation sectors. Rapid technology improvements yield benefits in the form of both lower prices and increased production to meet higher consumption requirements (Figure 99). In the rapid technology case, the natural gas share of fossil fuel inputs to electricity generation facilities in 2020 is 24.6 percent, compared with 22.2 percent in the slow technology case. The higher level of gas consumption comes largely at the expense of coal. There is little additional displacement of petroleum products in the rapid technology case, because natural gas captures the bulk of the dual-fired boiler market in the reference case. In contrast, in the slow technology case, natural gas loses market share to both coal and petroleum products in the electricity generation sector.

Production from unconventional gas resources (tight sands, shales, and coalbeds) is particularly responsive to changes in the assumed levels of technological progress. In the rapid technology case, the unconventional gas share of total lower 48 natural gas production in 2020 is projected to be 33.5 percent, compared with 25.2 percent in the reference case and 19.3 percent in the slow technology case.

The projections for domestic oil production also are sensitive to changes in the technological progress assumptions (Figure 100). In comparison with the projected lower 48 production level of 4.5 million barrels per day in 2020 in the reference case, oil production increases to 5.2 million barrels per day in the rapid technology case and decreases to 4.6 million in the slow technology case.

Given the assumption that changes in the levels of technology affect only U.S. oil producers, total oil supply adjusts to the variations in technological progress assumptions primarily through changes in imports of crude oil and other petroleum products. Net imports range from a low of 11.7 million barrels per day in the rapid technology case to a high of 12.4 million barrels per day in the slow technology

case.

Global trade in natural gas has not grown to the same extent as petroleum trade. Because opportunities for gas trade between the United States and countries outside North America are limited, changes in U.S. gas production are determined more by the market conditions in North America than by the international market.

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Projected domestic crude oil production continues its historic decline throughout the forecast (Figure 101), declining by 1.1 percent a year, from 6.5 million barrels per day in 1997 to 5.0 million barrels per day in 2020 [66]. Conventional onshore production in the lower 48 States, which accounted for 49.1 percent of total U.S. crude oil production in 1997, is also projected to decrease at an average annual rate of 0.9 percent over the forecast.

Crude oil production from Alaska is expected to decline at an average annual rate of 4.1 percent between 1997 and 2020. The overall decrease in Alaska's oil production results from a continuing decline in production from most of its oil fields and, in particular, from Prudhoe Bay, the largest producing field, which historically has accounted for more than 60 percent of total Alaskan production. Offshore production generally increases in the forecast through 2008 and then drops below current levels in 2020, resulting in an overall decrease of 0.7 percent a year. Technological advances and lower costs for deep exploration and production in the Gulf of Mexico contribute to the increase in the early years of the forecast.

Production from enhanced oil recovery (EOR) [67], which becomes less profitable as oil prices fall, slows through 2003 and then increases along with world oil prices through the remainder of the forecast.

Domestic petroleum supply declines in all the AEO99 cases (Figure 102), as U.S. crude oil production falls off. In the low price case, domestic supply drops from its 1997 level of 9.4 million barrels per day to 7.6 million barrels per day in 2020. In the high price case, domestic supply declines only slightly, to 9.3 million barrels per day in 2020.

The greatest variation in petroleum consumption levels is seen across the economic growth cases, with an increase of 8.2 million barrels per day over the 1997 level in the high growth case, compared with an increase of only 3.9 million barrels per day in the low growth case.

Additional petroleum imports will be needed to fill the widening gap between supply and consumption. The greatest gap between supply and consumption is seen in the low world oil price case and the smallest in the low economic growth case. The projections for net petroleum imports in 2020 range from a high of 18.4 million barrels per day in the low oil price case-more than double the 1997 level of 9.2 million barrels per day-to a low of 14.3 million barrels per day in the low growth case. The value of petroleum imports in 2020 ranges from $99.7 billion in the low price case to $158.1 billion in the high price case. Total annual U.S. expenditures for petroleum imports, which reached a historical peak of $140 billion (in 1997 dollars) in 1980 [68], were $60.9 billion in 1997.

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Imports Are Projected To Meet
About Two-Thirds of U.S. Oil Demand

Figure 103. Share of U.S. petroleum consumption supplied by net imports, 1970-2020 (percent)

Petroleum Imports and Refining

Modest Increases Are Projected for U.S. Refining Capacity

Figure 104. Domestic refining capacity, 1975-2020 (million barrels per day)

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In 1997, net imports of petroleum climbed to a record 49 percent of domestic petroleum consumption. Continued dependence on petroleum imports is projected, reaching 65 percent in 2020 in the reference case (Figure 103). The corresponding import shares of total consumption in 2020 are 61 percent in the high oil price case and 71 percent in the low price case.

Although crude oil is expected to continue as the major component of petroleum imports, refined products represent a growing share. More imports will be needed as growth in demand for refined products exceeds the expansion of domestic refining capacity. Refined products make up 20 percent of net petroleum imports in 2020 in the low economic growth case and 29 percent in the high growth case, as compared with their 11-percent share in 1997 (Table 10).

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Falling demand for petroleum and the deregulation of the domestic refining industry in the 1980s led to 13 years of decline in U.S. refinery capacity [69]. That trend was broken in 1995 by a capacity increase of 0.5 million barrels per day over a 2-year period. Financial and legal considerations make it unlikely that new refineries will be built in the United States, but additions at existing refineries are expected to increase total U.S. refining capacity in all the AEO99 cases (Figure 104).

Distillation capacity is projected to grow from the 1997 level of 16.0 million barrels per day to 17.3 million in 2020 in the low economic growth case and 18.7 million in the high growth case, as refining capacity exceeds the 1981 peak of 18.6 million barrels per day. Refining capacity is projected to expand on the East, West, and Gulf coasts. Existing refineries will continue to be utilized intensively throughout the forecast, in a range from 93 to 96 percent of design capacity. In comparison, the 1997 utilization rate was 95 percent, well above the rates of the 1980s and early 1990s.

Domestic refineries will produce a slightly higher yield of heating oil and jet fuel in 2020 in response to growing demand for those products. In 2020, heating oil is projected to represent 9 percent of production and jet fuel 13 percent, compared with 7 percent and 9 percent, respectively, in 1997.

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U.S. petroleum consumption is projected to increase by 6.0 million barrels per day between 1997 and 2020 in the reference case, 3.9 million in the low economic growth case, and 8.2 million in the high growth case (Figure 105). All the cases show growth in petroleum consumption in the transportation and industrial sectors and, with the exception of the low world oil price case, slight declines in residential, commercial, and electric utility oil use.

Most of the increase in petroleum consumption occurs in the transportation sector, which accounted for about 65 percent of U.S. petroleum use in 1997. That share grows to 69 percent in the low oil price case and 72 percent in the low economic growth case in 2020. Gasoline accounts for about 45 percent of the projected growth in total petroleum consumption, jet fuel 24 percent, diesel fuel 4 percent, and heating oil 9 percent. All these fuels are "light products," which are more difficult to produce than such heavier products as asphalt and residual fuel oil.

A shift in consumption patterns is expected within the transportation sector. Gasoline, which in 1997 represented 65 percent of the petroleum consumed for transportation, shrinks to a 61-percent share in 2020, as alternative fuels penetrate transportation markets. The jet fuel share rises from 13 percent in 1997 to 17 percent as air travel increases substantially. The share for diesel declines from 18 percent to 14 percent. With the emergence of biomass-based ethanol, the use of ethanol to boost octane or oxygen in gasoline increases from about 80,000 barrels per day in 1997 to 180,000 barrels per day in 2020.

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Refined product prices are determined by crude oil costs, refining process costs (including refiner profits), marketing costs, and taxes (Figure 106). In the AEO99 projections, crude oil costs continue to make the greatest contribution to product prices, and marketing costs remain stable, but the contributions of processing costs and taxes change considerably.

The processing costs for gasoline and jet fuel increase by 6 cents and 7 cents per gallon, respectively, between 1997 and 2020. For the most part, the increases can be attributed to the growth in demand for these products. A small portion of the increases can be attributed to investments related to compliance with refinery emissions, health, and safety regulations, which add 1 to 3 cents per gallon to the processing costs of light products (gasoline, distillate, jet fuel, kerosene, and liquefied petroleum gases).

Whereas processing costs tend to increase refined product prices, assumptions about Federal taxes tend to slow the growth of motor fuels prices. In keeping with the AEO99 assumption of current laws and legislation, Federal motor fuels taxes are assumed to remain at nominal 1997 levels throughout the forecast. Federal taxes have actually been raised sporadically in the past. State motor fuels taxes are assumed to keep up with inflation, as they have in the past. The net impact of these assumptions is a decrease in Federal taxes between 1997 and 2020-9 cents per gallon for gasoline, 11 cents for diesel fuel, and 2 cents for jet fuel.

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Continued improvements in mine productivity (averaging 6.2 percent a year since 1977) are projected to cause falling real mine prices throughout the forecast. Higher electricity demand and lower prices, in turn, yield increasing coal demand, but the demand is subject to a fixed sulfur emissions cap from CAAA90, which mandates progressively greater reliance on the lowest sulfur coals (from Wyoming, Montana, Colorado, and Utah).

The use of western coals can result in up to 85 percent less sulfur emissions than the use of many types of higher sulfur eastern coal. As coal demand grows, however, new coal-fired generating capacity is required to use the best available control technology: scrubbers or advanced coal technologies that can reduce sulfur emissions by 90 percent or more. Thus, even as the demand for low-sulfur coal grows, there will still be a market for low-cost higher-sulfur coal throughout the forecast.

From 1997 to 2020, high- and medium-sulfur coal production rises from 654 to 662 million tons (0.1 percent a year), and low-sulfur coal production rises from 445 to 696 million tons (2.0 percent a year). As a result of the competition between low-sulfur coal and post-combustion sulfur removal, western coal production continues its historic growth, reaching 772 million tons in 2020 (Figure 107), but its annual growth rate falls from the 9.4 percent achieved between 1970 and 1997 to 1.8 percent in the forecast period.

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