EIA's Caruso explains agency's long-term forecast for oil, coal and renewables
Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining us today is Guy Caruso. He is the head of the Energy Information Administration. Guy thanks a lot for being here today. Guy Caruso: Thank you Brian. It's good to be here.
Brian Stempeck: Last month you released the Annual Energy Outlook. This is basically EIA taking a look out 25, 30 years ahead, kind of projecting where we're going to be in terms of energy usage. Talk about some of the major findings in this report, just real broadly for us for a moment.
Guy Caruso: Sure, sure. This year, for the first time, we're going out to 2030, so that's one of the new things about this Outlook. What we looked at very closely as always are supply/demand and issues with respect to whether oil prices are sustainable, whether natural gas prices are sustainable at these high levels. So they've all made big differences is in our long term outlook this year. We expect a steady growth in oil and energy demand in general, about 1.1 percent per year over the next 25 years. The energy efficiency, the so-called energy intensity, how much energy we use per unit of GDP continues to decline. So that's good news. Our oil import dependency, although still rising, rises slower at the higher oil prices. And we also expect the natural gas prices to increase and we will be relying more than ever on imports of natural gas over the next 20 to 25 years. And finally, because so much of the energy supply is from fossil fuels in this Outlook, the growth in carbon dioxide emissions grows at about the same rate as total energy demand, 1.2 percent per year. So those are the highlights of this reference case which we released recently.
Brian Stempeck: Now there's a big change from last year's report when you go out and look at the long term oil price. Explain for a minute why was that. Why is it so much higher this time around?
Guy Caruso:: We have made a substantial increase in our assumptions about world oil prices. This year's Outlook is about $20 per barrel higher than the Outlook that we released in '05. We went from on an average price of about $30 a barrel for the light crude oil, so-called West Texas intermediate to averaging about $50 a barrel in real terms over the next 25 years. And it makes huge difference and there are three basic reasons why we changed our thinking on that. One is that the OPEC countries, their investment patterns, seemed to be implying that this is the price target range that they're looking at. They had a price target of roughly $25 only a year or two ago. And now they seem to be behaving and talking in the $40 to $50 range and that's basically where our long term price assumptions settled in at. And the second reason is there are a number of investment impediments to outside of OPEC countries and even within the OPEC countries. And it's slowing down the pace of investment in the exploration and production of not only oil, but also natural gas. And the third reason is price. Costs of doing business are going up in looking for, developing and producing oil and natural gas. Costs in this country alone have about doubled since 1995 in terms of steel rigs and getting the right personnel in the right place at the right time. All of these costs have gone up. So those three reasons are the main factors. And I always have to say that it's, what it's not, what the increase in price is not is that we're saying that oil is going to peak and decline in this timeframe.
Brian Stempeck: I was going to ask about that. I mean a lot of people recently have been talking about the idea of peak oil. That worldwide production is beginning to reach its kind of plateau before it begins a long term decline. Is that something that EIA has started to factor into its long-term projections? Is it at all or do you think that it's too early to start doing that?
Guy Caruso: Well we look at that closely and we work very closely with the United States geological survey and others that look at the global picture of resources. And our view is that given this outlook, with the price assumptions we now have and the demand numbers that we're projecting for out to 2030, we don't see a peaking and declining during this timeframe. That's partly because demand is lower at these higher prices. And also we're seeing unconventional liquids contributing to a larger share of world oil demand out over the next 20 or 25 years. Those unconventional liquids are Canadian oil sands, heavy oils in Venezuela and elsewhere and ultimately even oil shale will come into the picture if prices stay at high levels, so all of these for factoring in. But we do look at that and we don't have a peaking and declining in the timeframe that we're talking about here or 2030.
Brian Stempeck: Some of the other sectors that you look at in the report, when it comes to coal, that's one of the largest gainers in the long term outlook out to 2025, 2030. Because it's already a major player on the electricity generation side, it gets even larger in your report from about 50 percent to 57 percent. What accounts for that major increase?
Guy Caruso: That's a major change in this year's Outlook compared to last year and the main reason is the higher price of natural gas. We're now looking at the price of natural gas, in this reference case, about $5.50 per thousand cubic feet by 2030. Going down from where it is now, it's about nine dollars in today's market. We do think that will come down, but not as low as we thought even a year ago. We have it coming down under 5 by 2010 and then going back up again. And what that means is the investment decisions in new electric power plants, which have been dominated by combined cycled gas over the last 10 years, is going to shift back towards coal. So that in our Outlook, after, particularly after 2015 when new electric power capacity will be needed, when substantial new electric power capacity will be needed, those investment decisions will tend to be towards integrated gas, combined cycle coal units. And we have a substantial amount of new IGCC plants coming on between 2015 and 2030, partly aided by the provisions of the energy policy act of 2005, which gave some incentives to this IGCC technology.
Brian Stempeck: I was going to ask about that. In the energy bill that we saw pass in 2005 it had a lot of provisions, tax credits for different industries. What do you see as the most influential credits or provisions, within that bill, in terms of the kind of long term effect that it's going to have?
Guy Caruso: For those provisions that we were able to model, and unfortunately a lot of the provisions included the need for funding, which of course was not part of the energy policy act, so we did model everything in the energy policy act that was already funded or did not require any additional funding. And the biggest changes we see are in the technology and the incentives on the electric power side. One I've already mentioned, the IGCC, improvements in the financial situation there.
Brian Stempeck: Right.
Guy Caruso: And incentives. The other big one is for nuclear power. There is a production tax credit of 1.8 cents per kilowatt hour. That's given to the first 6000 megawatts of capacity of new nuclear plants. So in this Outlook we're now assuming that there will be 6000 megawatts of new nuclear power plants built in the period between 2015 and 2030. And that could be a minimum, but we certainly see the economics being very favorable for that. We also see improvements in renewable technology through incentives of the existing-extension of the existing production tax credits. And a number of additional states have passed renewable portfolio standards. I think about 21 states now have incentives or mandates for renewables, so that this year we see the renewable portion of electric power generation growing in market share. Not a lot, because as you pointed out, coal gains the most going from about 50 percent, 51 percent now to 57 percent in 2030. But renewables grow and the amount of nuclear generated electricity grows all at the expense of natural gas largely because of the higher price.
Brian Stempeck: I was going to ask about that. Talking about renewables and some of the alternatives we hear about, like hydrogen, fuel cells, a lot of these long term technologies that are really being touted right now with the energy bill, by the administration. In the long term, looking out to 2030, EIA doesn't really see either of those renewables or fuel cells really putting too much of a dent in our overall energy picture. What needs to be done in order for that to happen? Or I guess why are those numbers not adding up? Why are those sources not becoming a major factor?
Guy Caruso: The main factor is economics with the renewables and fuel cells, you mentioned fuel cells. They still, on a strict economic modeling of the picture, still are not the technology of choice if all other things are being equal. Now I mentioned there are renewable portfolio standards in about 21 states. There are incentives in the energy policy act of '05, some of which, as I said, require more funding. So therefore if that funding were made available in future years that could change the picture a bit. But the main drawback to renewables right now is economics. They're gaining. They're improving. Wind, for example, has reduced its cost and is growing. And we increased our estimates of wind. Fuel cells, again, still, under present economics, don't make a big dent in the utilization, either for stationary users or in new transportation sector. But these things can change. And when we release our full analysis of the Outlook, which will be in early February, we will do alternative cases in which we say what if the technology improves in areas like renewables or in other areas with other components of the energy mix. You'll see then that with high technology assumptions there can be significant changes. And much of that depends, of course, on how much is spent on R&D and how effective that R&D is and when it can be commercialized.
Brian Stempeck: Alright Guy, we're out of time. Thanks a lot for being on the show today.
Guy Caruso: Thank you Brian.
Brian Stempeck: I'm Brian Stempeck. This is OnPoint. Thanks for watching.