U.S. OIL DEMAND TO CLIMB IN 1990

Robert J. Beck
Economics Editor

Continued economic growth coupled with stable or slowly declining petroleum product prices will boost U.S. oil demand in 1990.

Last year product demand grew minimally due to substantial increases in product prices and competition from other fuels in the industrial and utility markets.

While demand grows, domestic supply will sag again.

A record low year for exploration and drilling activity in 1989 extended a U.S. crude oil production slide that began in 1986. And the Mar. 24 Exxon Valdez oil spill off Alaska steepened the decline by reducing average North Slope output.

This year's production decline-275,000 b/d-won't be as great.

Slowing the decline rate will be a production increase off California and a rise in drilling activity. But Alaskan North Slope production is beginning to decline, which will accelerate the overall decline rate in later years unless major new fields are brought on stream.

Imports will move up to fill the gap between increased consumption and falling domestic production, reaching their second highest level in history. Import dependency will climb to a record high 48% of domestic demand.

Oil price stability and growing demand for natural gas will encourage drilling this year, although the active rig count will remain low.

The key to 1990 again will be the ability of the Organization of Petroleum Exporting Countries to keep group output attuned to worldwide demand.

Overproduction seems likely during the first half of the year, which will weaken prices.

To stabilize the market, OPEC members must respond to first signs of price weakness by reducing production to quotas set last November.

If overproduction continues, prices will slump as they did in 1986 and 1988.

Here are highlights of Oil & Gas Journal's forecasts for 1990:

Total U.S. energy demand will increase 1.2% to 82.08 quadrillion BTU (quads). Consumption of all major types of energy will increase.
The greatest percentage increase, 9.1%, will be posted by hydroelectric, geothermal, and other sources as hydroelectric output continues to recover from the 1988 drought. Nuclear energy growth will slow to 1.2% from 2.5% last year and 15.7% in 1988.
U.S. petroleum product demand will move up 1.1% to 17.5 million b/d. This follows an increase of 0.2% in 1989,when demand averaged 17.31 million b/d. This year's demand will be highest since 1979.
U.S. crude and condensate production will slide 3.6% to 7.4 million b/d, lowest since 1962. Production last year fell 5.7%.
Total industry imports will move up another 5.4% to 8.43 million b/d.
Peak import year was 1977, with an average of 8.786 million b/d.
Input to refineries will rise 0.5% to 13.65 million b/d. Average refining capacity is expected to slip 0.4% to 15.6 million b/d. The refinery utilization rate will move up to 87.5%.
Natural gas consumption will increase 0.9% to 18.51 tcf for the year. This follows a 1.8% increase last year. Domestic production will be up 0.7% at 17.91 tcf. Imports will increase 9.9% to 1.5 tcf.

GNP, ENERGY GROWTH

Economic growth-an important factor in energy demand-will slow for the second consecutive year in 1990.

Last year, the gross national product (GNP) in 1982 dollars increased by an estimated 2.95%, compared with 4.42% the year before. It was the seventh consecutive year of economic growth. Increases in industrial production, consumer spending, and capital investment fueled the 1989 growth.

The same sectors will support this year's real GNP growth, projected at 2%. Rates of increase will drop to about 1.8% for industrial activity, 2.3% for consumer spending, and 2.5% for capital investment.

Energy efficiency, in terms of consumption per dollar of GNP, improved last year after 3 stagnant years. Before 1986, energy efficiency had improved every year since 1970.

In 1986, GNP was 31.5% higher than its level of 1976, but energy consumption was 0.2% lower. Energy price declines in 1986 changed the trend, reducing the incentive for conservation and investment in efficiency. From 1986 through 1989 GNP increased 11.4%, while energy consumption moved up 9.2%.

In 1989 the economy used 19,600 BTU of energy per dollar of GNP. Long term energy efficiency improvements appear to be entrenched so the ratio is expected to fall again this year to 19,400 BTU/$ of GNP. From a base year of 1970, energy efficiency will have improved through yearend 1990 by 30%.

This year's expected 1.2% increase in energy consumption, with economic growth offsetting the efficiency gains, compares with a 1.3% consumption increase last year to 81.07 quads.

SECTOR BY SECTOR DEMAND

Oil energy demand will rise 1.1% to 34.67 quads. Oil's energy market share will be 42.3%, the same as last year but down from 42.7% in 1988 and 42.8% in 1987.

The oil share fell to 41.8% in 1985, when high prices made other fuels competitive. The sharp drop in prices in 1986 revived demand for oil, market share of which rebounded to 43.4%.

Demand for energy from natural gas will increase only 0.5% in 1990 to 18.99 quads. That compares with a 1.8% increase last year to 18.89 quads. Gas market share will fall to 23.1% in 1990 from 23.3% in 1989. Market share rose the 2 previous years after falling to 22.5% in 1986.

In the key electric utility market, where gas competes with all major energy sources, increased hydroelectric and nuclear output this year will restrict market share growth by gas.

Coal energy consumption will climb 0.9% in 1990 to 19.05 quads. Demand last year was up 1% at 18.88 quads. Market share will slip to 23.2% from 23.3% last year. Coal moved ahead of natural gas in 1986 to become the second leading fuel source.

It will be another slow year for nuclear power. Unscheduled plant shutdowns and a slowdown in capacity additions slowed growth last year to 5.82 quads. This year nuclear energy consumption will total 5.89 quads, 7.2% of the energy market.

The strong growth expected in 1990 in consumption of energy from hydro and geothermal power follows a 9.2% increase in 1989 to 3.19 quads. Output this year will amount to 3.48 quads-4.2% of the market.

THE PRODUCTION OUTLOOK

The expected 275,000 b/d U.S. crude and condensate production dip this year follows a 465,000 b/d drop last year to 7.675 million b/d. That total was down 1.296 million b/d from the recent peak of 8.971 million b/d in 1985.

U.S. drilling, depressed for several years by uncertain oil prices, has been far too low to offset natural production declines. The Baker Hughes active rig count set a modern record low in 1989 with an average of only 869. This followed 2 years when the average was only 936.

Interruption of North Slope production last spring simply aggravated a well established production slide that will be irreversible in 1990.

Total liquids production fell 5.3% to 9.3 million b/d in 1989, lowest since 1965. Total liquids output will fall 2.8% in 1990 to 9.04 million b/d.

Production of natural gas liquids (NGL) and other hydrocarbons not included in the crude and condensate total fell 53,000 b/d to 1.625 million b/d last year and will rise to 1.64 million b/d in 1990.

In Alaska, environmental constraints, many of them implemented in response to the Exxon Valdez spill, are slowing North Slope exploration and development activity that might otherwise bring on new production to offset natural declines.

Alaskan production will average 1.865 million b/d in 1990, compared with 1.878 million b/d in 1989 and 2.017 million b/d in 1988. The 139,000 b/d 1989 decline accounted for 26% of the drop in total U.S. production.

Lower 48 crude production this year will average 5.535 million b/d, down 262,000 b/d from 1989, when the average dropped 326,000 b/d from the previous year. The slower rate of decrease reflects the forecast drilling rise. But the average will be the lowest since 1950.

Lower 48 production in 1989 dropped 326,000 b/d to 5.797 million b/d. Production in Texas fell 113,000 b/d to 1.949 million b/d. Louisiana's output was down 59,000 b/d at 1.158 million b/d, California dropped 46,000 b/d to 1.009 million b/d, and Oklahoma production fell 29,000 b/d to 323,000 b/d.

IMPORTS TO GROW

The 5.4% gain in total imports this year follows an 8.9% increase last year to an estimated 8 million b/d.

All of last year's increase was crude oil, imports of which jumped 15.1% to 5.82 million b/d, excluding imports for the Strategic Petroleum Reserve. Product imports fell 4.9% in 1989 to 2.18 million b/d.

This year, crude imports will increase 4.8% to 6.1 million b/d. Product imports will climb 6.9% to 2.33 million b/d.

The product import rebound will come as refiners make greater use of non-U.S. supplies to meet contingencies.

Import dependency is zooming. The projected record figure for imports as a percent of consumption this year, 48.2%, compares with 46.2% in 1989, 42.5% in 1988, and only 31.5% in 1985.

Crude oil imports for the SPR will remain at 50,000-55,000 b/d. At yearend 1989, SPR held 581 million bbl. The total will reach 600 million bbl at end 1990. In contrast, industry crude stocks have remained at 330-350 million bbl.

REFINING MARGINS SQUEEZED

For refiners last year, crude oil feedstock costs rose faster than product revenues, which narrowed margins. Partly offsetting that squeeze on refining profitability were demand growth, rising throughput, and increased utilization rates.

The average U.S. wellhead price of crude oil moved up 24.8% to an estimated $15.70/bbl in 1989. And the average landed cost of imported crude oil increased 12.2% to $16.60/bbl for the year.

Product prices did not move up as sharply. The average pump price of unleaded gasoline increased 8.1% to $1.023/gal for 1989. The average wholesale price of No. 2 fuel oil moved up 11.6% to 52.8/gal.

Average total crude runs increased 1.2% to 13.405 million b/d in 1989. Refining capacity was down 1.7% to 15.66 million b/d for the year. This combined to boost the refinery average utilization rate to 86.7% from 85.1% the year before. The higher utilization rate reduced operating cost per unit of output.

Through the first 9 months of 1989 average margins were positive but down about 15% from the year before.

Refining margins in 1990 will depend upon product demand and OPEC's ability to stabilize prices. Crude runs will be up 0.5% to 13.470 million b/d. If, as expected, OPEC production exceeds quotas in the first half, crude prices will sag, which will strengthen refining margins. Demand growing as projected will keep product prices from slumping as much as crude prices.

To help contain costs, refiners will continue to hold stocks at close to minimum levels. Total industry stocks will move up only 0.5% to 1.045 billion bbl by yearend 1990.

Crude oil stocks will remain at 340 million bbl. Product stocks, due to increased demand, will move up 5 million bbl to 705 million bbl at yearend. Stocks for some products are presently close to minimum operating levels.

PETROLEUM DEMAND TO RISE

With petroleum product prices unable to match inflation, the incentive to conserve oil will remain low-a key factor in OGJ's outlook for petroleum demand increase this year.

Demand will climb for all major products. The largest increase is expected for heavy fuel oil, prices of which will be weak.

Total demand, including exports, will be up 1% in 1990 at 18.32 million b/d. Exports will slip 1.2% to 820,000 b/d. Total demand was up 0.2% in 1989 at 18.14 million b/d, exports up 1.8% at 830,000 b/d.

Mainly due to high prices, U.S. demand for petroleum products fell for 5 consecutive years from the record high of 18.847 million b/d in 1978 to 15.231 million b/d in 1983. From 1983 through 1989 demand moved back up 2.079 million b/d, recapturing 57.5% of the loss.

Conservation and increased efficiency have reduced the amount of oil energy consumed per unit of economic growth. The ratio fell from 12,545 BTU/$ of GNP in 1977 to 8,280 BTU/$ in 1989-a drop of 34%. It is expected to slide further in 1990 to 8,200 BTU/$.

GASOLINE DEMAND TO GROW

OGJ projects a slight increase in gasoline demand in 1990 to 7.375 million b/d. That's based on an increase in the number of vehicles, a slowdown in the improvement in vehicle fuel efficien-cy, and stagnant pump prices.

Demand for motor gasoline in 1989 averaged an estimated 7.335 million b/d vs. 7.336 million b/d the year before.

Continued improvement in vehicle fuel efficiency and higher gasoline prices were the major reasons for last year's slowing of demand. The 8.1% jump in average pump price for unleaded gasoline last year, for example, was almost twice the inflation rate and encouraged some conservation.

Gasoline demand this year will be second only to the record 7.412 million b/d of 1978, the level from which efficiency improvements and price-induced conservation steadily drove consumption down to 6.539 million b/d in 1982.

Until last year, gasoline demand had been climbing again despite continued improvements in vehicle fuel efficiency. Increases in fleet size and vehicle use offset the efficiency gains.

Average distance driven per unit of fuel rose steadily from 13.3 mpg in 1973 to 19-95 mpg in 1988. Average distance driven per car increased from 9,141 miles in 1980 to 10,119 miles in 1988. The number of automobiles registered moved up from 121.6 million in 1980 to 140.7 million in 1988.

Also stimulating gasoline demand through 1988 were a drop in pump prices-the average in 1988 was 28.8% below the peak in 1981-and the increase in the interstate highway speed limit to 65 mph, estimated to have added 90,000 b/d to consumption.

JET FUEL, DISTILLATE

U.S. demand for jet fuel will climb 2.6% in 1990 to 1.525 million b/d. This is the same rate of increase as in 1989,

when demand averaged 1.487 million b/d.

Most of the growth will be in demand for kerosine jet fuel for commercial aircraft, expected to move up 33,000 b/d to 1.31 million b/d. This 2.6% increase compares with a 3.3% increase last year.

Total available seat miles flown by U.S. scheduled airlines was up an estimated 0.9% during the first 11 months last year. Domestic seat-miles were down 1.6%, but international seat-miles were up 10.3%. Air freight revenue-ton-miles for the first 10 months of 1989 were up 6.5% from the year before.

Increased fuel demand in 1990 will be due to continued gains in miles flown, particularly air freight.

Demand for naphtha jet fuel for military jets is expected to be up 5,000 b/d in 1990 at 210,000 b/d. There has been little change in consumption of military jet fuel for several years.

Economic activity in 1990 will boost demand for distillate 0.9% to 3.165 million b/d. Most of the increase will be in demand for highway diesel fuel. Truck freight will move up along with economic activity. With normal weather, residential and commercial demand will also be up in 1990. Weak prices will slow conservation and conversion to other fuels. These increases will be somewhat offset by slightly weaker demand for industry, farms, and railroads.

Distillate demand in 1989 was up only 0.5% at 3.138 million b/d. Growth was slowed by higher prices, with the average wholesale price of No. 2 fuel oil up 11.6%.

RESID, OTHER PRODUCTS

The competitive position of residual fuel oil will improve in 1990 due to somewhat weaker prices. OGJ projects a 3.4% resid demand increase to 1.385 million b/d.

Electric utility and industrial demand will rise in 1990. Continued growth in electrical power consumption will raise utility energy needs, part of which will be supplied by residual fuel oil.

Last year resid demand fell 2.8% to 1.34 million b/d. Resid lost market share to natural gas, particularly in the industrial sector, because of price gains. A rebound in hydroelectric output also reduced potential demand for fuel oil by utilities. Resid prices were up an estimated 13.5% from the previous year.

Demand for LPG and ethane will climb 0.9% in 1990 to 1.675 million b/d. Last year, demand was up 0.2% at 1.66 million b/d. Demand for petrochemical feedstocks is expected to continue to grow due to increased economic activity. Demand for LPG as a fuel also will increase.

Demand for all other products will gain 1.1% in 1990 to 2,375 million b/d. Last year demand moved up 0.3%. The largest increases will be in demand for asphalt and road oil, and for petrochemical feedstocks. This category now represents 13.6% of total domestic demand for petroleum products.

GAS DEMAND GROWING

The modest natural gas demand gain expected this year will occur in the industrial and residential-commercial sectors.

Those sectors accounted for last year's demand increase to an estimated 18.345 tcf from 18.028 tcf in 1988. Electric utility demand dropped last year because of the resurgence of hydro power.

This year, natural gas again will face stiff competition in the utility sector. Hydroelectric power will rise again, and resid price weakness will mean additional competition from oil.

The overall gas demand rebound will continue nevertheless. Consumption of gas fell from 20.241 tcf in 1979 to 16.221 tcf in 1986 due to gas price increases and competition from other fuels. Demand this year will be up 2.289 tcf from 1986, meaning that about 57% of the 197986 decline will have been recovered.

U.S. gas production hasn't gained back nearly as much. Output expected this year--17.91 tcf--represents only a 6.7% increase from the 1986 level, which contrasts with the 14.1% demand increase.

Last year marketed production fell 0.2% to 17.78 tcf.

Imports, mainly from Canada, have been rising rapidly to meet the increase in demand. They climbed 5.5% last year to a total of 1.365 tcf. LNG imports from Algeria accounted for 36 bcf; the remaining 1.329 tcf was from Canada. This year's expected import total includes 40 bcf of LNG from Algeria and 1.46 tcf from Canada.

The average wellhead price of gas rose to $1.70/Mcf last year from $1.69/Mcf in 1988. Prices will rise only slightly this year to $1.70-1.75/Mcf.

Gas prices didn't peak until 3 years after crude oil prices-at $2.66/Mcf in 1984-and then did not fall as rapidly when oil prices plummeted, falling to $1.67/Mcf in 1987.