ECONOMIC GROWTH TO RAISE U.S. OIL PRODUCTS, NATURAL GAS DEMAND

Robert J. Beck
Economics Editor

An accelerating economy will raise consumption of oil products and natural gas in the U.S. this year.

Contributing to demand growth will be the slump that began late last year in prices for crude oil and petroleum products. Some price recovery is likely in 1994, but there's little reason to expect a major increase.

For prices to rise sharply, worldwide demand would have to increase by more than seems probable with the industrial economies of Europe and Japan only beginning to recover from recession. Crude prices, therefore, will depend more than usual Oil the ability of the Organization of Petroleum Countries to set and enforce a group production quota that balances the market.

Other international uncertainties will influence or have the potential to influence oil prices this year.

One of them is the amount of crude in international trade from the Commonwealth of Independent States. The region's production is expected to drop again this year, although the decline rate is slowing. More important to the international market is the region's level of exports, which last year didn't fall along with production because internal demand plummeted. Whether that phenomenon, product of dreary economic performance, will recur in 1994 is unclear.

Another key uncertainty is embargoed Iraq. Timing of the potentially important producer's resumption of exports depends upon politics and is impossible to predict.

Regardless of what happens to crude prices, U.S. crude and condensate production will continue to slide in 1994. Oil & Gas Journal projects a decline of 159,000 b/d.

Except for a modest increase in 1991, when prices spurted and producers strained to make up for volumes lost in the wake of Iraq's invasion of Kuwait, U.S. production has been falling since 1985 at an average rate of 260,000 b/d/year.

Historically low drilling activity the past 2 years offers little optimism that the decline can be slowed. In 1992 the U.S. rig count posted a modern record low of 717 active rigs for the year. Last year the rig count averaged only 757, the second lowest on record.

The best hope for drilling in the U.S. is rising demand for natural gas. Gas well drilling is claiming a growing share of total activity.

With oil production falling and demand rising, imports will have climb again this year. OGJ projects 2.6% increase this year following a 6.6% increase last year. Imports are expected to fill a record high 49.3% of U.S. oil demand this year.

ENERGY AND THE ECONOMY

The U.S. economic growth rate rose in second half 1993 in a trend expected to continue through 1994.

This follows a recession that began in the last half of 1990 and lasted through the first half of 1992, which depressed demand for energy and petroleum products in 1990 and 1991. As the economy began its slow recovery, consumption of energy and petroleum increased marginally in 1992 and more robustly in 1993.

Real gross domestic product (GDP) fell 0.7% in 1991, ending a string of 8 years of economic growth. GDP moved up 2.6% in 1992 and an estimated 2.7% in 1993.

Growth, however, has been slower than usual for the recovery stage of a business cycle. GDP grew 5.7% during the fourth quarter of 1992 but only an estimated 0.8% in the first quarter last year and 1.9% in the second quarter. It gathered strength to 2.9% in the third quarter.

OGJ projects economic growth of 2.9% for 1994.

Among key economic indicators, industrial production, a component of both economic activity, and energy demand, moved up an estimated 3.4% in 1993. It will increase by 3.9% in 1994.

New car sales fell in 1992 to 8.3 million then increased to an estimated 8.8 million in 1993. Car sales are expected to move up again in 1994 to 9.1 million.

Housing starts hit a recent low of 1 million units in 1991 then recovered to 1.2 million in 1992 and an estimated 1.3 million last year. Low interest rates will continue the trend, pushing housing starts this year to 1.4 million.

While the modest recovery has eased joblessness, the unemployment rate isn't expected to drop to prerecession levels. It jumped to 7.3% in 1992 from 6.7% in 1991 and 5.5% in 1990. Last year's unemployment rate was 6.9%. This year the rate will slip to 6.5%.

Slow U.S. economic growth has been accompanied by a low rate of inflation. The GDP price deflator - one indicator of the inflation rate is estimated at 2.7% in 1993, compared with 2.8% in 1992, 4% in 1991, and 4.4% in 1990. The rate is expected to increase in 1994 to 2.9%.

The consumer price index (CPI) followed a similar path, falling from 5.4% growth in 1990 to 3.1% in 1992 and 1993. This year the CPI is expected to rise 3.2%.

OVERALL ENERGY USE

Rising manufacturing activity and electricity consumption will be major factors in an increase in overall energy demand this year.

Energy consumption efficiency in the U.S. will continue its long run improvement. But economic expansion be a stronger influence. The effect of further efficiency gains will be to keep energy demand growth below the rate of GDP growth.

Energy efficiency, measured in terms of energy consumption per constant dollar of GDP, has improved steadily since 1970. During periods of reduced energy prices the rate of improvement slows due to the reduced incentive for investment in energy saving equipment and technology.

The rate of improvement also is slowed by rising costs of incremental efficiency gains: The easiest and cheapest improvements are made first.

In 1993 the U.S. economy consumed an estimated 16,400 BTU of energy for every dollar of GDP. This is down 30% from the 23,400 BTU/$ in 1970. During that period GDP increased 78.3% while energy concuption increased 25.2%.

Improvements in energy efficiency and conservation are expected to continue for the foreseeable future. Increased environmental costs will tend to boost the cost of energy and stimulate additional investment in energy efficiency. As in the past the rate of improvement will be influenced by the relative cost of energy.

In 1994 energy consumption is projected to slip to 16,200 BTU/$ of GDP.

ENERGY BY SOURCE

The expected 1994 increase in energy consumption will come from all primary energy sources. But growth rates for specific fuels will vary, and market shares will change.

The slowest rate of growth is projected for energy from petroleum - 1.6% in 1994 to 34.39 quadrillion BTU (quads). This follows an increase of 1% last year.

Oil energy consumption fell from a recent high of 34,222 quads in 1988 to 32.845 quads in 1991. During the 3 prior years oil energy consumption had moved up 10.7%.

Petroleum's advantages of convenience and cost are expected to blunt government efforts to reduce oil consumption in absolute terms in the near future.

Petroleum's share of the energy, market will slip to 40.2% in 1994 from 40.3% in 1993 and 40.8% in 1992. The oil share of the market has oscillated in the past 15 years along with oil prices. When prices were historically high, the oil market share fell from 48.7% in 1977 to 41.8% in 1985. When prices fell and stimulated consumption, the oil market share moved up to 43.4% in 1986.

Since then, environmentally based efforts to reduce oil use and intermittently higher prices have trimmed petroleum's energy market share.

Energy use in the form of natural gas will move up 1.9% this year to 20.96 quads following increases of 2.2% in 1993 and 2.7% in 1992. The main reasons: increased industrial and electric utility demand.

Deregulation has increased competition and efficiency in the natural gas industry which has helped boost consumption. In addition, natural gas enjoys strong political support as all environmentally preferable fuel.

This year, gas is expected to lose some competitive ground to oil, which will slow the gas demand growth rate. The gas market share will remain at 24.5% in 1994, its level of the past 2 years. It was 24.2% in 1991.

Together, petroleum and natural gas will continue to dominate the energy, market with a combined market share slipping marginally to 64.7% in 1994. The figure was 64.8% in 1993 and 65.3% in 1992.

The combined market share of oil and natural gas peaked at 77.7% in 1972 and fell to 65.9% in 1985. lt has chanced little since then.

THE ELECTRIFICATION TREND

Much future energy, demand growth will come from increased demand for electrical power. All the major energy sources contribute to power generation, so the electrification trend affects all fuels. In addition, power generation is the area of most intense interfuel competition.

The major renewable fuel, hydroelectric power, increases generation when the weather conditions are favorable. But capacity is physically limited to close to existing levels.

Nuclear power growth will slow because capacity has peaked. Increased output will be limited to improvements in utilization rates.

Coal consumption for power generation will continue to rise as electricity demand grows. But environmental concerns and the related cost of cleanair regulations will slow the rate of increase in coal consumption.

In the near future, therefore, natural gas probably will fill most incremental demand for power generation. This opportunity for natural gas market growth is expected to last through the 1990s and will depend to a great extent on the ability of gas to compete on the basis of price with the other fossil fuels.

Nuclear power, once considered the major source for future electrical power generation, has been stymied by safety and environmental concerns. Nuclear output growth that might result from higher utilization of existing facilities will to some extent be offset by shutdown of old facilities.

The number of operable nuclear power units peaked at 112 in the summer of 1990 and is now down to 109. Nuclear power capacity peaked in August 1990 at 100.497 million kw. Capacity slipped to 97.982 million kw for the first quarter of 1993 but moved back up to 99.032 million kw in the second quarter.

Energy from nuclear power generation is expected to move up 1.6% this year to 6.84 quads. This follows a 1.3% increase in nuclear power production in 1993. The nuclear plant utilization rate reached an all time high of 70.9% in 1992, and the rate is expected to have exceeded 72% in 1993.

With further utilization gains, nuclear output in 1994 will set a record despite the slowdown in the growth rate.

Nuclear's share of the energy market will be 8% in 1994, same as 1993 and down from 8.1% in 1992. Nuclear power produced 22.1% of total power generation in 1992, the latest annual data available.

Price advantages helped boost coal consumption by 3.5% last year to 19.54 quads. It was the second highest growth rate of any of the major fuels. Coal demand is projected to increase by 1.7% in 1994 to 19.88 quads.

Coal's share of the total energy market is expected to slip to 23.2% in 1994 after rising to 23.3% last year from 23% in 1992.

Energy from hydro, geothermal, and other miscellaneous power sources is projected to increase 5.1% in 1994 to 3.52 quads. This follows an increase of 10.7% in 1993 to 3.35 quads. The level of hydroelectric output moved up after being depressed for several years due to low rain and snowfall. The market share will move up to 4.1% from 4% in 1993 and 3.7% in 1992.

SUPPLY

Many factors combine to keep U.S. production of crude oil and condensate in decline. They include depressed drilling, the natural decline of mature reservoirs, environmentally related drilling restrictions, and limitations on access to promising federal acreage such as the Arctic National Wildlife Refuge Coastal Plain.

Average U.S. crude and condensate production is projected to fall another 160,000 b/d in 1994 to 6.7 million b/d. This follows a decline of 311,000 b/d last year.

The recent high for U.S. crude oil and condensate production was 8.971 million b/d in 1985. Production increased 419,000 b/d during the drilling boom of the early 1980s. But production has fallen every year since then except for a slight increase in 1991.

OGJ's projection for 1994 production represents a decline of 2.27 million b/d from 1985 output a 25.3% drop in 9 years.

Current levels of exploration and drilling offer little hope for reversal of the production slide. The Baker Hughes Inc. count of active rotary rigs averaged only 757 for 1993, up only slightly from the modern record low of 717 posted in 1992.

OGJ expects a slight improvement in rig activity in 1994 to an average of to 810 active rigs.

With new technology, exploration and drilling are increasingly efficient. But this increased output per new well drilled is more than offset by the sharp drop in actual drilling conducted. In addition, more and more rigs in operation are drilling for natural gas, which doesn't help stop the oil production decline.

Output of natural gas liquids is expected to move up again in 1994 by 10,000 b/d to 1.75 million b/d. NGL output has been moving up since 1989, when it averaged 1.546 million b/d.

In addition, other hydrocarbon liquids are increasing their contributions to total domestic field production. Last year the Energy Information Administration (EIA) started including fuel ethanol and oxygenate production from methyl tertiary butyl ether plants as part of total liquids production; therefore, production of liquids other than crude oil, condensate, and NGL moved up from 92,000 b/d in 1991 to 128,000 b/d in 1992 and 250,000 b/d in 1993.

Production of other hydrocarbon liquids is expected to average 260,000 b/d in 1994.

The addition of these other liquids has slowed the apparent decline of U.S. total liquids output.

OGJ forecasts U.S. average total liquids production of 8.71 million b/d in 1994, down 1.6% from last year. This is down 18.1% from the recent high of 10.636 million b/d in 1985.

Production of NGL and other hydrocarbons not included in the crude and condensate numbers moved up 9% in 1993 to an estimated 1.99 million b/d. This followed a 4.2% increase to 1.825 million b/d in 1992. Other-liquids output is projected to move up to 2.01 million b/d in 1994.

Production from Alaska's North Slope, which for years offset declines in the Lower 48, has itself entered decline.

Start up of new North Slope fields will slow the average decline rate during the next few years and make Alaskan production fluctuate.

Average Alaskan production last year is estimated at 1.586 million b/d vs. 1.714 million b/d the year before. Output in 1994 is expected to average 1.59 million b/d.

Lower 48 production averaged 5.274 million b/d in 1993 vs. 5.457 million b/d the year before. Production fell in all states with output of more than 100,000 b/d: Texas, Louisiana, California, Oklahoma, Wyoming, New Mexico, and Kansas.

Lower 48 production will decline by 164,000 b/d in 1994 to 5.11 million b/d.

That will be 28.6% lower than the region's recent peak of 7.157 million b/d in 1984.

Here are 1993 production averages for the key, states, with declines from 1992 in parentheses: Texas 1.79 million b/d (52,000 b/d), Louisiana 1.116 million b/d (33,000 b/d), California 944,000 b/d (7,000 b/d), Oklahoma 267,000 b/d (11,000 b/d), and Wyoming 243,000 b/d (22,000 b/d).

IMPORTS

Imports of crude oil and petroleum will rise again in 1994, the result of falling domestic production and rising demand the pattern of the past 2 years.

Imports increased by 251,000 b/d in 1992 and 522,000 b/d in 1993, when they averaged 8.4 million b/d for the year.

That increase was in industry crude oil imports, a category, that excludes imports for the Strategic Petroleum Reserve (SPR). Industry crude oil imports rose 9.5% to 6.65 million b/d.

Increased U.S. refinery runs and changes in product demand patterns last year led to a 3% drop in product imports to an estimated 1.75 million b/d.

U.S. dependence on petroleum imports increased to 48.8% of domestic demand in 1993, a record high, from 46.3% in 1992. The previous high was 47.7% in 1977. The recent low was 31.5% in 1985.

The record import dependency level expected this year will come as crude and product imports increase by 220,000 b/d to 8.62 million b/d. Industry imports of crude oil will move up by 100,000 b/d to an average of 6.75 million b/d. Product imports are forecast at 1.87 million b/d, an increase of 120,000 b/d.

The U.S. imported an estimated 18,000 b/d for the SPR in 1993, raising total SPR crude stocks to an estimated 587 million bbl at yearend. The increase in total SPR stocks indicates a 1993 fill rate of about 33,000 b/d. Some domestic crude oil was purchased for the SPR during 1993.

The government resumed imports for the SPR in mid 1992 after suspending them during the Persian Gulf Crisis of 1990 91. In 1992 SPR imports averaged an estimated 10,000 b/d, which boosted total SPR stocks to 575 million bbl at yearend.

An emergency sale of crude in 1991 reduced SPR stocks by 17 million bbl, adding 47,000 b/d to domestic supply that year and backing out imports that would have been required.

The SPR fill rate depends on political decisions that are difficult to predict. OGJ projects additions to SPR in 1994 averaging 33,000 b/d, which would boost the total reserve to 599 million bbl at yearend.

Industry stocks are estimated at 1.09 billion bbl at yearend 1993, compared with 1.017 billion bbl at yearend 1992. Refiners took advantage of relatively low prices and interest rates to boost stock levels.

Crude stocks of 340 million bbl at yearend 1993 are projected to be unchanged at the end of 1994. Product stocks will be drawn down slightly to reduce costs, declining 7 million bbl to 743 million bbl at yearend 1994.

REFINING OPERATIONS

Refining margins improved during 1993 on the strength of rising product demand, throughputs, and capacity utilization rates. In addition, crude values fell more than product values did, which widened gross margins.

Crude runs to stills moved up along with demand during 1993, increasing 1.7% to an average 13.643 million b/d. Total input to stills moved up 2.2% to average 13.65% million b/d.

Despite demand gains, refining capacity slipped 2% in 1993 to average 15.155 million b/d. Toughening environmental regulations and product specifications have forced marginally economic refineries to close in a trend likely to continue.

Last year's increase in input coupled with the decline in capacity boosted the capacity utilization rate to 91.7%.

Crude runs this year are projected to move up 1% to 13.78 million b/d. Total input to stills will be up 1.1% at 14.04 million b/d. Refining capacity is expected to slip to 15.145 million b/d, pushing the utilization rate to 92.7%.

Last year's drop in product imports occurred partly because refiners increased crude runs and partly because residual fuel oil demand fell. It was the fifth consecutive year of reduced product imports. The decline from 1988, when product imports averaged 2.295 million b/d, amounts to 23.7%. Of the 545,000 b/d product import drop during the period, resid accounts for 288,000 b/d.

Last year, motor gasoline imports were down 157,000 b/d and distillate imports down 140,000 b/d from their 1988 levels. Demand for those products isn't in structural decline, as it is for resid. Rather, refiners are relying more on their own output and less on imported product in part because of product specifications set by the Clean Air Act amendments of 1990.

The decline in product imports is expected to end this year. U.S. refineries have little spare capacity with which to boost product output, and demand for products including resid will increase. The import increment will be mostly heavy product, reflecting the expected rise in resid demand and refiners' continuing focus on the manufacture of gasoline and distillate.

MARGINS GROW

On an annual basis, gross refining margins grew in 1993 from depressed levels of 1992, although product price declines eroded some of the gains late in the year.

The average U.S. wellhead price of crude oil fell to an estimated $14.40/bbl in 1993 from $15.99/bbl in 1992, $16.54/bbl in 1991, and $20.03/bbl in 1990. The average landed cost of imported crude fell to $15.95/bbl from $17.75/bbl in 1992, $18.02/bbl in 1991, and $21.13/bbl in 1990.

These 10% year on %rear crude price declines in 1993 weren't matched by price drops for all products.

The average pump price for unleaded gasoline slipped 2% to an estimated $1.104/gal. But the comparative product price strength didn't net back to refiners because retail margins widened during the year and taxes increased.

The refiners' wholesale price of unleaded motor gasoline averaged 58.2/gal during 1993, like crude oil falling 10% during the year. Total taxes averaged 33.9/gal, and transport costs and retail margins amounted to 18.3/gal.

The average wholesale price of No. 2 fuel oil also fell in 1993 but not as sharply as crude costs, dropping 7.3% to 53.7/gal. The improving economy, near normal winter weather, and consequent gains in demand supported the price during the first half of the year.

With supplies adequate and crude prices dropping, refiners were able to trim wholesale prices and sill maintain margins through most of 1993.

Much of the improvement in refining margins was due to increased throughput and capacity utilization.

For the first 9 months of 1993 the Gulf Coast cash operating margin as calculated by Wright Killen and Co. averaged $1.40/bbl, compared with 88/bbl in the same period of 1992. The cash operating margin was down from $2.07/bbl for the first 9 months of 1991 and $2.11/bbl in 1990.

The average refining margin for the year is expected to be somewhat lower as refining activity generally slows in the latter months of the year. In addition, refiners had substantial stocks to help satisfy demand.

Industry, stock levels are difficult to project. In 1992, stocks were reduced sharp]y, which added 80,000 b/d to supply. Last year the pattern reversed refiners added to stocks at an average rate of 140,000 b/d.

Yearend stock levels gained further from EIA's inclusion of motor gasoline blending components in the total. Yearend 1993 industry stocks of crude, product, and blending components increased by 73 million bbl from yearend 1992 to an estimated 1.09 billion bbl.

The 7.2% increase in stocks came about in part because carrying costs fell as crude prices and interest rates declined.

Relative to demand, however, the yearend 1993 inventory appears high. OGJ projects a 20,000 b/d reduction in total industry stocks in 1994, which will reduce the yearend level by 7 million bbl to 1.083 billion bbl.

At projected demand levels, yearend stocks will represent 62 days of supply, compared with 63.3 days at yearend 1993. Stocks at yearend 1992 represented only 59.7 days' supply.

In terms of forward supply, yearend stocks have been as high as 78 days in 1981, but the tendency in recent years has been to carry, stocks at closer to minimum operating levels. During the past 5 years, total stocks at yearend have represented only about 60 days of supply, compared with 76 days in the 1960s and 67 days in the 1970s and 1980s.

DEMAND

A growing economy, and falling oil prices will raise demand for all major petroleum products this year.

Demand will continue to decline for naphtha jet fuel, formerly, a major product now in eclipse as the military switches to kerosine jet fuel.

Last year demand rose for motor gasoline, kerosine jet fuel, and distillate and fell for naphtha jet fuel, residual fuel oil, LPG, and ethane and other products,

Total U.S. product demand, including exports, is forecast by OGJ at 18.44 million b/d for 1994. Last year total demand averaged 18.18 million b/d, up 1.1% from the year before.

Exports were up 2% last year at 969,000 b/d and are expected to average 970,000 b/d in 1994. Most of last year's increase was crude to Canada.

Expected product demand excluding exports will average 17.47 million b/d in 1994 the third consecutive increase. Domestic demand peaked at 18.847 million b/d in 1978. Demand fell sharply during the next 5 years in response to price hikes, bottoming at 15.231 million b/d in 1983. As prices eased, demand rose to 17.325 million b/d in 1989, recapturing 57.9% of the decline.

A slowdown in economic activity and a sharp rise in prices in 1990 related to the Persian Gulf crisis resulted in reductions in demand in 1990 and 1991.

Despite the Upturn since then, consumption efficiencies and fuel switching are slowing petroleum demand growth. Oil energy intensity has falling from 10,700 BTU/$ of GDP in 1973 to an estimated 6,600 BTU/$ in 1993 a 38% improvement in efficiency. The ratio is projected to slip to 6,500 BTU/$ of GDP in 1994.

MOTOR GASOLINE

In addition to rising economic activity, continued growth of the vehicle fleet, an increase in the average number of miles driven per vehicle, and price moderation will boost demand for motor gasoline in 1994.

Partly offsetting those factors will be continued gains in fuel use efficiency of the vehicle fleet. The rate of improvement depends greatly on the rate at which modern vehicles replace old ones. The rate of gain in vehicle efficiency will subside as modernization proceeds; in fact, preliminary data indicate that efficiency may have begun to level in 1992.

OGJ forecasts 1994 motor gasoline demand at a record high 7.54 million b/d. It will be the third consecutive year of increased demand following 3 years of decline.

Last year motor gasoline consumption averaged an estimated 7.482 million b/d, the current record.

The previous record for motor gasoline consumption was 7.412 million b/d in 1978. Price increases after that triggered conservation and efficiency improvement efforts and pushed gasoline demand to a low of 6.539 million b/d in 1983.

The following 5 years were similar to the present, with low gasoline prices and steady economic growth boosting gasoline demand as growth in the size of the vehicle fleet and in miles driven more than offset efficiency gains.

Average distance driven per unit of fuel consumption rose from a modern low of 13.3 mpg in 1973 to 21.7 mpg in 1991, an increase of 63%. Preliminary EIA estimates put 1992 fuel efficiency at 21.6 mpg.

The average fuel consumed per car per year fell from 771 gal in 1973 to 496 gal in 1991. The preliminary estimate for 1992 is 512 gal/car/year, although this is related to miles driven and doesn't strictly relate to declining vehicle efficiency.

Driving has rebounded in recent years. The average miles driven per vehicle was 10,256 in 1973. This fell to a recent low of 9,141 miles/vehicle in 1980 and has since climbed steadily to 11,063 miles/vehicle in 1992.

The number of automobiles registered increased from 120.7 million in 1980 to an estimated 142.6 million in 1992.

Motor gasoline pump prices showed little seasonal fluctuation during 1993, with prices modestly higher in the early, part of the year and drifting lower as crude prices fell later. Falling refining feedstock costs offset the price effects of rising demand and held prices steady.

The Computer Petroleum Corp. U.S. average pump price for self service unleaded motor gasoline was $1.111/gal the first week of 1993 and moved up to $1.144/gal the first week of February, the weekly, high for the year.

The price then hovered around $1.10/gal for most of the remainder of 1993 but fell to a low of $1.053/gal the first week of December, as crude prices slipped and demand slowed.

The years average price was $1.107/gal k,s. $1.13/gal in 1992. Adjusted for inflation, the 1993 average motor gasoline pump price was the lowest ever, despite increasing taxes. This is a major reason demand continues to rise in the face of efficiency gains.

Motor gasoline prices are not expected to change much in 1994.

JET FUEL

Last year's rise in demand for jet fuel followed 2 years of decline. Average demand gained 6,000 b/d to 1.46 million b/d.

The increase was all in kerosine jet fuel, which moved up 38,000 b/d to 1.348 million b/d. Demand for naphtha jet fuel dropped by 32,000 b/d to an average of 112,000 b/d in 1993.

Jet fuel demand moved up from 1.007 million b/d in 1981 to 1.522 million b/d in 1990 then fell in 1991 and 1992 as the economy moved into recession and the military cut demand.

Military demand for naphtha jet fuel has been falling since 1988, when it averaged 213,000 b/d.

Total jet fuel demand this year is projected to increase by 40,000 b/d to an average of 1.5 million b/d.

Commercial demand for kerosine jet fuel will increase by 72,000 to 1.42 million b/d. Military demand for naphtha jet fuel is projected to fall by 32,000 b/d to average 80,000 b/d for the year.

Key operating statistics show some improvement in airline activity in 1993.

Total revenue passenger seat miles flown by U.S. scheduled airlines for the first 11 months of 1993 were up 1.3% from the year before. Total passenger boardings moved up 0.1% over the same period. And total available seat miles were up 1.8% for the 11 months.

Most of the improvement was in international activity. Domestic revenue passenger miles were up only 0.1% through November. Passenger boardings were down 0.4%, and available seat miles were up 1.1%. International seat miles flown moved up 3.6%, international revenue passenger miles moved up 4.5% and international passenger boardings increased 5%.

Air freight revenue ton miles flown for the first 10 months of 1993 moved up 4.1% from the same period of 1992. Domestic freight operations posted an increase of 2.9% and international operations increased 5.5%.

The modest increase in fuel consumption last year reflects improvements in fleet fuel efficiency. With continued improvement in the economy, the traffic volume is expected to move up again in 1994. This will boost jet fuel consumption but will be partially offset by continuing improvements in aircraft fuel efficiency,.

DISTILLATE FUEL

Distillate's demand gain this year will be its third in a row.

The average is projected at 3.13 million b/d, compared with 3.07 million b/d last year. Last year's increase, 3%, was due to economic improvement and nearly normal winter weather.

Demand for distillate peaked in 1978 at 3.432 million b/d, fell to 2.671 million b/d in 1982, and grew slowly to 3.157 million b/d in 1989. The economic downturn lowered distillate demand in 1990 and 1991.

Last year, cool weather boosted residential and commercial demand for distillate, while relatively low prices for heating oil slowed the rate of conversions to natural gas. The biggest effect, though, was economic recovery, which boosted industrial, railroad, and highway transport demand for distillate.

This year normal weather during the heating season and competitive fuel oil prices will help to sustain the residential and commercial demand. Low fuel oil prices early in the year will slow fuel oil conservation and conversions to natural gas.

The improvement in the economy translates into an increase in the rail and highway transport of goods. Both rail and highway demand for distillate are expected to move up in 1994. Moderate fuel oil prices are also expected to help boost industrial and electric utility demand in 1993.

The average wholesale price of No. 2 fuel oil fell 7.3% in 1993 to an estimated 53.7/gal following declines of 6.9% in 1992 and 10.8% in 1991.

RESIDUAL FUEL OIL

This year will be unusually good for demand for residual fuel oil, price of which has slumped relative to that of natural gas.

Last year was different. Although the economy, continued to grow resid demand fell 7.7% to 1.01 million b/d. It was the fifth annual decline in a row in a trend that relates mainly to falling resid use by electric utilities.

Demand for resid has been as high as 3.071 million b/d in 1977.

Price weakness this year will help resid demand rise by 46,000 b/d to an average of 1.05 million b/d.

Price relationships will remain especially important to resid because of fuel switching capability, in its most important market electric utilities, which generally, use it as a power generating fuel in periods of peak demand.

Transportation demand for Resid is also expected to move up this year due to shipping activity associated with the increase in crude oil and petroleum product imports.

OTHER PRODUCTS

OGJ projects LPG and ethane to move up 1.7% in 1994 to 1.78 million b/d. Last year demand averaged 1.75 million b/d, down 0.3% from 1.755 million b/d in 1992.

Demand for gas liquids slumped severely, in 1990, when unusual winter warmth reduced residential use of LPG and a chemical industry recession cut demand for ethane and other feedstocks.

With weather closer to normal the past few years and the chemical industry improving, consumption of gas liquids is recovering.

The value of chemical industry shipments moved up 5.5% in 1993 and is expected to rise this year as the economy expands.

Demand for all other petroleum products as a group is expected to increase 1.2% in 1994 to 2.47 million b/d. Last year demand slipped 1.7% to 2.44 million b/d. Demand in 1992 was 2.483 million b/d, up 8.6%. Demand for other petroleum products is sensitive to changes in the economy and in particular the chemical and construction industries.

Much of the increase in overall demand will be increases in demand for asphalt and petrochemical feedstocks. Demand for lubricants will also move up along with the improvement in the economy and increased transportation

NATURAL GAS

Despite stiff price competition, natural gas will score another year of demand growth in 1994.

Consumption will increase in all major sectors except electric utilities.

The main factor will be economic recovery. Normal winter weather will also help gas demand. In addition, preference for natural gas in new houses and buildings will boost demand in the residential and commercial sectors. And conversions to natural as from heating oil will continue, although at a slower pace due to the lower fuel oil costs.

Industrial gas demand will move up due to general economic growth and increases in nonutility power generation.

Consumption of natural gas by electric utilities is expected to fall this year due to the price competition from fuel oil. At the end of 1993 some utilities were switching to resid to take advantage of falling fuel oil prices. Natural gas prices have slipped but not as sharply as oil prices.

Natural gas would regain its advantage over heavy fuel oil for power generation if oil prices began to move up later in the year or if natural gas prices weakened.

Longer term, the outlook remains good for natural gas as a power generating fuel.

Total U.S. natural gas consumption is forecast to move up to 20.35 tcf in 1994 from 19.97 tcf in 1993.

Last year's 2.2% increase from the prior year was concentrated in the residential and commercial sectors.

Residential demand increased an estimated 5.4%, and commercial demand was up 4.7%. Industrial demand slipped an estimated 0.8%, and electric utility demand fell 4.7%.

Consumption of natural gas fell from 20.241 tcf in 1979 to 16.221 tcf in 1986 due to price increases and competition from other fuels. It has risen since that recent low and this year will recover all of the market ground lost in 1979 86.

Natural gas consumption is expected to rise significantly later in the 1990s, with much of the growth in the power generating market.

U.S. gas production is expected to move up in 1994, but the gain won't quite match the 1.9% increase in demand.

Marketed gas production will rise 1.3% to 19.43 tcf. Last year U.S. gas production increased 2.5% to 19.185 tcf, its highest level since 1981.

Imports of natural gas moved up 7.3% in 1993 to 2.295 tcf. Imports from Canada increased 5.8% to 2.215 tcf. LNG from Algeria rose to an estimated 80 bcf. LNG imports were 44 bcf in 1992, 63 bcf in 1991, and 84 bcf in 1990. LNG remains marginally economic.

This year total gas imports are expected to move up 6.8% to 2.45 tcf. Canadian imports will increase 7% to 2.37 tcf. LNG imports are projected to remain at 80 bcf.

The average U.S. wellhead price of natural gas rose 19.5% in 1993 to an estimated $2.08/Mcf. The average price in 1992 was $1.74/Mcf, up 6.1% from the previous year.

Annual average gas prices had been relatively constant for 4 years: $1.67/Mcf in 1987, $1.69/Mcf in 1988 and 1989, $1.71/Mcf in 1990, and $1.64/Mcf in 1991.

Natural gas prices hit a peak in 1984 at $2.66/Mcf. As crude oil prices fell, fuel oil became more competitive with natural gas, and fuel switching reduced demand at a time of surplus deliverability.

Increased consumption and some slowing of the rate of import growth will help gas prices rise again this year. But the rate of increase will be lower than in 1993 due to the increased competition from fuel oil.

The average annual wellhead price is projected to move up 6 8% this year. The increase depends upon the rate of economic growth, the pace of Canadian imports, and the price of oil.