POLITICS SHAPING U.S. OIL, GAS OUTLOOK IN 1991

Robert J. Beck
Economics Editor

Politics, more than economics, will shape U.S. and international oil markets this year.

Prices will remain unsettled until the Middle East crisis ends, making projections tenuous.

But economic forces will remain at work. A halt in economic growth coupled with higher prices will reduce U.S. oil demand in 1991.

Demand also fell last year. Warm weather in the first few months of 1990 cut fuel oil consumption. And sharply higher crude and product prices following Iraq's invasion of Kuwait reduced petroleum demand overall during the last 5 months of the year.

This year, U.S. oil production will continue a slide that started in 1986. But at 180,000 b/d, the decline will be smaller than those of recent years, thanks mainly to a production increase in Alaska.

Elevated oil prices will boost rig activity and well completions. The average number of active rigs will exceed levels of the past few years but remain below rates needed to stop the U.S. production slide.

Also stimulating drilling will be growing demand for natural gas.

U.S. production of crude oil and lease condensate fell 333,000 b/d last year. The decline was exaggerated by pipeline and pump station maintenance work that crimped flow from Alaska.

Size of this year's production drop will exceed that of the demand decline, pushing imports up again. U.S. import dependency in 1991 will reach a record 48.1% of consumption.

Price is the wild card this year. A peaceful settlement of the Middle East dispute probably would depress prices once Iraqi and Kuwaiti production returned to the market. If war breaks out, prices will jump and remain high until the market has a chance to assess extent of the supply disruption. After that, the critical variables will be extent of damage to oil fields, the time required to restore production following a truce, and post-crisis Middle East politics.

Several members of the Organization of Petroleum Exporting Countries increased productive capacity following the Iraqi invasion. Even before the invasion some were planning capacity increases.

When Iraq and Kuwait resume production and exports, therefore, they'll be competing with potential sources of supply that didn't exist before the invasion. Managing the capacity surplus will test OPEC cohesion and keep politics in the oil market well beyond resolution of the crisis.

Barring war, production will be high enough to depress prices when demand slumps seasonally in the second quarter of the year. Overproduction would raise threats of a serious price slump.

HIGHLIGHTS

Here are highlights of Oil & Gas Journal's review of U.S. market developments in 1990 and forecast for 1991:

• Total energy demand will fall for the second consecutive year in 1991, declining a marginal 0.1% to 80.87 quadrillion BTU (quads). Petroleum will account for all of the decline.

  Consumption of energy from all other sources will post small increases.

• Petroleum product demand will fall 0.6% this year to 16.94 million b/d. This follows a decline of 1.6% in 1990. Before last year, demand had increased for 6 consecutive years.

• Crude and condensate production will drop 2.5% to 7.1 million b/d. Output in 1990 was down 4.4% from the year before at 7.28 million b/d. Production last year was the lowest since 1961.

• Total liquids production, including crude oil, NGL, and other hydrocarbons, will dip 2% in 1991 to 8.7 million b/d. Total liquids production last year was 8.875 million b/d, the lowest level since 1964.

• Total industry imports of crude oil and petroleum products will increase 0.6% in 1991 to 8.14 million b/d. Imports in 1990 were up 1.1% at 8.09 million b/d. The peak import year for the U.S. was 1977, when the average was 8.786 million b/d.

• Strategic Petroleum Reserve (SPR) crude oil stocks are projected to reach 612 million bbl by the end of 1991, an increase of 20 million bbl. SPR stocks increased 12 million bbl in 1990.

• Total input to stills in refineries in the U.S. will slip 0.6% in 1991 to 13.515 million b/d.

  Refining capacity will average 15.59 million b/d, up 0.2%. The refinery average utilization rate will fall to 86.7% from 87.3% last year.

• Natural gas consumption will increase 0.3% in 1991 to 18.51 tcf. Consumption last year fell 1.8% to 18.45 tcf. However, domestic production is expected to slip 1% in 1991 to 18.06 tcf. Imports will increase 4.7% to 1.55 tcf. Imports increased 7.1 % last year to 1.48 tcf. Imports of LNG will total 85 bcf in 1991.

THE ECONOMY

Economic growth will stall in 1991. Most economic studies estimate that a recession started in the fourth quarter of 1990 and will extend through at least the first or second quarters of 1991.

OGJ projects that gross national product (GNP) for 1991 will remain at the same level as last year. The recession is expected to be mild. A decline in economic activity in the first half of 1991 will be balanced by renewed growth in the second half.

Last year GNP in 1982 dollars increased by an estimated 1%, compared with 2.5% in 1989. Last year was the eighth consecutive year of economic growth, with the growth rate diminishing the past 2 years.

Industrial production moved up an estimated 1.1% in 1990, and personal consumption expenditures were up 1.1%. Nonresidential investment increased 1.2%. These increases led to the modest increase in GNP in 1990.

This year industrial production and nonresidential fixed investment both will fall by 1%. Housing starts and new car sales are also expected to be down in 1991. This will be partially offset by a 0.5% increase in personal consumption expenditures.

U.S. energy efficiency improved in 1990, extending a long term trend that will continue in 1991, although the gain will be modest.

Energy efficiency in terms of energy consumption per dollar of GNP has been improving steadily since 1970. Lower energy prices slowed the rate of improvement during 1986-88 by reducing incentives for conservation and investments in energy efficiency. Improvements in energy efficiency were posted again in 1989 and 1990 as prices moved up.

In 1990 the U.S. economy used energy at the rate of 19,500 BTU/$ of GNP. This is down 29.9% from the 27,800 BTU/$ in 1970. From the base year of 1970 through last year GNP has increased 72.2%, while energy consumption has increased only 20.5%.

Investment in energy efficiency is part of U.S. economic activity. And long term energy efficiency improvements are expected to continue. This year economic activity is expected to be at the same level as last year while energy consumption will drop 0.1% to 80.87 quads. Energy consumption will dip to 19,400 BTU/$ of GNP.

ENERGY DEMAND

The drop in total energy demand will all be attributed to a decline in oil energy demand. Oil energy demand will fall 0.6% in 1991 to 33.47 quads. This will be the third consecutive year of decline in consumption of oil energy. Last year it fell 1.6% to 33.68 quads. Oil energy consumption moved up from 30.054 quads in 1983 to 34.228 quads in 1988.

Oil's energy market share will slip to 41.4% from 41.6% in 1990. After falling from 48.7% in 1977 to 41.8% in 1985, the oil market share moved up when oil prices fell and demand rose, increasing to 43.4% in 1986. Market share slipped to 42.7% in 1988 and 42.1% in 1989.

Demand for energy from natural gas this year will increase 0.3% to 19.055 quads. This follows a decline of 1.8% in 1990 to 19.005 quads. Gas energy market share will move up to 23.6% from 23.5% last year. Market share was 23.8% in 1989 and 23.1% in 1988.

Natural gas is expected to make some headway in the electric utility sector in the next few years. Hydroelectric output will increase, but nuclear growth will stall. Coal consumption will continue to increase with growing demand for electric power, but the rate of growth will slow due to environmental concerns and costs.

Coal energy consumption is projected to move up only 0.1% this year to 18.945 quads. Demand last year also increased 0.1% at 18.93 quads. Market share will remain at 23.4% in 1991. The market share was 23.3% in 1989 and 23.5% in 1988. During the last several years coal and natural gas have been competing for second place as a fuel source.

Energy from nuclear power is expected to move up only 0.3% in 1991 to 6.12 quads. It increased 7.3% last year following marginal growth in 1989. Nuclear's share of the energy market will rise to 7.6% in 1991 from 7.5% in 1990. Its market share fell in 1989 to 7%. Energy from nuclear power is approaching its expected peak. The last new facilities are expected to come on line this year, but some of the increase in power generated will be offset by decreases in efficiency of older plants.

Energy from hydro and geothermal power is projected to increase 1.7% this year to 3.28 quads. This follows a 3.9% increase in 1990 to 3.225 quads. Market share will remain at 4% in 1991, up from 3.8% in 1989 and 3.6% in 1988. The level of hydroelectric output is still recovering from drought in the West the last several years.

OIL SUPPLY, PRODUCTION

Crude and condensate production this year will fall to its lowest level since 1960.

The recent production high point came in 1985 at an average of 8.971 million b/d. Since then oil price slumps and environmental restrictions have depressed drilling, and North Slope output has begun to decline.

OGJ's production projection for this year will represent a 20.9% slide since the 1985 peak.

And drilling shows no sign of improving enough to offset the production decline. The Baker Hughes Inc. active rig count moved up 16.2% in 1990 to an average of 1,010 active rigs. This was up from a modern record low of only 869 rigs in 1989. And during the previous 2 years the count averaged only 936 active rigs.

OGJ's projection for total liquids production this year8.7 million b/d-represents an 18.2% decline from the recent high of 10.636 million b/d in 1985 and the lowest level since 1963.

Production of NGL and other hydrocarbons not included in the crude and condensate numbers fell 0.7% in 1990 to 1.595 million b/d. Output is expected to move up slightly in 1991 to 1.6 million b/d.

Alaskan production for 1990 is estimated at 1.79 million b/d, down 84,000 b/d from 1989 and down 227,000 b/d from the peak of 2.017 million b/d in 1988.

This year, Alaskan production is expected to rise 3.4% to 1.85 million b/d, reflecting completion of the pipeline maintenance projects that restricted output last year.

Lower 48 production averaged 5.49 million b/d in 1990, compared with 5.739 million b/d in 1989. Output in the Lower 48 is expected to fall another 240,000 b/d in 1991 to average 5.25 million b/d. At the end of the drilling boom in 1984, Lower 48 output was 7.157 million b/d. Output last year was down 23.3% from that recent high.

Declines among key producing states in 1990 included Texas 70,000 b/d to 1.89 million b/d, Louisiana 80,000 b/d to 1.029 million b/d, California 34,000 b/d to 964,000 b/d, Oklahoma 20,000 b/d to 302,000 b/d, and Wyoming 11,000 b/d to 284,000 b/d.

IMPORTS RISING

Industry oil import growth rates are slowing. Import increases of 1.1% last year and 0.6% projected for this year compare with 11.3% in 1988 and 8.9% in 1989, when petroleum product demand rose while U.S. production declined sharply.

Last year's import growth slowdown reflects the demand turnaround. That trend will continue this year in conjunction with a production decline smaller than those of recent years.

Import increases last year and this year are crude oil. Product imports are down.

Crude imports, excluding those for SPR, moved up 3.3% last year to 5.98 million b/d. They will rise 1.3% to 6.06 million b/d this year.

With failing demand in 1990 product imports dropped 4.8% to 2.11 million b/d. They are expected to slip again this year to 2.08 million b/d. Lower demand for residual fuel oil is the main reason.

This year's expected import dependency-48.1% of total consumption-compares with an estimated 47.5% in 1990, 46.2% in 1989, 42.5% in 1988, and 31.5% in 1985.

Crude oil imports for SPR will remain at 50,000-55,000 b/d.

Industry crude stocks were 330 million bbl at yearend 1990 and are expected to increase to 340 million bbl at yearend 1991.

REFINERY OPERATIONS

Price volatility hurt refining profitability in 1990.

During the unusually warm early part of the year, product prices fell more rapidly than crude prices, which squeezed refining margins.

During the second quarter, crude prices weakened while product demand and prices remained relatively stable; margins improved.

Primarily due to the Iraqi invasion of Kuwait, crude and product prices jumped after Aug. 2. Margins widened as refiners rapidly adjusted product prices in line with sharply higher crude futures prices.

But physical crude prices more than caught up in following weeks. Margins plummeted in the last quarter of the year as the increase in crude costs far exceeded the early increase in product prices. Weak product demand in the fourth quarter helped keep product prices from rising to a level comparable to the higher crude prices.

The annual average U.S. wellhead price of crude oil moved up 24.6% to an estimated $19.75/bbl in 1990. The average landed cost of imported crude moved up 24.4% to $22/bbl.

Annual average product prices did not move up as sharply as crude oil prices in 1990. The average pump price of unleaded gasoline increased 11.7% to $1.14/gal for 1990. The average wholesale price of No. 2 fuel oil was up 18.6% at 67/gal for the year.

Even though demand was off in 1990, average total refinery crude runs increased 0.1% to 13.418 million b/d. Refining runs remained high as refiners boosted product stocks that had fallen to low levels at the end of 1989.

Product stocks moved up 6.1% to 700 million bbl at yearend 1990. During the previous year product stocks had fallen close to minimum operating levels. Crude stocks fell 3.2% in 1990 to 330 million bbl.

Average refining capacity was down 0.9% in 1990 to 15.564 million b/d. This combined with increased runs to boost the average utilization rate for refineries in the U.S. to 87.3%, up from 85.1 % in 1990. The higher utilization rate tends to help margins by lowering the operating cost per unit of production.

Through the first 9 months of 1990 the estimated average refining cash operating margin was $2.11/bbl, up from $0.85/bbl the year before. But the crude and product price movements in the futures market indicate that margins were probably negative in the fourth quarter and that the average for the year will be considerably lower than the 9 month figure.

Crude oil stocks will rise 3% to 340 million b/d at yearend 1991. Product stocks will remain at 700 million bbl.

PRODUCT DEMAND

Partly offsetting the main forces restraining petroleum products demand this year-elevated prices and economic stagnation-will be an assumed return to normal weather, which will push up fuel oil consumption early in the year.

For the entire year, however, kerosine jet fuel is the only product for which demand is expected to rise. The sharpest drop will be in demand for residual fuel oil, which is sensitive to price competition from other fuels.

Product demand including exports will fall 0.6% in 1991 to 17.725 million b/d. Exports will average 785,000 b/d, also down 0.6%. Estimated total demand for 1990 was 17.83 million b/d, down 1.9% from the year before. Exports last year were down 8% at 790,000 b/d.

Petroleum product demand peaked in 1978 at 18.847 million b/d after 5 straight years of increase, then slumped to 15.231 million b/d in 1983. It rebounded to 17.325 million b/d in 1989, recapturing 57.9% of the drop.

The amount of oil energy consumed for each dollar of GNP has been falling since 1977, although it has not been a steady decline. The amount of oil consumed in a given year is influenced by prices of other types of energy.

The ratio fell from 12,500 BTU/$ of GNP in 1977 to 8,1 00 BTU/$ of GNP in 1990, a drop of 35.2%. It is projected to slip further to 8,000 BTU/$ of GNP in 1991.

THE GASOLINE OUTLOOK

OGJ expects demand for motor gasoline to fall for the third consecutive year in 1991, dropping another 1% to 7.16 million b/d. The economic slow-down will combine with higher gasoline prices and improved vehicle fuel efficiency to reduce consumption.

This year's demand will be down 2.4% from the recent high of 7.336 million b/d in 1988. The gasoline consumption record was set in 1978 at 7.412 million b/d. Price induced conservation and improvements in vehicle fuel efficiency reduced consumption to 6.539 million b/d in 1983.

Lower prices and economic growth helped gasoline demand rebound during 1984-88. During that period, growth of the vehicle fleet and increased vehicle use more than offset vehicle fuel efficiency gains.

The average distance driven per gallon of motor gasoline has moved up from 13.3 mpg in 1973 to 20.54 mpg in 1989, an improvement of 54.4%. The average fuel consumed per car per year fell from 771 gal in 1973 to only 506 gal in 1989, a drop of 34.4%. The average distance driven per vehicle was 10,256 miles in 1973, which dropped to a low of 9,141 miles in 1980 and has climbed steadily to 10,382 miles in 1989. The number of automobiles registered increased from 121.6 million in 1980 to 144.4 million in 1989.

The gasoline price surge following Iraq's invasion of Kuwait and the fourth quarter economic slowdown suppressed demand last year.

The estimated average pump price for unleaded gasoline rose 11.7% in 1990 to $1.14/gal. The estimated average price in the fourth quarter was $1.369/gal, up 34.3% from the same quarter a year earlier.

JET FUEL, DISTILLATE

Total jet fuel demand is expected to rise by only 5,000 b/d in 1991 to 1.5 million b/d following a 6,000 b/d increase in 1990. The increase this year will be in demand for kerosine jet fuel for commercial aircraft, which will average 1.315 million b/d.

Last year kerosine jet fuel demand increased 2%. Total available seat-miles flown by U.S. scheduled airlines were up 7% from the year before for the first 11 months of 1990. Domestic seat-miles were up 5.8%, and international seat-miles were up 11%.

Air freight revenue-ton-miles flown for the first 10 months of 1990 were up 2.6% from the year before. Increased fuel demand due to increased miles flown was partially offset by increased aircraft fuel efficiency.

Miles flown are expected to increase in 1991, but the increase will be modest due to economic stagnation. Most of the increase will be offset by improved aircraft fuel efficiency and conservation, where possible. Demand for naphtha jet fuel for military aircraft fell 20,000 b/d in 1990 to 185,000 b/d. It is expected to remain there in 1991.

Demand for distillate will fall 0.3% to 3.1 million b/d in 1991. This follows a 1.5% drop last year. Much of the decrease in demand last year was due to the first quarter's warm weather. A return to normal weather this year will prevent distillate demand from failing in the first quarter despite the recession. The sluggish economic activity will, however, reduce demand for distillate below year ago levels in the second and third quarters.

With the economic slowdown, demand for highway diesel fuel for trucks will decline slightly in 1991. Industrial and railroad demand will also be down slightly. In addition, higher fuel oil prices will encourage conversions to other fuels for residential and commercial heating. These factors will be offset by the increase in consumption assumed to accompany normally cold weather early in the year.

The average wholesale price of No. 2 fuel oil moved up 18.6% to 67/gal in 1990 and contributed to the slide in demand. With much higher crude oil prices and increased demand, the price during the first quarter of 1991 is expected to be up considerably from a year earlier.

RESID DEMAND SLUMPS

Demand for residual fuel oil will fall this year by 1.6% to 1.215 million b/d. Last year resid demand fell 9.9% to 1.235 million b/d.

Declines this year and last relate to electric utilities' demand. Most utilities can switch to other fuels when the resid price is too high. In addition, the increase in hydroelectric power generation reduced the need for the more costly power generated from resid in 1990. This will continue in 1991. Nuclear power output was up substantially in 1990 and will increase again this year.

Demand in commercial and industrial sectors will remain close to 1990 levels. Transportation demand will move up slightly due to shipping activity associated with increased oil imports.

Demand for LPG and ethane won't change much from 1990's level-1.575 million b/d, down 5.6% from 1989. Last year's drop resulted mainly from a decline of about 65,000 b/d in chemical demand. Chemical sector demand is expected to remain close to 1.01 million b/d this year.

Demand for all other products will slip 0.2% this year to 2.39 million b/d, mostly due to the economic slowdown. Last year demand moved up 3.5% to 2.395 million b/d.

Last year's growth mainly reflected demand for asphalt and petrochemical feedstocks. Some growth in asphalt demand is expected this year, depending on the extent of the economic downturn. This miscellaneous "all other products" category will account for 14.1% of total domestic demand in 1991.

NATURAL GAS

The economic slowdown will offset a boost from more-normal weather to keep natural gas demand from rising much this year.

Colder weather will boost demand in the residential and commercial sectors. But recession will cut demand in the industrial sector.

Electric utility demand will remain at the 1990 level. In this sector higher oil prices will give a competitive advantage to natural gas at the start of the year. But hydroelectric and nuclear output increases will offset the natural gas gains from utility fuel switching.

Demand last year was down 1.8% at an estimated 18.45 tcf primarily because of extremely warm weather in the first quarter. Residential demand fell 7.1%, and commercial demand was off 2.9%. Electric utility demand also dropped due to the rebound in hydroelectric and nuclear output.

Natural gas consumption is expected to rise in the future. Environmental considerations and domestic availability make gas an attractive fuel source.

Consumption of gas fell from 20.241 tcf in 1979 to 16.221 tcf in 1986 due to price increases and competition from other fuels. Demand in 1991 will be up 2.289 tcf from 1986, recovering 57% of the 1979-86 decline.

U.S. gas production is expected to decline slightly in 1991 due to the marginal increase in consumption and rising imports. Marketed natural gas production will fall 1% to 18.06 tcf.

Last year domestic gas production rose 1.1% to 18.24 tcf. Much of the gain came from replenishment of underground storage, which had been drawn down due to record cold weather in December 1989.

Imports of gas last year moved up 7.1% to 1.48 tcf. Imports from Canada increased 5.1% to 1.409 tcf. LNG imports from Algeria increased to 71 bcf. This year total imports will gain 4.7% to 1.55 tcf. Canadian imports will increase 4% to 1.465 tcf, and LNG imports will increase to 85 bcf.

The wellhead price of natural gas averaged $1.69/Mcf in 1990 for the third consecutive year. The average price was $1.67/Mcf in 1987. The static gas price, despite seasonal swings, contrasts with crude price volatility of recent years. This also has been the case in the past. Gas prices peaked in 1984-3 years after crude oil prices-at $2.66/Mcf. Prices didn't fall as rapidly as oil prices in 1986.

With weak demand growth and the possibility of an oil price drop sometime in 1991, gas prices are not expected to increase this year.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.