Forecast and Review OGJ SPECIAL U.S. Oil, Natural Gas Demand Still Climbing

Robert J. Beck
Associate Managing Editor-Economics

Steady economic growth and slightly lower prices will boost demand for petroleum and natural gas in the U.S. again this year. Economic growth will lag behind last year's level but will remain strong.

Increased worldwide petroleum production should lower oil prices and encourage fuel-switching, which will suppress natural gas prices.

In the U.S., total energy consumption will grow less rapidly than economic activity due to continuing improvement in energy efficiency.

U.S. petroleum product demand will to move up 1.5% in 1997 to average 18.45 million b/d. And natural gas consumption will be up 0.7% at 22.05 tcf.

Despite the oil price increases of in 1996, U.S. crude oil production will continue to slide in 1997; Oil & Gas Journal projects a drop of 1.1%. U.S. production has been falling since 1985, except for a modest increase in 1991 related to the Persian Gulf war.

The rate of decline has diminished in the past 2 years, but U.S. crude oil production has still fallen at an average rate of about 226,000 b/d/year since 1985.

A price-related increase in wellhead revenues in 1996 and growth in oil and natural gas demand will boost U.S. drilling activity in 1997. But the level of activity will remain close to record low rates.

With domestic oil production falling and demand rising, petroleum imports will rise again this year, reaching a record high of 9.83 million b/d, 53.3% of domestic demand.

U.S. refining capacity will continue to operate at close to capacity and will be unable to meet the increase in product demand. Expansion of distillation capacity is restrained by environmental regulations and costs. This will boost imports of petroleum products and increase the vulnerability of U.S. product supply from unforeseen shutdowns.

The economy

Real gross domestic product (GDP) in the U.S. grew 2.4% in 1996, compared with 2% in 1995. OGJ expects the growth rate this year to slip to 2.2%.

This will be the sixth consecutive year of growth following the shallow recession that lasted from the second half of 1990 through the first half of 1992. A GDP decline of 0.7% in 1991 ended a string of 8 consecutive years of economic growth.

The current economic expansion has led to increases in consumption of both total energy and petroleum. The recent expansion's slowdown results from somewhat lower consumer spending and business investment along with reduced government spending.

Some of the major economic indicators are expected to post mixed results in 1997. Industrial production, a key component of both economic activity and energy demand, will move up 3% this year following growth of 3.1% in 1996, 3.3% in 1995, and 5.4% in 1994.

New car sales will fall to 8.5 million units in 1997 from 8.6 million last year and 8.7 million in 1995. Housing starts are forecast to slip to 1.38 million units from 1.47 million units in 1996.

Little inflation is expected in 1997. The consumer price index is forecast to rise 2.9%, the same as in 1996. The GDP price deflator, a measure of prices for all goods and services, will move up 2.3% from 2.1% in 1996.

The unemployment rate is expected to increase to 5.5% from 5.4% in 1996.

Total energy consumption

The increase in economic activity will boost total energy consumption, mainly due to increased manufacturing activity and greater consumption of electricity.

Following an increase of 2.8% in 1996 to an estimated 89.7 quadrillion BTU (quads), total energy demand will increase 1% in 1997 to 90.56 quads.

The long-running trend of improvement in the efficiency in U.S. energy consumption will continue. But the effect will be more than offset by the increased consumption required to support higher economic activity.

Energy efficiency, measured as energy consumption per constant dollar of GDP, has been improving steadily since 1970. During periods of low energy prices the rate of improvement slows due to the reduced financial incentive to conserve. In addition, the cost of each new increment in energy use efficiency tends to be higher than its predecessors.

In 1996 the U.S. economy consumed an estimated 12,990 BTU of energy for every dollar of real GDP. This is down 34% from the 19,800 BTU/$ rate of 1970. Over that period GDP increased 104%, while energy consumption increased only 34%. In 1997, the economy will use 12,830 BTU/$ of GDP.

Improvements in energy efficiency are expected to continue, the rate depending on potential savings and government mandates that may be enacted, probably for environmental reasons, or for cuts in energy use.

Energy sources

Consumption of all primary energy sources, except hydroelectric power, will increase in 1997. The growth rates for individual primary fuels will vary depending upon cost and other output constraints.

Oil energy consumption will increase 1.5% in 1997 to 36.1 quads after posting a 2.6% increase in 1996. Colder winter weather, increased economic activity, and competitive prices stimulated oil consumption last year.

Petroleum's share of the energy market will increase to 39.9% in 1997 from 39.5% in 1996 and 39.7% in 1995. Over the past 15 years oil's share of the market has gyrated, moving with changes in oil prices.

Oil's share of the U.S. energy market fell from 48.7% in 1977 to 41.8% in 1985, primarily due to price rises during that period. The subsequent fall in oil prices helped boost oil consumption, and market share moved up to 43.4% in 1986. Over the past 10 years, competition from other fuels and environmentally related efforts to improve efficiency and conservation have slowly reduced oil's market share.

Consumption of natural gas energy will increase 0.7% to 22.68 quads in 1997 following increases of 1.2% in 1996 and 4.3% in 1995.

This year's demand for energy from natural gas will be at its highest level since 1972, largely on the strength of consumption by industries and electric utilities.

Deregulation has helped improve the efficiency of the natural gas industry and improved its competitive position in the energy industry. However, competition from coal and hydroelectric power in the electric utility sector has slowed the rate of growth in demand below the rates for these competing fuels. As a result, the natural gas share of the energy market will slip to 25% in 1997 from 25.1% last year and 25.5% in 1995.

Combined energy from petroleum and natural gas will continue to dominate the energy market. The combined oil-gas market share will rise to 64.9% in 1997 from 64.7% in 1996. The share was 65.2% in 1995 and 65.9% in 1995. It peaked at 77.7% in 1972.

The main stimulus to future energy consumption in the U.S. will be growth in demand for electrical power.

Energy from hydroelectric power increased by 9.4% in 1996 to 3.91 quads due to higher rainfall and snow levels. Hydro energy consumption will slip 2.6% to 3.81 quads in 1997, depending on weather. In the long run, hydro capacity is physically limited to existing installed capacity levels. The hydro share of the energy market will slide to 4.2% in 1997 from 4.4% last year.

Even though nuclear power capacity has peaked, there has been growth in nuclear output. This has been primarily due to more efficient utilization of existing facilities. Nuclear power was up 1.8% in 1996 and will move up 0.7% this year to 7.37 quads. The nuclear power share of the energy market will slip to 8.1% in 1997 from 8.2% in 1996 and 1995.

A variety of safety and environmental concerns have curtailed expansion of nuclear power generation facilities. In 1995 the Tennessee Valley Authority (TVA) announced an end to construction on the last three nuclear reactors being built for use in the U.S. As a result, increased power output from nuclear facilities depends upon increasing the utilization rate of existing facilities. Future plant shutdowns will offset gains likely from greater utilization rates overall.

The number of operable nuclear power units peaked at 112 in the summer of 1990. The number slipped to 109 in 1992 but increased to 110 last year. Nuclear power capacity also peaked in August 1990 at 100.49 million kw. Capacity slipped to 97.88 million kw for the first quarter of 1993 but moved back up to 99.15 million kw in 1995 and 100.32 million kw in 1996.

The capacity utilization rate has moved up from 62.2% in 1989 to 77.5% in 1995 and an average of 78.5% for the first 8 months of 1996.

Coal energy consumption increased 4% in 1996, primarily due to a 2.9% increase in total electric power generation. Coal energy consumption will move up again this year as growth in power output from nuclear and hydro facilities slows.

Coal energy consumption will move up 1% in 1997 to 20.6 quads. Coal's share of the energy market will remain at 22.7%.

It is expected that coal consumption will continue to increase in future years along with demand for electricity. However, environmental concerns and related costs of clean air regulations could slow the increase.

With the capacity constraints on nuclear and hydro facilities, and the environmental regulation costs related to coal consumption, natural gas has a well-recognized chance to capture some of the growth in demand for primary energy for electricity generation. The price of gas, however, will have to remain competitive with other fuels.

Oil supply

U.S. crude and condensate production will fall 70,000 b/d in 1997 to an average of 6.42 million b/d for the year. This follows a similar decline last year, when output averaged 6.49 million b/d. The OGJ projection for 1997 represents a decline of 2.551 million b/d from the recent high of 8.971 million b/d in 1985.

That is a drop of 28.4% in domestic crude oil output in 12 years.

In the early 1980s domestic production benefited from a drilling boom related to higher oil prices and posted an increase of 419,000 b/d during 1979-85. Subsequently, slumping oil prices, costly environmental regulations, and regulations denying access to promising new areas depressed exploration and drilling activity.

Favorable developments, such as revival of drilling in the Gulf of Mexico-especially in deepwater and below salt formations-and technologically driven onshore plays such as horizontal drilling in the Austin chalk of Texas and Louisiana, won't reverse the downtrend in U.S. production of crude and condensate.

Drilling activity remains depressed by historic standards. The Baker Hughes Inc. count of active rotary rigs averaged an estimated 778 in 1996, up from only 723 in 1995, 775 in 1994, and 757 in 1993. These drilling rates are only slightly higher than the modern record low of 717 posted in 1992.

OGJ forecasts an improvement in rig activity in 1997 to 830 active rigs. Higher oil and natural gas prices in 1996 make additional funds available for exploration and drilling activity this year.

Production of natural gas liquids (NGL) will increase 10,000 b/d in 1997 to average 1.825 million b/d. NGL output has been trending upward since 1989, when it averaged only 1.546 million b/d. Increased natural gas production, deeper processing, and rising prices have helped boost output.

In recent years other hydrocarbon liquids have made a growing contribution to total domestic production. Starting in 1993, the Energy Information Administration (EIA) started including fuel ethanol and oxygenate production from methyl tertiary butyl ether (MTBE) plants as a part of total liquids production. As a result, production of liquids other than crude oil, condensate, and NGL moved up from only 92,000 b/d in 1991 to about 300,000 b/d in 1996. It will move up to 305,000 b/d this year.

OGJ projects total liquids production of 8.55 million b/d for 1997, down 0.6% from last year and down 19.6% from the recent high of 10.636 million b/d in 1985.

North Slope oil production continued to slide in 1996, pulling Alaskan output down 4.4% to an estimated annual average of 1.42 million b/d. This followed a 4.7% drop the year before. Alaskan output in 1996 was down 597,000 b/d from the 2.017 million b/d in 1988. Output in 1997 will slide 3.5% to an average 1.37 million b/d.

Lower 48 production averaged an estimated 5.07 million b/d in 1996, down only 5,000 b/d from the 1995 level. New technology has helped to sustain output and slow the decline rate. Improved secondary recovery and higher average production per oil well drilled due to 3D seismic and horizontal drilling were major factors.

In the seven Lower 48 states with output over 100,000 b/d, production fell in six: Texas, California, Oklahoma, Wyoming, New Mexico, and Kansas. But the combined output from these states declined only 26,000 b/d, offset by a 26,000 b/d increase in Louisiana. In addition, output in North Dakota increased 8,000 b/d to average 88,000 b/d last year.

In 1996 production averages in the major producing states were Texas 1.638 million b/d, down 6,000 b/d; California 957,000 b/d, down 3,000 b/d; Oklahoma 235,000 b/d, down 5,000 b/d; Wyoming 210,000 b/d, down 6,000 b/d; New Mexico 176,000 b/d, down 1,000 b/d; and Kansas 115,000 b/d, down 5,000 b/d. Louisiana averaged 1.195 million b/d.

Lower 48 production will continue the slow slide in 1997, falling 20,000 b/d to 5.05 million b/d. The recent high for Lower 48 production was 7.157 million b/d in 1984.

Imports

U.S. imports of crude oil and petroleum products will set a record high in 1997, averaging 9.83 million b/d, up 390,000 b/d from 1996.

Total petroleum imports increased 605,000 b/d last year to average 9.44 million b/d. Product imports moved up 295,000 b/d to an average 1.9 million b/d. The limited excess refining capacity and low stock levels necessitated a jump in product imports to meet the sharp increase in consumption. Product imports have been as high as 2.295 million b/d in 1988 but fell to 1.605 million b/d in 1995 as refiners sharply lowered inventories.

Imports of all major products moved up in 1996. There were significant increases in imports of motor gasoline, distillate, residual fuel oil, and products counted as miscellaneous.

Crude imports increased 310,000 b/d in 1996 to average a record high 7.54 million b/d. Crude imports are projected to move up 260,000 b/d in 1997 to average 7.8 million b/d.

Product imports will jump by 130,000 b/d to average 2.03 million b/d this year. Refinery utilization rates are close to sustainable limits; therefore, demand growth will have to be increasingly met by product imports.

Dependency on petroleum imports moved up to a record high 51.9% of domestic demand in 1996 from 49.8% in 1995. It will increase to 53.3% this year. The recent low was 31.5% in 1985.

No crude imports are expected for the Strategic Petroleum Reserve (SPR). In fact, the SPR level was reduced last year. The last crude imports for the SPR were in June 1994. Total SPR crude stocks were reduced to 570 million bbl from the 592 million bbl level that had been sustained since mid-1994. Last year the SPR crude sales were used as a source of funds to reduce the deficit, and there does not appear to be much political interest in adding to the stockpile.

Stocks

Industry stocks were estimated at 965 million bbl at yearend 1996, down from 971 million bbl at yearend 1995 and 1.061 billion bbl at yearend 1994.

The reduction in stocks averaged about 20,000 b/d in 1996, compared with 247,000 b/d in 1995. In prior years stock adjustments fluctuated, increasing 37,000 b/d in 1991, falling 79,000 b/d in 1992, and increasing 136,000 b/d in 1993 and 4,000 b/d in 1994 .

By the end of 1995 industry stock levels had been reduced to close to minimum operating levels, which prevented a sharp additional drawdown last year.

At yearend 1995 total industry stocks represented only 54.8 days of supply. At yearend last year they represented 53.1 days of supply at the estimated 1996 demand level. That is down significantly from the 59.9 days of supply at yearend 1994. Yearend stocks were as high as 78 days of supply in 1981.

OGJ projects a modest increase in industry stocks in 1997 to 976 million bbl at the end of the year. The majority of the increase will be in crude stocks, which are expected to move up to 310 million bbl from 302 million bbl at yearend 1996.

Product stocks are projected to finish the year at 666 million bbl, up from 663 million bbl at yearend 1996.

Refining

Refineries continued to be run at close to full capacity in 1996. Average capacity was slightly lower than the previous year.

Last year crude oil runs to stills increased 1.3% to average an estimated 14.16 million b/d. Total input to stills moved up 1.2% to average 14.29 million b/d.

Average refining capacity slipped to 15.335 million b/d from 15.346 million b/d in 1995. The increase in input to stills coupled with the reduction in capacity boosted the refinery utilization rate to an average of 93.2% from 92% in 1995.

That is very close to at maximum sustainable capacity utilization, since some excess capacity is required for maintenance downtime and other contingencies.

Crude runs are projected to move up 0.8% in 1997 to average 14.27 million b/d, and total inputs to stills will increase to an average 14.4 million b/d.

Some refining capacity had been added by yearend 1996. Average capacity will increase to 15.4 million b/d in 1997. Even with the added capacity the utilization rate will increase to 93.5% for the year. But there are physical limits on how much crude can be refined domestically.

The sufficiency of refining capacity in relation to demand is a growing question in the U.S.

Refining margins and prices

Increased product demand, higher refinery utilization rates, and higher product prices increased refining margins slightly in early 1996. But the positive margin factors were partially offset by increased crude oil feedstock costs.

For the first 9 months of 1996, the Gulf Coast cash operating margin as calculated by Wright Killen & Co. averaged 53¢/bbl, up from 25¢/bbl for the same period of 1995. However data were not available for the latter 3 months of the year, when both crude costs and heating oil prices surged. In the latest month available, August, the average refining margin had fallen to 2 6¢/bbl, compared to 58¢/bbl a year earlier. Therefore, it is unlikely that the average refining margin for the year will be much higher than the 33¢/bbl for 1995. Refining margins averaged 88¢/bbl in 1994 and $1.39/bbl in 1993.

Both crude oil and refined product prices moved up in 1996.

The estimated average U.S. wellhead price of crude oil increased 25.4% last year to $18.33/bbl. This is the second consecutive year of higher average crude oil prices following four years of decline. The wellhead crude oil price averaged $20.03/bbl in 1990 and fell steadily to $13.19/bbl in 1994.

The average landed cost of crude oil imports increased 20.5% last year to $20.20/bbl, up from $16.77/bbl in 1995.

The average pump price for unleaded gasoline moved up 7.2% in 1996 to an estimated average of $1.23/gal. This followed a 3.1% increase in 1995 to $1.147/gal, highest since 1983. The refiners' wholesale price of finished motor gasoline increased 16.6% to an estimated average of 73¢/gal in 1996.

Total gasoline taxes at the pump averaged 39.5¢/gal in 1996, up from 39.3¢/gal in 1995 and 37.5¢/gal in 1994.

The average wholesale price of No. 2 fuel oil increased 23% to an estimated 62.9¢/gal last year following a 1% increase in 1995 to 51.1¢/gal. Fuel oil prices had fallen for four consecutive years through 1994

Oil demand

Consumption will move up for all major products in 1996.

OGJ projects total U.S. product demand, including exports, of 19.42 million b/d in 1997, up 1.4% from 19.16 million b/d last year.

Exports increased 3.3% last year to 980,000 b/d. Exports are expected to average 970,000 b/d in 1997. The increase last year was for both crude oil and product exports. Exports could move up higher in the future if significant volumes of Alaskan crude oil are exported.

Domestic petroleum product demand, as projected for 1997, will be up for the sixth consecutive year. Demand will average 18.45 million b/d, a recent high but still below the record high of 18.847 million b/d set in 1978.

After the peak year, demand fell sharply for the next 5 years to a recent low of 15.231 million b/d in 1983. It then climbed steadily to 17.325 million b/d in 1989. An economic recession and a brief but sharp rise in oil prices due to the Persian Gulf war reduced demand in 1990 and 1991.

The subsequent economic expansion has boosted petroleum product consumption for the past 5 years.

Petroleum product demand has been rising even though the amount of oil energy consumed per dollar of GDP has been falling since 1973. Oil energy consumed per dollar of GDP fell from 8,900 BTU/$ in 1973 to an estimated 5,100 BTU/$ in 1996, a drop of 43%. The ratio will remain at 5,100 BTU/$ of GDP in 1997.

Motor gasoline

Motor gasoline demand will move up again in 1997 as a result of the increase in economic activity, growth of the vehicle fleet, an increase in the miles driven per vehicle, and the slowdown in the improvement in vehicle fuel efficiency. Increased speed limits in most states will also boost gasoline consumption.

This may be partially offset if pump prices are higher. Increased demand and the cost of producing reformulated gasoline could boost pump prices. An expected dip in crude prices may offset these effects.

Improvement in efficiency of the vehicle fleet, as measured by miles per gallon, ceased in 1992 and declined in 1993. According to EIA, efficiency improved again in 1994 and 1995.

Future improvements will depend upon the rate of replacement of old, inefficient vehicles and consumer preferences. Higher auto prices tend to slow replacements. Recently, consumers have preferred light trucks, sport utility vehicles, and large cars.

Average miles per gallon of gasoline for the vehicle fleet moved up from 13.3 mpg in 1973 to 21.69 mpg in 1991. Miles per gallon then slipped the following 2 years to 21.04 mpg in 1993. The following gains took efficiency to an estimated 22.56 mpg in 1995.

Driving distance reached a record 11,329 miles/vehicle in 1995. The recent low was 9,141 miles/vehicle in 1980.

OGJ projects 1997 motor gasoline demand at a record high 7.99 million b/d, up 1.7% from the 7.86 million b/d last year. This will be the sixth consecutive year of increased motor gasoline demand and the fifth consecutive record.

Prior to the recent period of record years the high for motor gasoline consumption was 7.412 million b/d in 1978. High gasoline prices then encouraged conservation and rapid improvement in vehicle fuel efficiency. Gasoline consumption fell to 6.539 million b/d in 1983. Since that time, lower gasoline prices, steady economic growth, a growing vehicle fleet, and a steady rise in miles driven per vehicle have boosted gasoline demand, more than offseting gains in vehicle fuel efficiency.

The total number of automobile registrations increased from 121.6 million in 1980 to 147.2 million in 1994, an increase of 21%. Truck registrations moved up from 33.7 million in 1980 to 47.6 million in 1994, an increase of 41.6%.

Relatively modest gasoline prices preceding the 1996 jump to $1.23/gal also stimulated demand. The pump price for unleaded motor gasoline averaged $1.127/gal during 1991-95, ranging from a low of $1.108/gal in 1993 to a high of $1.147/gal in 1995.

Even though the pump price moved up in 1996, demand increased 0.9%. This is probably because even with the increase, the pump price adjusted for inflation is significantly lower than a decade earlier. The inflation-adjusted price was close to record lows during 1991-95. This is a major reason why gasoline demand continues to rise and surpass the effect of efficiency gains.

Jet fuel demand

Demand for jet fuel increased 5% last year to 1.59 million b/d.

This is the reflection of the steady increase in economic activity in the U.S. and throughout the world and of fares kept fairly low by competition.

Almost all jet fuel consumption is now kerosine jet fuel, previously used primarily by commercial aircraft. The military has converted most of its aircraft from naphtha to kerosine jet fuel. Consumption of naphtha jet fuel averaged an estimated 6,000 b/d last year, compared with 17,000 b/d in 1995 and 205,000 b/d in 1989.

Key operating statistics showed increases in airline activity in 1996. Total revenue-passenger seat-miles flown by U.S. scheduled airlines for the first 10 months of 1996 were up 6.5% from the year before. Total passenger enplanements were up 4.9% over the same period. And total available seat-miles were up 2.5% for the 10 months. There was significant improvement in both domestic and international activity. Domestic revenue-passenger-miles were up 7% through October. Domestic passenger enplanements were up 5%, and available seat-miles were up 2.4%. International revenue-passenger-miles moved up 5.2%, passenger enplanements increased 4%, and available seat-miles increased 2.9%.

Air freight revenue-ton-miles flown for the first 10 months of 1996 were up 3.6% from the same period of 1995. Domestic freight operations posted an increase of 2.8%, and international operations increased 4.6%.

Jet fuel consumption moved up for 9 consecutive years-from 1.007 million b/d in 1981 to 1.522 million b/d in 1990. The increase was due to expanding commercial airline business.

Demand then fell in 1991 and 1992 as the economy moved into recession and the military cut consumption. As the economy recovered so did demand for jet fuel.

The increase in economic activity will boost jet fuel demand this year by 30,000 b/d to an average 1.62 million b/d. With increased economic activity, passenger-miles and ton-miles will both increase.

Distillate fuel

Demand for distillate fuel oil will increase 1.5% this year to 3.4 million b/d, close to a record high. This follows a 4.5% jump in demand last year to 3.35 million b/d.

The increase this year will be due primarily to the improvement in the economy. Demand was boosted in 1996 by colder than normal winter weather and increased heating season demand for fuel oil.

This will be the sixth consecutive yearly gain in distillate demand. Demand for distillate hit its peak in 1978 at 3.432 million b/d. Higher prices then encouraged conservation and fuel-switching, and demand fell to 2.671 million b/d in 1982. Lower oil prices and steady economic growth revived demand, which increased except during the economic recession in 1990-91.

Last year economic activity boosted industrial, highway transport, and railroad demand for distillate. And the cold winter sustained residential and commercial demand. Demand for transport fuel will move up again this year, although the gain may be moderated by rising costs of diesel.

A normal winter would stabilize commercial and residential demand. The sharp increase in natural gas prices at yearend 1996 will make distillate fuel more competitive in the industrial and electric utility sectors.

Residual fuel oil

OGJ projects that demand for residual fuel will increase 10,000 b/d in 1997 and average 870,000 b/d. Resid demand moved up 8,000 b/d last year to an estimated average of 860,000 b/d.

Cold winter weather and a price competitive with natural gas helped boost demand.

Resid demand has been sliding for almost 20 years. The peak year for resid consumption was 1977 at 3.071 million b/d. Demand last year was down 72% from that level. The sharp drop over the years was primarily due the reduction in demand in the electric utility and industrial sectors. Increased nuclear power output and price competition from coal and natural gas resulted in a reduction in fuel oil demand in these sectors.

The modest increase in demand this year will come from those industrial and utility sectors along with some increase in transport demand. Higher prices for natural gas will help stabilize demand for resid.

Increased economic activity and trade will boost transport demand for resid.

There will be increased demand for electrical power to support the higher level of economic activity. Most utilities have fuel-switching capabilities that enable them to use the lowest-cost fuels for peak generating needs. Resid is used when additional capacity is needed to meet peak demand or small incremental increases in electrical power demand.

Other petroleum products

Demand for LPG and ethane will move up 1% in 1997 to average 2.01 million b/d. Last year demand averaged 1.99 million b/d, up 4.8 % from 1.899 million b/d in 1995.

Colder than normal winter weather and increased economic activity, including increased chemical industry activity, resulted in the sharp increase in demand last year. The colder winter weather also boosted residential and commercial consumption.

Demand for all of the other petroleum products as a group will increase 1.2% in 1997 to 2.56 million b/d. Last year, demand for all of the other petroleum products increased 2.7% to 2.53 million b/d. This miscellaneous petroleum product category will represent 13.9% of total domestic demand in 1997.

Demand for other petroleum products is sensitive to changes in the economy and in particular the level of activity in the chemical and construction industries.

Increases are expected in demand for asphalt and lubricants to keep pace with the steady increase in transport activity. Increases are also expected in demand for petrochemical feedstocks as the economy expands.

Natural gas

Natural gas will run into price competition from other fuels early in 1997, but consumption will continue to increase modestly.

Due to the colder than normal winter weather, natural gas prices have started the year much higher than their levels a year earlier. This may moderate demand as utilities and large industrial users shift to competing fuels, primarily fuel oil.

Gas prices are expected to slide following the heating season as consumption falls. This may be partially offset by replenishment of natural gas inventories.

Gas demand

Total U.S. natural gas consumption will move up 0.7% in 1997 to 22.05 tcf. Natural gas demand will be close to the record consumption of 22.10 tcf in 1977.

The increase in consumption will occur mainly in the industrial and electric utility sectors as economic activity expands. Closer to normal winter weather should lower demand in the residential and commercial sectors.

Increased demand for electrical power coupled with slow growth in nuclear power output and a slide in hydro power output will increase electric utility consumption of natural gas. Industrial demand will move up as economic activity increases. The increase will be slowed by the high prices at the start of the year.

Last year natural gas consumption increased 1.2% to 21.9 tcf. Economic expansion coupled with colder than normal winter weather lifted consumption in most economic sectors. Cold weather raised residential demand an estimated 6.5% and commercial demand 4.4%. Demand in the industrial sector increased an estimated 1% to support the economic expansion.

But electric utility demand fell an estimated 9%. A sharp rise in hydro power output and increased nuclear power output displaced natural gas in this sector. Higher natural gas prices also resulted in a shift to coal and fuel oil.

Consumption of natural gas fell from 20.241 tcf in 1979 to 16.221 tcf in 1986 due to price increases, fuel-switching, and government controls. Lower prices, deregulation, and industry restructuring made natural gas more competitive in subsequent years; demand has been rising steadily since 1986. Demand in 1997 will be at close to a record high level and will be the highest since 1972.

Natural gas consumption will continue to increase through the late 1990s, particularly for electric power generation.

Gas supply

U.S. gas production has been increasing in recent years and will move up again this year.

The production increase has occurred despite the low level of overall drilling activity. Drilling identified as targeted to only gas has increased.

Marketed natural gas production will move up 1.5% in 1997 to 20.105 tcf. Last year, domestic natural gas production increased 0.4% to 19.81 tcf. That was the highest level of domestic production since 1981.

To fill the gap between domestic output and consumption, imports have jumped; however, the increase in imports was relatively small in 1996: 1.3% to 2.878 tcf. Imports from Canada increased only 0.5% to 2.83 tcf. LNG imports from Algeria moved up to 33 bcf from 18 bcf the year before. Imports from Mexico increased to 15 bcf from 7 bcf in 1995.

In 1997, total gas imports are expected to move up 3.2% to 2.97 tcf. Canadian imports will increase 3.2% to 2.92 tcf as new pipeline capacity becomes available. LNG imports are projected at 35 bcf and imports from Mexico at 15 bcf.

The price gain of 1996 followed declines in 1994 and 1995. The average U.S. wellhead price of natural gas increased 41.5% to an estimated $2.25/Mcf in 1996 from $1.59/Mcf in 1995 and $1.88/tcf in 1994.

Natural gas prices were relatively steady during 1987-92 with a range of annual averages of $1.64-1.74/Mcf. Over that period imports increased rapidly, while total consumption growth was relatively slow.

Prices jumped to $2.03/Mcf in 1993 as demand surged to 20.279 tcf. That was the first time demand was above 20 tcf since 1979.

Slower demand growth due to closer to normal winter weather and increased competition from fuel oil and coal should result in slightly lower natural gas prices this year.