EMF OP 23: EMF 8 Projections of U.S. Industrial Energy Demand

Abstract:

The demand for energy by U.S. industry plays a critical role in determining fuel prices in oil, gas, and electricity markets. OPEC oil production policies are the single most determinant of crude oil prices. However, changes in world oil demand have been significant unexpected sources of change in OPEC’s capacity utilization, a major determinant of its production and pricing policies. Moreover, changes in fuel consumption patterns by U.S. industry drive the fluctuations in the prices of other fuels that occur over their long adjustment to changes in crude oil prices. The oil price collapse of 1986 has again led to dramatic changes in all fuel markets, making it even more important to reexamine trends in industrial energy use.

Industrial energy demand projections are of great interest to a variety of planners. Capital investment decisions are often based in part on energy prices which in turn are affected by total energy demands. Energy suppliers choose production and pricing strategies by considering customers’ demands. Government energy policies depend on estimates of future energy demands and the impacts that regulations will have on the economy.

Although making accurate industrial energy demand projections is important, it is not easy. Industrial energy demand is affected by a large number of factors, most of which are not controllable by any one individual or group. Decisions on energy-related investments – like any other corporate investment decisions – can depend as much on financing considerations and the state of the economy as on expected energy prices. However, the sheer magnitude of the industrial sector’s energy consumption insures its central role in determining future fuel prices, even if energy prices are not the most critical determinant of its energy use. In 1985 the industrial sector used approximately 20 quadrillion Btus of direct fuel, electricity, and fossil fuel feedstock, nearly 40 percent of all energy consumed in the United States. And this 40 percent figure significantly understates the roles of the industrial sector in U.S. energy demand because a large part of the commercial sector provides services to industry, and a significant share of the transportation sector is devoted to the transportation of industrial supplies and products.

Both energy prices and economic growth have been erratic since the 1973-1974 Arab oil embargo. Fundamental innovations in the production of all types of commodities appear literally overnight in this era of high technology and increased international competitiveness. Foreign competition provides challenges in world markets once dominated by American products. These and other factors are important determinants of U.S. industrial energy demand. Uncertainties in these areas make projecting industrial energy demand a difficult challenge.

The EMF 8 project examined these issues and their implications for industrial energy demand through a study of models of industrial demand currently in use. These models represent the state of the art in aggregate projections of future energy demand. The methodologies employed in these models include econometrics, input-output analysis, and process analysis. Projections derived from a standardized base case and a variety of alternative scenarios were used to examine the possible effects of the key uncertainties affecting industrial energy demand. Through this process, insights were gained about the strengths and limitations of the specific modeling efforts included in the study and, perhaps more importantly, about the likely level and composition of industrial energy demand in the years ahead. A range of possible energy/technology futures was examined by dealing explicitly with the uncertainty about factors affecting future industrial demand. Contingency planning is facilitated when these uncertainties are recognized and allowance is made for them in making investment decisions. Ultimately, this process can lead to a better appreciation of the forces governing industrial demand and to better energy policies.

In addition to the standardized model comparisons, this EMF working group pursued three topics related to the use of analysis in the study of industrial energy use trends: (1) the appropriate use of models by corporations involved in producing or consuming energy; (2) the availability and appropriate use of data on industrial energy use; and (3) the impact of the changing structure of the U.S. economy on the use of energy by the U.S. industry.