Behind the Numbers Beyond cheap oil
Falling oil prices dominate the news, but of longer-term interest is how the US energy profile is changing.
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Increased production and slowing world demand have caused the price of oil to decline by more than 40 percent over the last seven months. However, this price decline is an overlay on two important energy trends: declining energy intensity and a shift in energy mix. Coming out of the last recession, the US economy has been able to grow without increasing overall energy consumption. Further, below this overall flattening have been shifts in the pattern of how energy is used and sourced. Together, these trends will influence the path of future demand.
Falling energy intensity: With only a couple of minor blips (most notably in the late 1960s), the United States has been steadily reducing the amount of energy consumed per dollar of GDP created. At present, we consume 57 percent less energy per real dollar of GDP than we did in 1970 and 21 percent less than we used in 2000.1 As shown in figure 1, in terms of absolute BTUs consumed, the United States peaked in 2008 and remains below that level even as real GDP increased by 8.5 percent.
Figure 1 also shows where the United States consumes energy: 32 percent is consumed by the industrial sector, 27 percent in transportation, 19 percent in the commercial sector, and 22 percent by the residential sector. This is a big change from 1960, when the industrial sector accounted for more than half of all energy consumed.
Another shift in the energy landscape has been changes in source of US energy. In figure 2, the impact of the 1973 Arab oil embargo is evident in the petroleum consumption, and the impact of the 1980 and 1981 recessions is visible in the slowdown of both petroleum and natural gas consumption. Beginning in the mid-2000s, a new trend in consumption appears to be emerging, with petroleum and coal losing share to natural gas and, to a lesser extent, nuclear and renewables.
With the exception of transportation, the end-use sectors consume a significant portion of their energy indirectly in the form of electricity rather than from the primary sources shown in figure 2. Since 2000, there has been a shift in the production of electricity away from coal and toward natural gas and renewables (figure 3). The increase in the proportion of electricity generated by renewables between 2000 and 2014 is specifically due to the increase in wind capacity, which rose from 0.1 percent of total electric generation in 2000 to 4.3 percent in 2014.
The remainder of this post provides a snapshot of the energy evolution occurring in the four end-use sectors.
As shown in figure 1 above, total energy consumption by the residential sector has been flat since 2008. This is particularly striking since the number of homes have increased and the size of newer homes is larger. After shrinking slightly during the recession, the size of new homes has resumed its upward trajectory, with the median square footage of new homes built in 2013 5 percent above the prior peak in 2007.2 Balancing the larger size is increased efficiency. According to the Energy Information Agency’s most recent residential energy survey, homes built between 2000 and 2009 are 30 percent larger, but consume about the same amount of energy as older homes.3 In the new homes, increased use of appliances, electronics, and lighting are offset by more efficient space and water heaters. The overall growth in the number and type of appliances and devices that need power is a driver behind the steady increase in residential electricity consumption relative to other energy sources is shown in figure 4. The other energy source making gains in the residential sector is renewables, which has returned to the levels seen in the mid-1980s when there was an upsurge in biomass generation. At present, two-thirds of the renewable energy used in the residential sector is from biomass with most of the remainder from solar with a small contribution from geothermal.
The commercial sector, as measured by the Energy Information Agency, includes buildings used for activities such as offices and retail to hospitals, places of worship, and food establishments. According to the periodic Commercial Buildings Energy Consumption Survey, commercial buildings increased by 14 percent and square footage increased by 22 percent between 2003 and 2012.4 Over that same period, energy consumption remained flat. Similar to the story with residential consumption, the gain in square footage, with no increase in energy consumption, implies substantial increases in overall energy efficiency. Energy use is the single largest operating expense in commercial office buildings, representing approximately one-third of typical operating budgets.5 In 1988, electricity passed natural gas as the major source of energy used by this sector and now accounts for more than one-half of the energy used by this sector.
Finally, a sector where oil plays a major role! Although transportation fueled by natural gas and electricity are slowly increasing, at present, they account for less than 4 percent of the energy consumed by this sector. Energy consumption, which in this case is the same as petroleum consumption, peaked in 2006 and has been trending downward since. This is explained by the fact that average fuel efficiency increased by 4 percent over the period,6 even as total miles driven remained virtually flat.7
The industrial sector, which includes facilities and equipment used for manufacturing, agriculture, mining, and construction, remains the largest user of energy in the US economy. After peaking in terms of total BTUs consumed in 1997, the proportion of energy used by this sector was on a downward trend, but it has been stable at 32 percent of total energy consumed for the past four years. This sector also shows the most reaction to recessions, the 2007–2009 recession—when manufacturing output sharply fell—being no exception. The growth in petroleum and mining activities in this sector have been offset by declines in construction and other manufacturing industries, where real, added value remains below its pre-recession levels.
Part of the energy intensity of this sector, and its continued high use of petroleum in particular, is explained by the fact that the two largest energy consumers in this sector—petroleum refining and chemicals—use petroleum as an input to production (feedstock) as well as using energy for production processes.8
Given their reliance on oil, the transportation and the industrial sectors will be the major beneficiaries of the decline in oil prices. However, unlike petroleum, other sources of energy have not undergone substantial price declines, and the EIA forecasts that retail natural gas prices and the price of electricity will remain stable to rising. The biggest question, looking forward, is whether or not efficiency gains will continue to outstrip increases in the various end-use sectors.