In 2009, U.S. energy markets continued to be shaped by the economic downturn that began in late 2007, according to the U.S. Energy Information Administration’s Annual Energy Outlook for 2010 (AEO2010). Over the next few years, key factors influencing U.S. energy markets will be the pace of the economic recovery, any lasting impacts on capital-intensive energy projects from the turmoil in financial markets, and the potential enactment of legislation related to energy and the environment.

Having a profound effect on energy markets will be the “dynamic” shale-gas story, according to the report.

An economic bellwether is total electricity generation, which fell by 1% in 2008 and then dropped by another 3% in 2009. Although other factors, including weather, contributed to the decrease, it was the first time in the 60-year data series maintained by the EIA that electricity use fell in two consecutive years.

The report projects moderate growth in energy consumption, increased use of renewables, declining reliance on imported liquid fuels, strong growth in shale-gas production, and slow growth in energy-related carbon dioxide emissions, in the absence of new policies designed to mitigate greenhouse-gas emissions.

Total U.S. primary energy consumption will increase by 14% from 2008 to 2035, according to the EIA reference case, representing an average annual growth rate of 0.5%—only one-fifth of the projected 2.4% annual growth rate of U.S. economic output. The difference between the two rates stems from continuing improvement in the energy intensity of the U.S. economy, measured as the amount of energy consumed per dollar of gross domestic product.

From 2008 to 2035, energy intensity falls by 1.9% percent per year in the reference case, as the most rapid growth in the U.S. economy occurs in the less energy-intensive service sectors, and as the efficiency of energy-consuming appliances, vehicles, and structures improves.

EIA projects the strongest growth in fuel use for the renewable fuels used to generate electricity and produce liquid fuels for the transportation sector. The growth in consumption of renewable fuels is primarily a result of federal and state programs—including the federal renewable fuels standard, various state renewable portfolio standard programs, and funds in the American Recovery and Investment Act—together with rising fossil fuel prices.

Although fossil fuels continue to provide most of the energy consumed in the U.S. over the next 25 years, their share of overall energy use falls from 84% in 2008 to 78% in 2035, according to the EIA.

U.S. consumption of liquid fuels is projected to continue to expand over the next 25 years, but reliance on petroleum imports decreases. With government policies and rising oil prices providing incentives for the continued development and use of alternatives to fossil fuels, biofuels account for all the growth in liquid fuel consumption in the U.S. over the next 25 years, while consumption of petroleum-based liquids is essentially flat.

Total U.S. consumption of liquid fuels, including both fossil fuels and biofuels, rises from about 20 million barrels per day in 2008 to 22 million per day in 2035.

The role played by petroleum-based liquids could be further challenged if electric or natural-gas-fueled vehicles begin to enter the market in significant numbers, notes the EIA. Rising oil prices, together with growing concerns about climate change and energy security, are leading to increased interest in alternative-fuel vehicles, although both electric and natural gas vehicles face significant challenges.

The growth in shale-gas production in recent years is one of the most dynamic stories in U.S. energy markets, notes the EIA. A few years ago, most analysts foresaw a growing U.S. reliance on imported sources of natural gas, and significant investments were being made in regasification facilities for imports of liquefied natural gas (LNG).

Today, the biggest questions are the size of the shale-gas resource base (which by most estimates is vast), the price level required to sustain its development, and whether there are technical or environmental factors that might dampen its development, according to the report.

Beyond those questions, future domestic natural gas production will also depend on the level of gas demand in key consuming sectors, which will be shaped by prices, economic growth, and policies affecting fuel choice.

Total domestic natural gas production is projected to rise from 20.6 trillion cubic feet in 2008 to 23.3 trillion in 2035, according to the report.

With technology improvements and rising natural gas prices, gas production from shale formations is expected to grow to 6 trillion cubic feet in 2035, more than offsetting declines in other production. By 2035, shale gas will provide 24% of the natural gas consumed in the U.S., up from 6% in 2008.

Alternative cases in AEO2010 examine the potential impacts of more limited shale-gas development and of more extensive development of a larger resource base. In those cases, overall domestic natural gas production varies from 17.4 trillion cubic feet to 25.9 trillion in 2035, compared with the reference case’s 23.3 trillion. The wellhead price of natural gas in 2035 is forecast to range from $6.92 per thousand cubic feet (Mcf) to $9.87 per Mcf in the alternative cases. The reference case assumes $8.06 per Mcf.

The outlook acknowledges uncertainties about the potential role of natural gas in various sectors of the economy. In recent years, total natural gas use has been increasing, with a decline in the industrial sector more than offset by growing use for electricity generation.

In the long run, the report projects a rise in the use of natural gas for electricity generation. However, over the next few years the combination of relatively slow growth in total demand for electricity, strong growth in generation from renewable sources, and the completion of a number of coal-fired power plants already under construction limits the potential for this use of gas in the electric power sector.

The near- to mid-term downturn could be offset if policies are enacted that make the use of coal for electricity generation less attractive, if the recent growth in renewable electricity slows, or if policies are enacted to make the use of natural gas in other sectors, such as transportation, more attractive, the report notes.