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  Report #: SR-OIAF/2009-03  Released Date: April 2009  Next Release Date: One-Time

### An Updated Annual Energy Outlook 2009 Reference Case Reflecting Provisions of the            American Recovery and Reinvestment Act and Recent Changes in the Economic Outlook

| 4. Other Key Changes in the Updated Reference Case

 Update of Macroeconomic Assumptions

 The published AEO2009 reference case used November 2008 macroeconomic projections            from IHS Global Insight as a starting point. However, since November, all            macroeconomic forecasts have reduced their short-run economic growth projections and            delayed the beginning of the eventual economic recovery. For example, November’s            forecast showed real GDP declining by 1.3 percent in 2009, before rebounding to 2.2            percent growth in 2010. In the same forecast, IHS Global Insight expected job losses            between 350,000 and 400,000 per month for November and December. However, actual            employment losses were much larger, exceeding 500,000 per month, with a total of 1.9            million jobs lost in the final 4 months of 2008. As a result, forecasts of real GDP growth            in the first half of 2009 have worsened and the eventual economic recovery, i.e. first            positive growth expected, is projected to starter in the last quarter of 2009 rather than the            second quarter of 2009, as had been expected in earlier analyses.

 The updated reference case discussed in this paper is based on a February 2009            macroeconomic projection through 2030 that was also provided by IHS Global Insight.            This projection, which was developed before final enactment of ARRA, reflects a            stimulus package that differs in minor respects from the package that was ultimately            enacted, but the differences are not material for the purposes of this analysis. For            example, the total stimulus package is $780 billion instead of $787 billion. In Global            Insight’s February 2009 forecast, annual real GDP growth rates are -2.7 percent and 2.0            percent for 2009 and 2010, respectively.

 The no-stimulus case presented in this paper was developed based on a contemporaneous            simulation from IHS Global Insight under the counterfactual assumption that no            economic stimulus program was enacted. The simulation provided by HIS Global Insight            for this case runs through 2019 only. EIA staff extended that simulation through 2030            using the exogenous variables, such as population, exchange rates, trading countries’            GDP, marginal tax rates, full-employment unemployment rate, some categories of            government expenditures and depreciation rates, from the simulation with ARRA that            runs through 2030. 
figure data
The March 2009 control forecast has reduced short-term growth considerably—2009            growth at -3.7 percent compared to the February 2009 estimate of -2.7; 2010 growth at            1.4 percent compared to the February estimate of 2.2 percent—although the difference in            the lower growth was due to a sharp revision in fourth quarter 2008 growth as well as            larger-than-expected employment losses and not due to the differences in the stimulus            package. Global Insight’s monthly control’s forecast horizon is typically 10 years;            however, four times per year the horizon is extended out 30 years. Since February’s            forecast horizon is 30 years, EIA staff used the February forecast as a revised            macroeconomic baseline.

Update of Near-Term Oil Price Projections

 The global financial crisis and recession combined with the provisions of ARRA lead to            lower expected world oil price assumptions in the near- and mid-term. Furthermore,            increased pessimism regarding the depth, duration, and scope of the current global            recession, the substantial decline in labor and material costs in the oil industry, which will            lower the costs of developing new oil production capacity, and the expectation that            certain provisions of the ARRA will lower petroleum product demand in the United            States all point to lower oil prices over the next decade than previously expected.            However, the global economy is expected to begin recovering in 2010 and return to longterm            trend growth in subsequent years. Therefore, the oil price assumptions after 2020            are the same as those in the previously published AEO2009 reference case (Figure 4).

Update of CAFE Standards

 Light-duty vehicle fuel economy standards assumed in the AEO2009 reference case            reflect those proposed by the National Highway Traffic Safety Administration through            model year 2015. For model years 2016 through 2020, fuel economy standards are            assumed to increase in stringency to achieve 35 miles per gallon on average for the new            light-duty vehicle fleet in 2020, after which the standards remain constant. The updated            reference case incorporates the fuel economy standards enacted for model year 2011 and            assumes updated standards for model years 2012 through 2020 that reflect adjustments            based on revisions in energy prices. As a result, projected new vehicle fuel economy in the updated reference case is slightly lower (less than 1 mile per gallon) for model years            2011 through 2015.

 Temporary Reinstatement of CAIR

 The AEO2009 reference case did not include the sulfur dioxide and nitrogen oxide capand-            trade programs for power plants called for in the Environmental Protection Agency’s            CAIR. The Circuit Court for the District of Columbia had vacated CAIR in a ruling            issued on July 11, 2008, and, as a result, it was not included in the AEO2009. However,            the Court temporarily reinstated the rule in a December 23, 2008, ruling and it is            represented in the updated reference case presented here.

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