Winter Heating Bills Set To Soar

High Fuel Prices, Low Temperatures Chill the Forecast

http://www.washingtonpost.com/wp-dyn/content/article/2005/09/14/AR2005091402557.html

This summer's gasoline price shock will be followed by a similarly sharp jump in winter heating bills in the Washington area, analysts are warning, and fuel bills will leap even higher if forecasts for unusually cold weather prove true.

Winter heating costs have followed in lockstep with the rise of crude oil and natural gas prices, as supplies of energy commodities strain to keep up with growing demand for fuels worldwide. Natural gas prices paid by consumers have doubled since the beginning of 2000, and the increase in heating oil costs has been almost as great.

Consumers nationwide are expected to spend 34 percent more for heating oil this winter than last, 52 percent more for natural gas, 16 percent more for coal and 11 percent more for electricity, according to the preliminary winter fuel projection by the government's Energy Information Administration. The heaviest burden should fall on natural gas customers in the Midwest, the EIA predicts, with costs 71 percent higher than last winter.

The winter fuel increases will bring total energy spending for the nation to just over $1 trillion this year, 24 percent higher than in 2004, claiming the biggest share of U.S. output since the end of the oil crisis 20 years ago, the EIA said.

The higher fuel prices pose a severe threat to low-income households from the Midwest to the Northeast, said Mark Wolfe, executive director of the National Energy Assistance Directors' Association. "A few years ago, you could heat a home for $500. Now it takes $1,500," said Wolfe, whose association represents state residential heating assistance programs. "Energy has become a lot less affordable for low-income families," and they will face painful spending choices this winter, he said.

The important wild card this winter is not price, but weather. Energy analysts are pointing to forecasts such as the current AccuWeather Inc. projection of an early arrival of much colder winter weather from Maine to the District.

Kenneth Reeves, AccuWeather's senior meteorologist and forecasting director, said winter temperatures in the Northeast are expected to be three degrees lower than a year ago, throughout the winter heating season. A persistent temperature drop over three months of winter has a big impact, he said.

Almost all of the nation east of the Mississippi River is in for colder winter weather, AccuWeather forecasts, citing an unusually large area of warm water off the East Coast, which is expected to linger and draw cold Canadian air to the Northeast.

"It's actually a pretty dreadful forecast if it holds up," said Zeta Rosenberg, senior vice president for ICF Consulting in Fairfax. "It doesn't just drive up demand [for fuel] and prices," she said. "The whole [energy supply] infrastructure gets strained" as harsh weather disrupts fuel deliveries and stresses pipeline operations.

The EIA forecast assumes normal winter weather -- not the harsher conditions projected by AccuWeather. It also assumes that repairs to Gulf Coast oil production and refining facilities from Hurricane Katrina will have been completed by no later than December. If the recovery schedule slips, prices will move above EIA forecasts.

Prices for home heating oil should average $2.52 a gallon over the October-to-March winter heating season in the Northeast region, according to EIA, a 31 percent increase over last winter's average of $1.93 a gallon. Prices in the mid-Atlantic region including the metropolitan Washington area will be slightly lower than in the Northeast, but consumers here will face a similar increase over last year's bills, according to EIA economist David W. Costello.

An equal jump is in store for natural gas, which the EIA expects to rise to $16.64 per one thousand cubic feet at retail, or about $1.60 per therm, the unit used on consumers' heating bills. Last winter, the average customer price in the region was $12.60.

District households and businesses heating with electricity will pay higher prices this winter compared with last because of a price increase that took effect last February. Maryland's electricity rates were raised in 2004, but those in Northern Virginia are essentially frozen at last year's levels.

Washington Gas, which supplies natural gas to nearly 1 million customers in the Washington area, has not completed its winter forecasts. Just over half of the company's gas supplies have already been purchased or are effectively locked in at prices lower than today's gas prices, promising consumers some relief.

For families on the economic margins, the main lifeline is the federal Low Income Home Energy Assistance Program, which last year paid about one-quarter of the eligible households' heating bills. The District and 20 states, including Maryland but not Virginia, supplement the federal program with state assistance, Wolfe said.

Congressional committees have tentatively earmarked $2.1 billion for the coming winter, up 20 percent from 2002. Wolfe said the program provided an average of $315 per family for about 5 million recipients a year ago. This winter, thousands of new families will need help, he said. The only option for states without heating assistance programs is to make it harder for utilities to cut off delinquent customers in the worst of winter.

"We are in trouble," Wolfe said. "The program is not designed to deal with these kinds of price increases."

The High Cost of Staying Warm

The Energy Information Administration forecasts higher energy prices this winter.

	Last winter	Projected 2005	% change
Heating Oil (Northeast U.S.*)	$1.93	$2.52 per gallon	Up 30.6%
Natural Gas (Mid-Atlantic region)	$12.60	$16.64 per one thousand cubic feet (retail)	Up 32.1%
	2004	Projected 2005	% change
Total U.S. Energy Spending	$870 billion	$1.08 trillion	Up 24.1%

*EIA doesn't have a mid-Atlantic heating oil forecast; the closest is the Northeast forecast.

New York State Energy Research and Development Authority - Pricing information

Heating oil is a petroleum product used by many Americans to heat their homes. Historically, heating oil prices have fluctuated from year to year and month to month, generally being higher during the winter months when demand is higher. This winter, distillate fuel inventories are low and customers will be concerned about the potential for higher prices. To understand the reasons for these price variations, consumers need to understand how heating oil is used and how and where it is produced.

Of the 107 million households in the United States, approximately 8.1 million use heating oil as their main heating fuel. Residential space heating is the primary use for heating oil, making the demand highly seasonal. Most of the heating oil use occurs during October through March. The area of the country most reliant on heating oil is the Northeast (see box).

Some customers try to beat rising winter prices by filling their storage tanks in the summer or early fall when the prices are likely to be lower. However, most homeowners do not have large enough storage tanks to store the full amount needed to meet winter demands. Because homeowners may have to refill their tanks as often as 4 or 5 times during the heating season, possible rising or spiking prices are a concern.

The United States has two sources of heating oil: domestic refineries and imports from foreign countries. Refineries produce heating oil as a part of the “distillate fuel oil” product family, which includes heating oils and diesel fuel. Distillate products are shipped throughout the United States by pipelines, barges, tankers, trucks and rail cars. Most imports of distillate come from Canada, the Virgin Islands, and Venezuela. Refiners are limited in the amount of heating oil they can make to meet the demands of the winter heating season. Some winter heating oil is produced by refineries in the summer and fall months and stored for winter use.

During the coldest winter months, the inventories that are built in summer and fall are used to help meet the high demand. Refiners can increase heating oil production in the winter to a modest degree, but they quickly reach a point where, to produce more heating oil, they would also have to produce more of other petroleum products which could not be sold in sufficient quantities during the winter months. On the other hand, if consumer demand is high for a seasonal product, such as gasoline, refiners may delay producing heating oil for the winter, which may lower inventories at the start of the heating season. Such was the case in the summer of 2002, when refineries produced more gasoline to supply high gasoline demand. As a result, the 2002-2003 heating oil season started with low inventories.

Heating oil is brought into oil storage terminals in an area by refiners and other suppliers. For example, heating oil may be delivered to a central distribution area, such as New York Harbor, where it is then redistributed by barge to other consuming areas, such as New England. Once heating oil is in the consuming area, it is redistributed by truck to smaller storage tanks closer to a retail dealer’s customers, or directly to residential customers.

Heating oil prices paid by consumers are determined by the cost of crude oil, the cost to produce the product, the cost to market and distribute the product, as well as the profits (sometimes losses) of refiners, wholesalers and dealers. In 2001, distribution and marketing costs accounted for 46 percent of the cost of a gallon of heating oil. The next largest component, crude oil, accounted for approximately 42 percent of the cost of a gallon of heating oil. Lastly, refinery processing costs account for another 12 percent. (See Figure 1.)

Heating oil prices paid by consumers can vary over time and by where a consumer lives.

Seasonality in the demand for heating oil - When crude oil prices are stable, home heating oil prices tend to gradually rise in the winter months when demand is highest.

However, at times, prices can surge quickly to very high levels, as occurred in January/February 2000 (see box on “What Causes a Surge in Heating Oil Prices”). A homeowner in the Northeast might use 650-1000 gallons of heating oil during a typical winter, while consuming very little during the rest of the year.

Changes in the cost of crude oil - Since crude oil is a major price component of heating oil, changes in the price of crude oil will generally affect the price of heating oil. (See Figure 2.)

Crude oil prices are determined by worldwide supply and demand. Demand can vary worldwide with the economy and with weather. Supply can be influenced by the Organization of Petroleum Exporting Countries (OPEC) and other factors.

Competition in local markets – Competitive differences can be substantial between a locality with only one or a few suppliers or dealers versus an area with a large number of competitors. Consumers in remote or rural locations may face higher prices because there are fewer competitors.

Regional operating costs - Prices also are impacted by higher costs of transporting the product to remote locations. In addition, the cost of doing business by dealers can vary substantially depending on the area of the country in which the dealer is located. Costs of doing business include wages and salaries, benefits, equipment, lease/rent, insurance, overhead, and state and local fees.

You can arrange to have your tank filled in late summer or early fall when prices are generally lower. Talk to your heating oil dealer about participating in a budget plan to help stabilize your monthly bill. You can also talk to your heating oil dealer about “cap” or fixed price protection programs, which can help keep costs down. You can obtain a home energy audit to ensure that your furnace and appliances are running efficiently before the season begins. You can achieve conservation gains by weatherizing your home, i.e., installing the proper insulation in your house and around your hot water heater. Quick and easy fixes such as caulking and weather stripping windows and doors to seal out cold air also help save energy. Installing a programmable thermostat and reducing temperature settings on your thermostat, especially when you are not at home, are other ways to reduce your heating fuel costs.

Lastly, both Federal and State energy assistance programs are available to heating oil customers who have a limited budget. For example, the Low Income Home Energy Assistance Program (LIHEAP) is a Federal program that distributes funds to States to help low-income households pay heating bills. Additional State energy assistance and fuel fund programs may be available to help households during a winter emergency. To find out if you qualify for assistance in your State, see: www.acf.dhhs.gov/programs/liheap/states.htm or contact your local heating oil dealer.

Of the 8.1 million households in the United States that use heating oil to heat their homes, 6.3 million households or roughly 78 percent exist in the Northeast region of the country. The Northeast region (which includes the New England and Central Atlantic States) remains the area with an appreciable share of oil-heated single family homes. In other regions, older homes have been converted from oil heat to gas heat, and oil no longer has a noticeable share of the new home construction market. Thus, the seasonal increase in inventories and demand (sales of heating oil) is largely confined to the Northeast. In 2001, 5.4 billion gallons of heating oil were sold to residential consumers in the Northeast; this is 82 percent of total residential fuel oil sales. (See Figure 3.)

Home heating oil prices sometimes can change dramatically in a short period of time. Why does this happen? If refiners, wholesalers, dealers and consumers have enough heating oil in storage and temperatures do not drop rapidly, prices hold fairly steady (assuming crude oil prices are also not changing much). However, a rapid change to colder weather can impact both supply and demand; people want more fuel at the same time that harbors and rivers are frozen or delivery systems are interrupted. During this time, the available heating oil in storage is used much faster than it can be replenished. Refineries normally cannot keep up with demand during these cold periods. Wholesale buyers become concerned that supplies are not adequate to cover short-term customer demand and bid up prices for available product. In the Northeast, for example, additional supplies may have to come from some distance away, such as the Gulf Coast or Europe. It costs more to transport heating oil from these sources to the Northeast, and it also can take two to three weeks to arrive. During the time that resupply from distant markets is occurring, the supply of heating oil that sellers in the region have in storage drops further, buyers’ anxiety about finding heating oil in the short term rises, and so do prices – sometimes sharply – until new supply arrives.

Additionally, during very cold periods, prices of other heating fuels (such as natural gas or kerosene) may increase even more than heating oil prices. In this case, some consumers may switch from using their normal heating fuel to using heating oil, thereby increasing the demand for heating oil.

Information about heating oil prices...
For the latest update on heating oil demand, prices, and inventories, see our “Heating Oil and Propane Update” section of the Web site at: http://tonto.eia.doe.gov/oog/info/hopu/hopu.asp

Most people know propane as the fuel in a white container attached to a barbecue grill. But propane has long proven its versatility for heating homes, heating water, cooking, drying clothes, fueling gas fireplaces, and as an alternative fuel for vehicles. However, more propane is used to make petrochemicals which are the building blocks for plastics, alcohols, fibers, and cosmetics, to name just a few.

Propane naturally occurs as a gas at atmospheric pressure but can be liquefied if subjected to moderately increased pressure. It is stored and transported in its compressed liquid form, but by opening a valve to release propane from a pressurized storage container, it is vaporized into a gas for use. Simply stated, propane is always a liquid until it is used. Although propane is non-toxic and odorless, an identifying odor is added so the gas can be readily detected.

A unique feature of propane is that it is not produced for its own sake, but is a by-product of two other processes, natural gas processing and petroleum refining. Figure 1 shows a diagram of where propane comes from and how it gets to the consumer.

Natural gas plant production of propane primarily involves extracting materials such as propane and butane from natural gas to prevent these liquids from condensing and causing operational problems in natural gas pipelines. Similarly, when oil refineries make major products such as motor gasoline and heating oil, some propane is produced as a by-product of those processes. It is important to understand that the by-pro- duct nature of propane production means that the volume made available from natural gas processing and oil refining cannot be adjusted when prices and/or demand for propane fluctuate.

In addition to these two processes, demand is met by imports of propane and by using stored inventories. Although imports provide the smallest (about 10 percent) component of U.S. propane supply, they are vital when consumption exceeds available domestic supplies of propane. Propane is imported by land (via pipeline and rail car from Canada) and by sea (in tankers from such countries as Algeria, Saudi Arabia, Venezuela, Norway, and the United Kingdom).

Propane prices are subject to a number of influences, some are common to all petroleum products, and others are unique to propane. Because propane is portable, it can serve many different markets, from fueling barbecue grills to producing petrochemicals. The price of propane in these markets is influenced by many factors, including the prices of competing fuels in each market; the distance propane has to travel to reach a customer; and the volumes used by a customer. More specifically, propane prices are affected by:

Crude Oil and Natural Gas Prices -Although propane is produced from both crude oil refining and natural gas processing, its price is influenced mainly by the cost of crude oil. This is because propane competes mostly with crude oil-based fuels (Figure 2).

Supply/Demand Balance - Propane supply and demand is subject to changes in domestic production, weather, and inventory levels, among other factors. While propane production is not seasonal, residential demand is highly seasonal. This imbalance causes inventories to be built up during the summer months when consumption is low and for inventories to be drawn down during the winter months when consumption is much higher. When inventories of propane at the start of the winter heating season are low, chances increase that higher propane prices may occur during the winter season.

Colder-than-normal weather can put extra pressure on propane prices during the high demand winter season because there are no readily available sources of increased supply except for imports. And imports may take several weeks to arrive, during which time larger-than-normal withdrawals from inventories may occur, sending prices upward. Cold weather early in the heating season can cause higher prices sooner rather than later, since early inventory withdrawals affect supply availability for the rest of the winter.

Proximity of Supply - Due to transportation costs, customers farthest from the major supply sources (the Gulf Coast and the Midwest) will generally pay higher prices for propane.

Markets Served - Propane demand comes from several different markets that exhibit distinct patterns in response to the seasons and other influences. Residential demand, for instance, depends on the weather, so prices tend to rise in the winter. The petrochemical sector is more flexible in its need for propane and tends to buy it during the spring and summer, when prices decline. If producers of petrochemicals should have to depart from this pattern for some reason, the coinciding demand could raise prices. And when prices rise unexpectedly, as they do sometimes in the winter, petrochemical producers pull back, helping to ease prices. Prices could also be driven up if agricultural sector demand for propane to dry crops remains high late into the fall, when residential demand begins to rise.

Where are Crucial Winter Inventories Stored & How Are They Delivered to Consumers?

There are three types of storage for propane inventories (stocks): primary, secondary, and tertiary. Primary storage consists of refinery, gas plant, pipeline, and bulk terminal stocks. Primary inventory withdrawals provide the second largest source of propane during the winter heating season, the largest source being production from natural gas plants and refineries. Propane storage facilities at the primary level are generally located near the major production and transportation hubs and consist of pressurized depleted mines and underground salt dome storage caverns clustered mostly in Conway, Kansas, and Mont Belvieu,Texas. The reservoirs are linked directly to the major natural gas liquids pipelines and are capable of maintaining high deliverability rates during peak demand periods.

Secondary storage consists primarily of large, pressurized above-ground tanks located at approximately 25,000 retail dealers scattered throughout the United States. Tertiary storage consists of small above-ground tanks located mostly at residences and commercial establishments.

The primary mode of transporting propane within the United States is by approximately 70,000 miles of interstate pipelines. The pipeline system is most developed along the corridors between production areas and petrochemical consumers along the Gulf Coast and the agricultural-industrial consumers in the Midwest. The Northeast and South Atlantic States each are served by a single pipeline.The upper Midwest also is served by two lines from Canada. _ Other modes of transport include about 22,000 rail tank cars, 6,000 highway bulk transports, 18,000 _local delivery trucks, about 60 inland waterway barges, and several ocean-going tankers.

Petrochemical Industry Use - Seasonal & Regional
About 38 percent of the propane consumed in the U. S. is used in the petrochemical industry (Figure below). Propane is only one of many possible raw materials used by this industry to make plastics, etc. Therefore, because the petrochemical industry can switch to other commodities when the price of propane becomes too high, propane usage here tends to exhibit seasonal patterns, rising during the summer _when its price is low and falling during the winter heating months (October-March) when its price is high. Petrochemical demand is also regional due to the high concentration of petrochemical plants in the Gulf Coast region.

Residential/Commercial Use - Highly Seasonal & Regional
Excluding propane gas grills, residential and commercial use accounts for about 45 percent of all propane used in the United States. Of the 101.5 million households in the U. S., 8.1 million depend on propane for one use or another. Because 57 percent of these households rely on propane for their primary heating fuel, this is highly seasonal usage ._Propane is most commonly used to provide energy to areas not serviced by the natural gas distribution system. Thus, it competes mainly with heating oil for space heating purposes. Homeowners in the Midwest use it predominantly for heating, while Northeast residences rely on it more for cooking.

Farm Use - Seasonal & Regional
Farm use is the third largest retail propane market, accounting for 7 percent of total demand. Farm or agricultural uses of propane include crop drying, weed control, and fuel for farm equipment and irrigation pumps. The amount of propane used for crop drying, the largest component of farm use, is not only seasonal (fall months), but can vary greatly from year to year depending on crop size and moisture content. Agricultural use of propane is primarily concentrated in the Midwest.

Industrial Use - Not Seasonal But Regional
Industrial use of propane, the fourth_ largest propane-consuming sector accounting for about 7 percent of U. S. consumption. Uses include space heating, soldering, cutting, heat treating, and _fork-lift fuel. Sixty percent of industrial applications for propane occur in the Midwest and are typically not seasonal.

Transportation
While transportation represents the smallest sector to use propane, the largest alternative fuel in use today for transportation is propane

Propane prices occasionally spike, increasing disproportionately beyond that expected from normal supply/demand fluctuations. The main cause appears to lie in the logistical difficulty of obtaining resupply during the peak heating season. Because propane is produced at a relatively steady rate year-round by refineries and gas processing plants, there is no ready source of incremental production when supplies run low. Propane wholesalers and retailers are forced to pay higher prices as propane markets are bid higher due to dwindling supply. Consequently, higher propane prices are simply passed on to consumers. Imports do not offer much cushion for unexpected demand increases or supply shortages due to the long travel time. On the other hand, when propane prices do spike, the petrochemical sector may cut back on its use, thus freeing up supplies for other uses.