Oil squeeze hits home - HIGH PRICES: Gas, fuel for heat at peak levels

www.sfgate.com Carolyn Said, Chronicle Staff Writer Thursday, February 27, 2003

With war clouds on the horizon and frigid weather gripping the Midwest and East Coast, energy prices across the nation have soared to record highs, while inventories have fallen.

Crude oil futures for April delivery hit $37.70 a barrel Wednesday, their highest level since Iraq's 1990 occupation of Kuwait.

The higher prices and tight supplies are hitting crude oil, gasoline, heating oil, diesel and natural gas.

"This is serious," said John Kingston, global director of oil for Platts, a McGraw-Hill energy information service in New York. "Everybody has been stunned by this continued cold weather; it is fricking freezing out here. We're seriously pulling on inventories at a time when we should not be pulling on them."

Jitters over a potential war with Iraq and a Venezuelan strike that constrained that country's oil exports have helped fuel a 43 percent jump in oil prices over the past three months. Iraq and Venezuela produce about 7 percent of the world oil supply.

Consumers are feeling immediate sticker shock from the increased fuel costs when they fill their gas tanks and pay their heating bills. Higher fuel costs also are likely to propel the cost of a range of energy-dependent products and services, from airline tickets to UPS deliveries.

"This will cause short-term economic difficulties, no question about it," said Ross DeVol, an economist with the Milken Institute in Santa Monica. "Consumers are running out of steam. This will take discretionary income out of consumers' pocketbooks at a time when consumers had been carrying the economy. It comes at a very problematic period."

Adrian Hines of Belmont, who drives at least 100 miles a day for his job installing DirecTV satellite TV systems, is one consumer who's already reining in discretionary spending because of the gas hikes. Hines, who pays for gas out of his own pocket, winces when it's time to fill up his 1986 Ford Ranger now that prices are around $2 a gallon.

"It's definitely going to be a drain on my profit," he said. He, his wife and their 7-year-old will try to save the money elsewhere. "We're going to have to cut back on leisure-time things, movies, dinners out, taking trips," he said.

Bay Area utility customers, the majority of whom heat their homes with natural gas, also are likely to feel some fallout from higher natural gas prices nationally.

Natural gas prices surged earlier this week to their highest level in two years before dropping slightly on Wednesday.

"We could be in shorts weather here, but if it's 35 below in Chicago, it has an impact on us," said Jason Alderman, a spokesman for PG&E in San Francisco.

PG&E BUYS IN SUMMER

PG&E cushions price fluctuations by buying natural gas in summer, when prices are low, and injecting it into huge underground storage facilities for use during the winter. But the company still buys some portion of its natural gas at market prices -- for competitive reasons, it declined to specify how much. PG&E doesn't take a markup on gas; it passes along market costs plus a transport charge.

"There's definitely an impact on our residential customers when prices go up so dramatically nationwide, but that is tempered by our shrewd buying habits," Alderman said. "We're looking at prices in New York and Chicago and Louisiana going up by 50 percent to 100 percent within the past week. Our customers will not see anything like that."

The utility is now calculating how much February gas prices will rise for customers, he said; it expects to have that figure available today.

Natural gas prices have been affected by the freezing weather in much of the country, which has increased its use for heating. Inventories are 43 percent less than last year at this time -- and there's no easy way to increase supplies because the whole country gets gas from the same existing fields in the United States and Canada.

"You're fighting with everyone else for the same commodity," said Paul Rolniak, vice president of EAI Inc., a Denver energy consulting firm.

"If there's a squeeze on supplies, there's nothing that can come to the rescue," Kingston said. "You can bring some in (from overseas) in liquefied form, but you can't ramp that up very easily. Even if you had a flotilla of it coming it, it would have a relatively small impact."

Natural gas prices also affect the cost of electricity, much of which is produced in gas-fueled plants. PG&E says "only a tiny sliver" -- less than 2 percent -- of its electricity is bought on the spot market, where wholesale prices have risen to $140 a megawatt hour. PG&E electricity rates for consumers are set by state regulators, rather than directly linked to market fluctuations.

ALASKAN PRICES

Meanwhile, crude oil prices are being dramatically affected by ongoing geopolitical uncertainty.

"Last year, crude oil was 21 bucks a barrel," Rolniak said. "Now, the Alaskan North Slope crude being delivered into California refineries is around 36 bucks a barrel."

Gasoline, heating oil and diesel are all refined from crude oil and so reflect any increases in crude prices.

On Wednesday, the Department of Energy reported declines in U.S. inventories of oil and petroleum products, further spooking energy traders.

Oil inventories fell by 1 million barrels to 271.9 million barrels for the week ended Feb. 21, the Energy Department said. That was 14 percent less than last year at this time.

On Tuesday, Energy Secretary Spencer Abraham told a Senate hearing that the Strategic Petroleum Reserve should not be used to manage price fluctuations. The 600 million barrels of oil stored in underground salt caverns on the Gulf of Mexico will be used only in case of "any severe disruptions," Abraham said.

In other words, energy analysts say, the government will tap its emergency oil reserves only for major events, such as a war with Iraq.

"If war came, and Iraq's 2 million barrels a day (were no longer available),

the Strategic Petroleum Reserve could do that, no problem," said Kingston.

In ultimate worst-case scenarios -- if the Iraqi military somehow cut off production or exports from Kuwait and even Saudi Arabi -- "that would be complete chaos," he said. "Taken to the extreme, that would take 10 to 12 million barrels a day out of 77 million barrels a day world consumption. No way in hell could you replace that."

The Bloomberg News service contributed to this report. / E-mail Carolyn Said at csaid@sfchronicle.com.