Fuel Zaps Consumers' Wallets

www.zwire.com BY STEPHEN DAILY THE SUNDAY TIMES 03/09/2003 Financially drained homeowners aren't the only ones who think this will stand out as an exceptional year in terms of heating prices. Industry analysts agree. "Next year, I think we will look back and say we're a lot better now than we were last year," said Sarah Emerson, director of petroleum at Energy Security Analysis Inc., Wakefield, Mass. The winter heating season, which is nearing its end, has seen a steady and swift increase in the price of home-heating oil, which jumped nearly 50 percent. On Dec. 9, the Pennsylvania average for a gallon of home-heating oil was about $1.26. By Jan. 6, the price jumped to $1.39 and, on March 3, the state average neared $1.84, according to the EIA Weekly Petroleum Status Report. And it's not just heating oil. Compared to last winter, natural gas costs are up 30 percent, propane up 25 percent and electricity up 11 percent. At the same time, from October through February in the Northeast, heating degree days -- the cumulative number of degrees during the period when the mean temperature fell below 65 degrees -- were 12 percent above normal and 35 percent above last year, according to the EIA short-term energy outlook. Ms. Emerson says it's all part of what she refers to as the "perfect storm." She said this was the worst possible winter to have excessively cold temperatures -- Venezuela cut off oil exports, and there is the lingering expectation of war with Iraq. The three factors led to higher demand for oil and lower inventories. But relief for homeowners may come as early as the next two weeks, Ms. Emerson said. Mid- to late March usually marks the end of the home-heating season and the decision to go to war with Iraq should be made soon. Whether we go to war or not, a decision would end a period of uncertainty, which is historically detrimental to oil prices, she said. Also favoring a return to normal prices are increasing oil imports from Venezuela, the fourth leading supplier of crude oil to the United States. At the core, prices rise when supplies are low and demand is high. Dave Costello, economist with the Energy Information Administration, said weak demand for oil in the first half of 2002 caused inventory levels to lower. But the demand for oil rose sharply this winter because of cold weather and loss of oil supply in Venezuela. This triggered an interaction that sent prices sharply higher. Barring no further major world disorder, next winter should bring lower prices. "Generally, anything that causes further disruptions in the supply of crude oil increases the prices of heating oil," Mr. Costello said. A big hurdle the government must overcome before prices drop is filling low inventories. The strong heating demand from residential and commercial consumers, and demand for production from a slowly recovering industrial sector, have resulted in 64 percent more of the country's natural gas storage being used than last year. More than 2.75 trillion cubic feet is likely to be withdrawn from stored natural-gas supplies by the end of this winter heating season, which would be an all-time record high, according to Energy Business Watch. Total supplies for the year will likely fall to 1.5 trillion to 2 trillion cubic feet below the Energy Department's 2003 forecast of expected U.S. consumption. Crude inventories are dangerously low, on the verge of not being enough to supply the refineries, according to a report from Dailyfutures Inc. OPEC 10 has increased its quota by 1.5 million barrels per day as of Feb. 1, to 24.5 million barrels per day, but the oil is slow in arriving, the report states. EIA estimates that OPEC countries, excluding Iraq and Venezuela, hold between 2 million and 2.5 million barrels per day of excess oil production capacity that could be brought online. Around 70 percent of this spare capacity is located in one country -- Saudi Arabia -- with nearly all the rest located in four Persian Gulf countries: UAE, Qatar, Kuwait, and Iran. The U.S. government recently announced it would be ready to release oil from the nation's petroleum reserve if war with Iraq broke out. Mr. Costello said such a move would likely lower prices of crude oil. Ron Planting, American Petroleum Institute analyst, said the only other time the government tapped into the petroleum reserves for emergency purposes was the Persian Gulf war. But exhausting its oil supply should not be a concern at this point, Mr. Planting said. The U.S. has about 600 million barrels of crude oil in reserves. Even at a high rate of usage -- 2 million barrels a day -- the supply is enough to last 300 days without any imports.