US Northeast winter heating oil concerns mounting

July 31, 2000
Concerns continue to mount in Washington, DC, about the specter of possible heating oil shortages and related price spikes in the US Northeast this winter.

Concerns continue to mount in Wash- ington, DC, about the specter of possible heating oil shortages and related price spikes in the US Northeast this winter.

In addition, new concerns are being voiced about possible shortfalls of natural gas supplies and concomitant price jumps for that fuel this winter (see related story, p. 20).

The concerns come as industry and government officials still squabble over the cause of gasoline price spikes in the US this year, with both sides pointing fingers at the other. And many areas of the US are trying to cope with electric power shortfalls that result in brownouts and blackouts amid record heat waves.

At least one major critic of the energy policies of the administration of Pres. Bill Clinton suggests that the problems are interrelated and reflect a systemic breakdown in the US energy supply system that needs to be fixed.

Systemic problem

Frank Murkowski (R-Alas.), the Senate energy committee chairman, recently warned the Clinton administration it needs to remedy US energy supply problems.

Murkowski said, "The recent price spikes and dislocations we have seen, and the others we know we will see soon, are like 'canaries in a coal mine'-they are the early warning signs of a system that is reaching its breaking point. I think the Midwest [gasoline price problem] is just part of an overall energy delivery system in the US that has deteriorated to an unhealthy level."

Murkowski spoke during a recent Senate energy and natural resources committee hearing on US gasoline supply problems. Government and industry officials testified.

The Alaska senator said, "I think we are heading for serious problems after years of neglect. Last winter, Northeast heating oil prices hit the roof when cold weather caused supply problems that couldn't be offset by imported heating oil with a higher sulfur content.

"There is a coming price shock for consumers this winter when they start using natural gas. Even though demand has skyrocketed for this fuel, supply has remained constant. Prices for natural gas are reaching historic highs and storage, which is usually high during the summer months, is extremely low this summer.

"Since 50% of Americans heat their home with natural gas, the Northeast's heating oil problems last year may look like a picnic compared to the howling we will hear this winter."

EIA warning

John Cook, director of the Energy Information Administration's petroleum division, echoed those concerns. He said distillate stocks remain well below normal.

"Even with a typical inventory build this summer, we likely will enter the winter heating season with lower-than-normal stocks. Strong gasoline and diesel demand this summer will effectively limit heating oil stock-building as refinery production is used to meet consumption."

Cook said, "Partly for the same reasons, natural gas has yet to show signs of building adequate inventories ahead of next winter.

"Not only does this mean industrial and utility consumption of more distillate this winter," said Cook, "it suggests utilities may use more distillate this summer to meet peak cooling needs, if natural gas prices remain high through the summer months. This could further reduce distillate stock-building, resulting in very low distillate inventories before winter begins."

Cook said the gasoline problems may not be over yet, either.

"Midwest stocks are recovering, but East Coast gasoline stocks at the end of June were 8% below their 5-year average, with reformulated gasoline 13% below average. California gasoline stocks were 6% below average.

"Consumers are not expected to reduce consumption much in the short term. As we enter the peak gasoline season, refiners will be pushed to just meet demand. With low stocks and refineries operating at very high levels, supply disruptions could trigger another price run-up."

Industry confident

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Red Cavaney, American Petroleum Institute president, said there is no cause for alarm yet about winter fuel supplies.

He said diesel fuel and home heating oil inventories are 8% below average nationally because refiners have been meeting summer demand for gasoline rather than building distillate inventories.

He said, "Five months remain for these inventories to build before the beginning of the heating season, and more than 90% of the home heating oil is shipped directly from refineries to consumers-it does not come from inventories.

"In addition, the industry has shown it is able to produce substantial amounts of distillate when the need arises. Accord- ingly, summertime distillate inventories are not necessarily a significant indicator of fuel availability once the season begins."

Cavaney noted that severe weather, not low inventories, was the principal reason for last winter's home heating oil supply problems in the Northeast.

Richardson concerned

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US Energy Sec. Bill Richardson last week said he is "very concerned about stocks" of distillates needed to heat homes in the Northeast next winter.

Richardson met recently with heating oil distributors and congressional staff about the Clinton administration's plan to create an interim 2 million bbl distillate stockpile in the Northeast by October (OGJ, July 24, 2000, Newsletter, p. 7). Participants said Richardson urged them to build distillate stocks, and there was give-and-take about how the distillate reserve would be used.

Richardson told reporters, "I assured them the home heating oil reserve would only be used for emergency purposes and not price manipulation."

The secretary said he has created an interagency task force to examine the means of removing transportation bottlenecks for home heating oil. A similar task force was established to explore ways to improve natural gas storage before winter.

Richardson told a Senate agriculture subcommittee hearing that diesel and home heating oil are nearly the same petroleum product.

"We are concerned about heating oil supplies for the upcoming winter. We need to build stocks, so this is creating some price pressure on diesel, which affects our nation's farmers and truckers."

He added that prices for diesel are beginning to drop slightly.

During the hearing, former Energy Sec. James Schlesinger dismissed a 2 million bbl stockpile as "trivial." He explained, "It is a gesture, but it will not significantly affect the market."

Saudi production

On the related matter of crude oil supply tightness, Richardson could not clarify whether Organization of Petroleum Ex- porting Countries nations would further increase oil production in the next few weeks.

Saudi Arabia proposed this month that OPEC increase output another 500,000 b/d. But after the price of the basket of crudes that OPEC uses to monitor prices fell below $28/bbl, the OPEC president said a production increase was unnecessary to restrain prices (OGJ, July 24, 2000, p. 31).

Saudi Arabia is expected to begin producing another 250,000 b/d in August, anyway.

Richardson said, "It is clear that the world needs more oil," and the market is not being helped by "confusing" signals about production from OPEC members. He added, "Saudi Arabia has shown a lot of leadership on the issue of more production. Hopefully the rest of OPEC will follow suit."

14 steps

Richardson last week announced 14 steps the government could take to improve energy supplies in the Northeast US. The recommendations were in a DOE study prompted by a home heating oil price jump in the region last winter.

The Northeast market accounts for nearly 75% of the nation's home heating oil consumption.

Clinton already has implemented one of the study's recommendations-creation of a temporary Northeast home heating oil reserve.

Richardson said, "We need to address this situation now, when the demand for heating oil is lower and we can prepare for next winter. We don't want to find ourselves in another cold winter season with low heating oil inventories and dramatic price increases. Consumers and small business owners shouldn't have to endure that."

The study concluded that last winter's problems in the Northeast heating fuels market resulted from several events, including rapidly rising world oil prices, lower-than-normal distillate inventories, adverse weather, and natural gas pipeline capacity constraints. It said those factors, when added to the region's dependence on distillate and tight worldwide crude oil supplies, led to price spikes and heating oil shortages.

Recommendations

DOE said the study's recommendations would help avoid a recurrence, although "many of the relevant decisions affecting energy supply and consumption are the responsibilities of state and local governments."

In addition to the establishment of a Northeast distillate stockpile, the report urged DOE's Office of Energy Emergencies to coordinate emergency responses and improve communications with states and industry. It said DOE should improve seasonal supply data and forecasts for the Northeast energy market and encourage all market participants to improve supply planning. It also said the US should study the need for additional port dredging in the Northeast so petroleum products could be moved more easily.

On natural gas, it said the government should reduce permitting delays for Northeast pipeline and storage capacity, evaluate gas storage opportunities, consider changing the tax treatment of conversion and hookup costs, facilitate increases in LNG infrastructure and supplies, and develop alternative energy supplies for large gas users.

It said DOE should seek options to reduce or convert heating oil use at federal buildings in the region and promote construction and weatherization programs that would reduce fuel use. And it recommended creation of an interagency working group on natural gas supplies and that DOE resume annual meetings with Canadian energy officials.