U.S. refiners drew the blame at a congressional hearing last week for last month's sharp increases in middle distillate and propane prices.
Members of the House energy and power subcommittee were indignant about the increases and were not satisfied with explanations detailing record cold weather and refinery shutdowns. They vowed not to let the matter drop simply because prices are declining now.
As Rep. Matthew Rinaldo (R-N.J.) noted, "This is the biggest issue in my congressional district." He said industry cannot be blamed for cold weather but complained that industry has little or no incentives to keep adequate inventories.
Significantly, none of the congressmen called for a return to products price or allocation controls.
Congressmen said major oil companies declined invitations to testify at the hearing.
The Senate government affairs committee plans an inquiry into the fuels shortages this week. Sen. Joseph Lieberman (D-Conn.), who called the hearing, voiced this question: "Why does it take so long for prices to fall, when a price rise can occur practically overnight?"
INITIATIVES PLANNED
Rep. Phil Sharp (D-Ind.), chairman of the House subcommittee, encouraged the Bush administration to investigate last December's price increases for evidence of illegal practices.
Other congressmen at the hearing took the Energy Information Administration to task for being slow to gather information on distillate price increases and for having no information on propane price increases.
Department of Energy officials promised to investigate the shortages. EIA will study oil companies' profits from the price increases, although that study won't be complete until June.
Congressmen said they also will press legislation to increase funding for low income energy assistance programs.
And the hearing lent impetus to Sharp's Strategic Petroleum Reserve bill, which would set up a federal program for stockpiling petroleum products in the U.S. Northeast. Sharp said the shortages showed that holding more supplies of heating oil for quick release is necessary.
WHAT HAPPENED
DOE said the price increases were an unfortunate coincidence of record low temperatures, resulting high demand, and refinery shutdowns.
Helmut Merklein, EIA administrator, said wholesale spot prices of No. 2 heating oil in New York Harbor rose from 47/gal in early August to $1.15 by Dec. 27, with 530 of the increase occurring in December alone.
Residential prices for heating oil rose about 30/gal nationwide in the period, with 240 of that occurring in December. On the East Coast, prices rose by 450 to $1.40/gal in December.
Merklein said demand increased almost 1 million b/d, or 33%, to 4.1 million b/d nationwide in December. This surge was the largest 1 month increase in at least a decade, most of which occurred on the East Coast, and more than double that seen in December 1983, when prices also rose sharply in response to a sudden cold snap.
Merklein's figures showed that on a heating degree basis, December 1989 was 27% colder than normal nationally, 29% colder than December 1988, and 33% colder than normal on the East Coast, making it the coldest December there in 60 years.
INVENTORY QUESTION
Merklein said primary distillate inventories were 122 million bbl at the beginning of October, 9 million bbl less than the 1988 level and 4.5 million bbl less than 1987.
"Apparent causes include a prevailing downward trend in distillate stock levels over the past decade due to various financial disincentives, including the emergence of a futures market and the declining share of the seasonal heating component of total distillate consumption," Merklein said.
Throughout the late summer and fall, distillate import volumes were lower because strong European demand for gas oil and relatively high prices served as disincentives to trans-Atlantic shipments to the U.S.
John Lichtblau, president of the Petroleum Industry Research Foundation Inc., New York, said lower industry inventories were justified.
East Coast stocks at the end of November-just before the big freeze-amounted to 51.5 million bbl or about 5.5% below the comparable 1988 figure but only 1% below the comparable 1987 stocks. Total U.S. distillate stocks at end-November were about 5% below comparable 1988 and 1987 levels.
Lichtblau said, "Since U.S. distillate demand in October was about 4% lower than a year ago, the inventory levels were quite reasonable."
Industry used to build higher preseason inventories, but heating oil demand has fallen substantially as a share of total distillate demand.
"On average," Lichtblau said, "year-round residential demand for distillate accounts for only 16% of the distillate total. It used to account for 40% in the 1960s and 30% in the mid-1970s.
"Thus, it follows that the necessary seasonal stock build is now lower than it used to be. In the peak normal heating season, residential demand routinely accounts for 25-30% of demand for all distillate."
The Petroleum Marketers Association of America acknowledged that heating oil inventories may have been insufficient to meet the sudden surge in demand but said, "Given the volatility in prices for heating oil and other petroleum products and the substantial costs for storage, it is not economically prudent to put more oil in storage than one can reasonably anticipate needing."
And it admitted an "inevitable sense of panic" gripped the market, causing consumers to top off tanks and middlemen to try to stockpile fuel.
Witnesses noted creation of a federal products reserve might continue the decrease in industry's reserve operating capacity.
PRICES EBBING
Merklein said a number of refineries had to close or reduce operations in the last 2 weeks of December due to the cold weather and/or fire and explosions.
Increased demand for heating oil brought on by cold weather resulted in short term transportation bottlenecks, but no consistent terminal outages could be confirmed.
With the return to near normal temperatures in the eastern U.S., the distribution system is recovering and demand is moderating.
Although decreases in refiners' wholesale distillate prices are expected to follow the spot market price drop, there are likely to be significant lags in the reduction of retail prices, Merklein said.
"Distributors that were forced to purchase inventory at high prices in late December may attempt to recoup those costs as long as residential demand persists.
"Nevertheless, on an inflation adjusted basis, U.S. residential prices in December were still 68/gal below 38% less than-the all time high that occurred in March 1981."
DOE INQUIRY
John Easton, assistant DOE secretary for international affairs and energy emergencies, said the Justice Department is reviewing complaints from customers and public officials about increased fuel prices in an effort to determine if a formal inquiry is needed.
Easton said the propane shortage in the Northeast was aggravated because a deepwater propane terminal in Newington, N.H., declared force majeure due to a delayed tanker arrival.
He said with propane, "there simply was not enough transportation to get the supplies where they were needed. Representatives of major refiners and pipeline systems said in general their facilities were operating at maximum capacities."
The Jones Act requires seaborne transport between two U.S. ports be carried out in U.S. flag vessels, and Easton said DOE tried to expedite seven requests that the Jones Act be waived to allow foreign tankers loading on the Gulf Coast to be diverted to New England.
Four waiver requests were for propane, two were for middle distillates, and one was for residual fuel oil. But only one was granted, for a propane shipment.
Easton recommended changing the law to allow faster federal response to waiver requests.
SWITCHING FROM GAS
Lichtblau said preliminary DOE data show nationwide demand for distillates in December was 550,000 b/d higher than a year ago. Most of the demand increase took place in the Northeast, where 45% of housing units are heated with oil.
The cold wave probably raised demand for heating alone by 350,000-400,000 b/d, "an extra 35% of what would be normal for this time of the year and, hence, an enormous add-on."
Lichtblau said there also was a surprising surge in nontraditional uses of distillate-at least 100,000 b/d by utilities alone.
That was caused by utilities running some turbines on interruptible gas which was diverted to other uses in December, forcing them to oil. Utilities generated more electrical power due to the cold weather in the U.S. Northeast and exported more to Canada, where weather was even colder.
PMAA said as much as 20% of the increased distillate demand was created by entrance into the market by interruptible natural gas customers with dual fuel capability.
PRICE GOUGING
Witnesses at the House hearing agreed that heating oil dealers generally restrained prices and reduced their profit margins.
But Joan Claybrook, president of Public Citizen, charged companies or individuals made as much as $1 billion in December's price runup.
"At the rate at which prices were rising, it is reasonable to suspect that many in the industry were hoarding supplies in anticipation of much higher prices," she said.
"Refinery profit margins have increased an estimated 257% over the past 5 weeks, resulting in a total influx of hundreds of millions of dollars. Independent wholesalers as well as commodity market speculators also have benefitted from this crisis, although it is much more difficult to estimate their profit level."
Lichtblau replied, "Obviously, anybody who had inventories benefitted from the price increase. There's no question the refiners' margins went up. That's part of the business.
"There's no way it can be explained away or anyone would want to explain it away. But that is no reason companies wanted to increase prices. They did not create the weather."
He questioned how the increases could be labeled price fixing or gouging when "all the price movements can be rationally explained by weather."
He said, "A market that swings so rapidly with the weather is not fixed. In fact, prices have remained relatively stable under these exceptional conditions."
Merklein noted if there were winners, there also were losers. "A lot of people must have taken terrible losses in the futures market, especially in distillates."
INDUSTRY'S EFFORT
PMAA said, "Even though our free market system allows the type of blips that we have witnessed over the past few weeks, it also has allowed prices in general to be lower in the 1980s than they were in the 1970s."
Lichtblau pointed out that the main conduit from the Gulf Coast to the Northeast is Colonial Pipeline, supplying 750,000-775,000 b/d from Houston to Linden, N.J.
"Because so many shippers tendered product, Colonial had to prorate its volumes, another indication that the Gulf Coast industry was doing all it could to alleviate temporarily the Northeast shortage," Lichtblau said.
"While the distillate price increases brought hardship to many consumers, all consumers received all required volumes when and as needed.
"Thus, logistically the industry performed quite well under very difficult conditions for which it had not prepared because there was no precedent."
Copyright 1990 Oil & Gas Journal. All Rights Reserved.