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Get ready for a long winter in the Northeast. Spot prices for crude soared above $35 a barrel in early September, and natural gas broke the $5-per-million BTU mark. That means even as the nation begins to recover from the summer's record gasoline prices, heating costs are about to take off. U.S. heating-oil inventories are at a 24-year low, and the U.S. Energy Dept. forecasts a 30% increase in heating-oil prices this winter, vs. 1999.
In an effort to lower prices and sidestep political fallout in an election year, President Clinton, at the U.N. Millennium Summit in New York after Labor Day, jawboned OPEC leaders to further increase production. The strength of the global economy could be a stake, he said. His efforts, for what they were worth, worked: OPEC ministers on Sept. 10 approved an increase in oil production by some 800,000 barrels a day. But the move won't lead to lower energy prices this winter, especially in the U.S. "The problem is deeper than OPEC," says Senator Charles Schumer, D-N.Y.
OPEC members already are "leaking," or overproducing, some 670,000 barrels more than their current quotas allow, meaning that the Sept. 10 announcement essentially validates existing output. And analysts expect even that little new oil supply to be directed first to Southeast Asia, where demand is highest and an economic recovery is in full swing.
UNUSUAL CONFLUENCE. Even if OPEC wanted to boost production more, it probably couldn't, thanks to capital-spending cuts in the late 1990s that reduced capacity. "The reality is there's just less excess capacity than there has been in the past," says Edward Murphy, general manager for downstream operations at the American Petroleum Institute in Washington.
Logistical problems also complicate matters. The world's oil-tanker fleet is aging, and not enough new ships are being built to replace those going to dry dock. Even if tankers can be found to deliver the oil, most U.S. refineries already are running at capacity. So new crude supplies arriving in the U.S. in the coming months will likely end up in storage.
Meanwhile, an unusual confluence of events has put supply and demand out of whack, exacerbating heating-oil prices. Part of the problem stems from a year-old game of catch-up among refiners. When home heating-oil prices were high in 1999, refiners shifted their production to that market at the expense of diesel fuel. That led to supply shortages of diesel and protests by the nation's truckers. As diesel profit margins widened, refiners shifted back to diesel production. Then gasoline prices spiked, and refiners concentrated their efforts on gasoline production. This syndrome means refiners are late in switching to home heating-oil production, and reserves will be lower than normal.
"ENERGY CRISIS." Demand for natural gas also will contribute to higher heating-oil prices. Clean-air laws and increased demand for electricity (thanks to the exploding use of electronic gadgetry and an unrelenting heat wave in the U.S. South) have led to booming demand for natural gas this year. U.S. natural-gas reserves are at 2.1 trillion cubic feet, down 15% from a year ago. Residential prices for natural gas will be at least 27% higher this winter, according to Energy Dept. forecasts.
How does that affect heating oil? Large numbers of big energy users, especially in the Northeast, have signed so-called interruptible contracts to buy natural gas, which give buyers a price break in exchange for taking on risk of supply disruptions. If temperatures drop too much or gas prices reach a certain ceiling, natural-gas suppliers can force customers on interruptible contracts to give up their gas usage or pay killer premiums. Most users will turn to heating oil instead, pushing demand -- and prices -- up even further.
"You'd have to call it an energy crisis, not an oil crisis," says John Maniscalco, executive vice-president of the New York Oil Heating Assn., which represents small heating suppliers within New York City.
MISSING ROUGHNECKS. Don't look to domestic drillers to help the U.S. out of its energy bind. Even with high oil prices offering the potential of windfall profits to domestic drillers, U.S. oil production continues to drop, just has it has every year since 1982, when 4,000 rigs operated in the U.S., vs. 1,000 today.
Domestic producers plead that tight capital markets have hampered their ability to uncap wells that were shut when crude prices dropped to less than $20 a barrel in 1998. To make matters worse, many domestic drillers hedged their bets when they saw crude prices inching up last year and locked into sale contracts in the $20-per-barrel range for crude. They're taking a bath now.
Even if rigs for new wells could be found, workers can't. The industry lost 65,000 roughnecks between the end of 1997 and mid-1999. Only some 20,000 have returned, with the rest presumed to have found work in other, perhaps more stable, industries.
NEGATIVE IMPACT? To solve the short-term problem, President Clinton is preparing a temporary 2 million-barrel home heating-oil reserve for the Northeast. To establish the reserve on a permanent basis, Energy has asked Congress for money to pay for long-term leases on storage tanks. The Senate has appropriated $4 billion for a permanent home heating-oil reserve, but it's unclear so far if the House will go along. Even if the measure is approved, many industry experts say in the short run, a reserve would do more harm than good by siphoning off more heating from the market.
"There's only two things that could quell prices," says Scott Espenshade, an economist with the Independent Petroleum Association of America. "A mild winter, milder than the last two years, which were two of the warmest winters in the past 115 years, or if the global economy tanks."
Neither seems likely. The upshot? "It's going to be the toughest winter in terms of expense," Senator Schumer says. People who paid $100 a month to heat their homes two years ago and $200 a month last year could pay $400 a month this year. And for once, Americans can't blame just OPEC.
By Lorraine Woellert in Washington Edited by Beth Belton
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Copyright 2000, Bloomberg L.P.
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