Heating bills poised to spike

Higher oil prices mean the average US household may spend at least $200 more this winter.

Even before the leaves start falling and the air has that familiar nip to it, it looks as if Americans are going to be paying more to stay warm this winter.

Oil prices are expected to be about $9 to $10 a barrel higher than last winter – meaning energy bills will be at least 20 percent higher, and possibly more, depending on winter temperatures.

Put another way, the average home heating bill is likely to be at least $200 more this winter, based on the current oil price of almost $28 a barrel.

For the fragile American economy, this is not good news. The higher costs could siphon off about $100 billion – the equivalent of the first year of President Bush's tax cut. If prices hold, economists estimate that it could cut about 0.75 percent from the nation's gross domestic product next year.

"If energy prices are rising, it's a hardship," says Mark Zandi of Economy.com. He adds that any big spike in energy prices – say to as high as $35 a barrel – "could be enough to push the economy back into a recession."

The higher prices come at a time when statistics show the economy is still soft. On Tuesday, for example, the Institute for Supply Management said its August survey of members found future orders soft and business angst increasing. This news didn't help the stock market, with the Dow Jones Industrial Average plunging 355.45 points.

Tomorrow, analysts will get an even better sense of the economy's strength when the government reports the nation's unemployment rate for August.

OPEC's moves

Energy prices are remaining high, despite cheating by OPEC members. In a recent survey, Bloomberg News found that the cartel's members exceeded their quotas by 8.2 percent last month. Next week, the OPEC ministers meet in Vienna to discuss fourth-quarter production.

One of the major reasons oil prices are up is the uncertainty over what Mr. Bush plans to do about Iraq. Indeed, the oil markets have factored in a "war premium" of several dollars a barrel.

In fact, "if it weren't for the war premium, we should be in a price collapse right now," says John Huber, president of the National Oil Heat Research Alliance. "There is a lot of new production coming on, and we're in an international recession."

One indication of how the Iraq uncertainty is weighing on the market came Tuesday, amid reports that Saddam Hussein is trying to garner international support by agreeing to let in UN weapons inspectors. This helped cool oil prices by $1.19 per barrel on the New York Mercantile Exchange.

But even with some gradual easing of tensions in the area, "we see supply and demand fairly close into 2003," says Dave Costello, an analyst at the Energy Information Administration in Washington. "We think the fundamentals are good for strong prices."

The unemployed, the poor, and those on fixed incomes will not appreciate this outlook if it comes to pass. After help from federal programs, the needy typically spend between 3 and 6 percent of their household income on winter energy bills.

Surveys have found that when heating bills rise, those with low incomes cut back on utility bills, prescription drugs, and even food. "They are forced to do a lot of juggling to have any kind of existence whatsoever," says David Fox, communications director at the Campaign for Home Energy Assistance, an interest group that lobbies for federal energy aid for low-income people.

Washington is now considering the budget for the Low Income Home Energy Assistance Program (LIHEAP). The Senate has approved spending $1.7 billion, the same level as last year, but the House has yet to take up the issue. Meanwhile, Bush has proposed $1.4 billion.

Mr. Fox anticipates a difficult battle. "It's clear the program is in serious jeopardy," he says.

If funding is cut, it will quickly ripple through to the states. In Iowa, for example, Bush's budget would mean a cut of $5.5 million.

"The average benefit will be down by 20 percent," says Jerry McKim, bureau chief for the program in Des Moines. He says this comes at a particularly crucial time, since "a lot of people are still trying to pay off their bills from two winters ago when it was really cold."

Also feeling the pinch

Higher energy prices are also likely to pinch school districts, hospitals, and other large institutional consumers of energy. For example, in Middletown, Conn., the school district must heat 11 schools and provide diesel for the 51 buses that transport 6,617 kids to and from school each day.

"If prices increase substantially, there will be a dramatic increase in the school budget, and we will have to start to rob Peter to pay Paul," says Richard Cormier, associate superintendent of schools. "It could have an effect from classroom instruction to staffing."

Indeed, many Americans may find higher prices changing their lifestyles. "People may need to turn the thermostat down, get back to conservation, and wear sweaters," says Mr. Huber of the National Oil Heat Research Alliance. "What people should do is figure out how to conserve in an efficient manner."

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