Plenty of fuel on hand to keep US warm – for now

But prices of oil and natural gas are climbing as a cold snap and earlier cuts in OPEC production take their toll.

By Ron Scherer | Staff writer of The Christian Science Monitor

from the February 8, 2007 edition

NEW YORK - The cost of staying warm this winter may suddenly go up just as the thermometer goes down.

The onset of Arctic-like conditions in the northern US, combined with cuts in OPEC oil production of up to 1 million barrels a day, is helping to drive the price of fuel higher. Moreover, natural gas, which is used in much of the Midwest to stay warm, has become more costly as well, driven upward by industries that are humming along at full throttle during a relatively strong economy.

If oil prices were to remain high – and temperatures low – for weeks, millions of Americans might have to pay more when they replenish their supply of home heating oil.

Energy experts, though, say people don't need to rush out to refill their tanks now. Oil supply is plentiful, in part because first part of the winter was so mild.

"The terminals are full, and the customers' tanks are full of product," says John Huber, president of the National Oilheat Research Alliance in Alexandria, Va. "There is no innuendo of a squeeze at all."

Natural gas is also in good supply, says Larry Goldstein, a director at the Energy Policy Research Foundation Inc., in New York. "Inventories are still above the five-year average. But if temperatures stay cold, [inventory] will be below [the level of] a year ago in a few weeks."

But ample inventories haven't stopped the price escalation. Since Jan. 19, the price of oil has rebounded by more than $10 per barrel, or over 20 percent, and the price of natural gas is up about 10 percent. Wednesday, the price of West Texas Intermediate (WTI) crude at Cushing, Okla., was $59.40 a barrel, up 52 cents since Tuesday.

This is still well below the oil-price peak set last August, when the spot price of WTI hit $77.05 a barrel. Natural gas, too, has not approached its record high price; it's still more than 50 percent below the peak price set in the fall of 2005.

With the rise in crude prices, gasoline prices have shot up since the weekend by 6 cents a gallon, to an average of $2.18, says Brad Proctor of GasPriceWatch.com. "That's a huge jump in a short period of time."

Weather forecasters don't expect to see much relief from the cold weather anytime soon.

"Over the medium to long range, we don't expect any extreme warm-ups. We'll be inching toward normal," says Kerry Schwindenhammer, senior meteorologist at AccuWeather in State College, Pa.

Through February, AccuWeather is expecting temperatures to run from 2 to 6 degrees below normal. The coldest areas will be the Ohio and Tennessee valleys. "We're on pace for a very cold month," says Mr. Schwindenhammer.

The cold surge comes as President Bush's budget calls for an 18 percent cut in the Low Income Home Energy Assistance Program. It would apply to fuel assistance for next winter.

"Even with the modest decline in energy prices, it does not justify the program cut the administration is proposing," says Mark Wolfe, executive director of the National Energy Assistance Directors' Association in Washington. "This will never get past Congress, especially now with the Democrats in charge."

The current price run-up involves more than just the cold snap, say energy analysts. In October and then again in December, OPEC announced cuts in oil production totaling about 1.7 million barrels a day. Although few analysts believe the OPEC nations have curtailed production that much, they may have cut back as much as 1 million barrels per day, says Mr. Goldstein.

"It's oil not on the water [in transit by sea], and if it's not on the water that means it's 30 to 50 days when it's not in inventory," says Goldstein. "The commodity markets are forward-looking, so they understand that."

OPEC nations have felt compelled to reduce production in large part because worldwide demand for gasoline has eased. "The growth rate of demand for gasoline and diesel has been historically 1.4 to 1.5 percent per year," says Mark Routt of Energy Security Analysis Inc. in Wakefield, Mass. "But the growth rate has not been that high because of the high prices."

Because of the relatively warm winter, demand for home heating oil in the US is down as well. Since Dec. 1, the number of degree days – a way to measure the departure from the normal temperature – is down about 30 percent. But since mid-January, degree days are up.

This has been reflected in the retail price of home heating oil in Connecticut, where the average price in the state is $2.36 a gallon, up 8 cents since Jan. 22.

Homeowners Fred and Lisa Clarke in Norwalk can attest to the price spike. Before the chill set in, the Clarkes had paid $2.35 a gallon for heating oil. Last week, the price rose to $2.45 a gallon. "This is not my favorite time of the year," says Mr. Clarke, who has also had to cope with his furnace quitting in the middle of the night. "It would be nice to at least be warm."