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Energy costs this winter: high

Heating-oil and natural-gas prices are already up, and gasoline costs could rise, too.

By Ron SchererStaff writer of The Christian Science Monitor / September 20, 2007



New York

Unless it's a warmer than expected winter, heating the house this winter will cost consumers more money.

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Indeed, this fall – even before the first real freeze – the first tank of home heating oil will cost consumers about 7 percent more than last year at this time.

Consumers who use natural gas to heat their home will also see price hikes, though they're likely to be more modest. Through July, natural-gas prices were 5.5 percent higher than last year at the same time.

In past winters, many consumers have shrugged off the rising cost of staying warm. But this winter, it may not be so easy: The economy is expected to continue slowing, and home prices are likely to continue to drop. Although the actual dollar amount of the higher heating costs may be small, economists worry about the effect on consumers from bad news.

Another piece of unsettling news for consumers: The price of crude oil is hitting record highs (not adjusted for inflation). On Tuesday, a barrel of oil closed at $81.51 on the futures market.

"The economy used to be so strong that even these blows [higher energy prices] hurt some but not everyone," says Dennis Jacobe, chief economist at the Gallup Organization in Washington. "Now, these more marginal impacts can hurt more people."

Higher heating costs are likely to hurt the lower and middle class the most since their income has a harder time keeping pace with the heating costs. "It's a bigger blow to them," says Mr. Jacobe.

Although winter heating costs may be higher, gasoline prices have remained flat. In fact, on Wednesday, the Labor Department reported that August consumer prices fell 0.1 percent – in large part because of a drop of 4.9 percent in gasoline prices and 4.2 percent in natural-gas prices.

But for the year, energy costs are up at a 12.7 percent annual rate.

Economists don't expect the lower gasoline prices to last, given the high prices of crude oil. Still, gasoline prices fell about 1 cent a gallon on a national basis between Tuesday and Wednesday, according to GasPriceWatch.com.

"We have not seen gasoline prices rising correspondingly because inventories are kind of high. But over time, we will see higher prices at the pump," says Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla.

Yet some analysts are not convinced oil prices will stay this high. "Both the US and Europe are moving into the refinery maintenance period," explains Mark Routt, an energy analyst at Energy Security Analysis Inc. in Wakefield, Mass. "When refineries are down for maintenance, their requirement for crude-oil products drops."

But the dynamics of the oil markets are also affected by economic policy. After the Federal Reserve dropped interest rates by half of a percentage point on Tuesday, the dollar dropped in value compared with the euro. "Oil is priced in dollars, so when the dollar goes down, the price has nowhere to go but up," says Mr. Brown.

The relatively strong economy has also bolstered demand for diesel, which is now selling for more than the price of gasoline. On a year-to-date basis, diesel demand is up 9 percent, says John Felmy, chief economist for the American Petroleum Institute in Washington.

Some oil-market participants blame speculators, hedge funds, and pension funds for the rise in crude-oil prices. "Oil is the new investment tool now that real estate has dropped off the charts," says John Maniscalco, executive vice president of the New York Oil Heating Association. "Now, they are hyping up this coming heating season, centering on home heating oil and spiking the price."

Part of the problem, Mr. Routt says, is the changing dynamics of the home heating oil and diesel markets because of new regulations requiring low-sulfur diesel. Heating oil and diesel must be kept in separate tanks and run through separate pipelines since there is risk of contamination.

Heating oil is now at the lowest number of supply days in the past five years, Routt says. But diesel inventories are on track. "Fewer companies want to touch heating oil," he says. "But if you look at diesel and home heating oil together, it's right where it needs to be."

In a worst-case scenario, consumers who normally use home heating oil may have to use diesel fuel and pay diesel prices this winter, Routt says.

So far, the higher prices have not affected too many people. Few consumers have started to fill up their fuel tanks for the winter yet, Mr. Maniscalco says.

"They are still filled up from the springtime," he says. "The first surge comes with the first cold snap."

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