Heating-oil prices to stay hot for winter

Some suppliers are already charging 35 cents a gallon higher than 2003.

If you think it's expensive to fill-up the SUV, wait until the fuel truck starts delivering this winter's heating oil.

That's right - there will be no respite from this summer's high prices. Fuel-oil companies are now offering customers' contracts that cap prices at about 35 cents a gallon higher than last winter. The Energy Information Agency estimates it will cost consumers an extra $100 to stay warm this winter using oil and an extra $179 using natural gas. And those estimates are based on wishful thinking: government forecasters are hoping today's price at more than $45 a barrel for crude oil will drop back to $38 by October. How much more it will ultimately cost to run the furnace this winter depends on the weather: a colder winter than normal could cause additional price spikes; a warmer winter might help lower or stabilize prices.

The higher energy prices will not be a welcome addition to the economic outlook. The higher oil prices, for example, will suck $1 billion more out of the pockets of consumers, mostly in the Northeast. Natural gas which is estimated to cost an extra $1 per thousand cubic feet this winter, could cost the 52 million households an extra $9.3 billion over last year.

"Higher energy prices are the key threat to the continued strength of the economy," says Mark Zandi of Economy.com. "There is a risk if prices move higher and stay there that it would begin to undermine productivity growth and the economy's long-term potential, as happened in the 1970s and 1980s."

There could also be some serious short-term effects. If oil stays at around $40 a barrel, Mr. Zandi estimates it could reduce economic growth by about 0.6 of a percentage point. For example, the current consensus forecast calls for 4.2 percent economic growth this year. Without the drag of oil prices, Zandi says it would be 4.8 percent. "If prices rise even higher, which is plausible, then the loss of income could be even greater," he says.

In June, retailers watched as consumers stayed away as gasoline prices soared. The prospect of high energy prices continuing this winter is cause for concern, especially over the critical holiday period. "When people have to pay more at the pump and [to heat] their homes, it acts as a tax on consumers' disposable income," says Scott Krugman, a spokesman for the National Retail Federation in Washington. "But, it's hard to say what effect it will have on holiday shopping since when it comes to buying for others, the same rules don't apply."

Advocates for the poor, however, have no doubt that the higher energy prices this winter will cause many problems. In a survey this spring, the National Energy Assistance Directors' Association found that 22 percent of those receiving federal aid under the Low Income Energy Assistance Program (LIHEAP) still went without food for at least one day, 38 percent went without medical or dental care, and 28 percent didn't make their rent or mortgage payment.

Current funding for the LIHEAP program, which provides low-income people with energy assistance, is $1.88 billion. For fiscal 2005, the Senate appropriations committee has added another $100 million.

"It will be just a drop in the bucket," says David Fox of the Campaign for Home Energy Assistance in Washington. "This is certainly a year we may have to go back to Congress and ask for a supplemental appropriation."

Low-income Americans may especially feel the brunt since many rely on propane for heating. Propane, a mixture of refined oil and natural gas, is up 53.3 percent compared with August of last year. Inventories are down 10 percent compared with last year. Phil Square, a spokesman for the National Propane Gas Association, says he doesn't expect any problems meeting demand in the coming months. "Prices are high so it will be attractive to import," says Mr. Square.

The rest of the winter energy industry is expected to enter the heating season with ample supplies. The EIA is projecting that natural gas storage will be 4 percent over the five-year average and 12 percent above last year's levels. Supplies of home heating oil are in the "normal" range.

Healthy inventories, however, don't mean retailers are extending any specials to customers. In past winters, many local oil dealers offered consumers the chance to pay a fixed amount in advance. The oil company got its money up front and the consumer locked in a price. In contrast, this year dealers are very wary about offering these types of deals, says John Huber, president of the National Oilheat Research Alliance in Washington. "Traditionally, dealers are marketing their plans in July based on prices in June," says Mr. Huber. "But this year they are all saying, 'What's the latest I can wait before I start offering this program?' "

The delays are causing some consternation among consumers. In Guilford, Conn., Jenifer McShane normally signs up for a prepurchase program when her fuel company calls early in the summer. "We haven't heard from them, and we've yet to shop around for anything else," says Ms. McShane, a married mother with two young boys. "I'm not looking forward to it."

Dealers are probably gun shy about offering deals because programs sold in July are probably losing them money. For example, last month, in Riegelsville, Pa., Kenneth Simmons signed up to buy his home heating oil for $1.39 a gallon.

Today, home heating oil is closer to $1.55 gallon. "I couldn't see prices going any lower so that's why I jumped on it," says Mr. Simmons. The price, however, is still 13 cents a gallon higher than Simmons paid last winter. This year's contract will cost him an extra $260.

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