This winter, cost of heating homes is forecast to drop

With the first chill of autumn in the air, some homeowners are cranking up their heat for the first time since this spring. Many will get a pleasant surprise when they look at their bills: They may be slightly lower.

Since last year at this time, the price of natural gas at the wellhead has plunged 47 percent, and the wholesale price of home heating oil is down 20 percent. If prices were to remain close to these levels – and if the winter is not overly cold – homeowners could save as much as $250 compared with last year, some energy analysts estimate.

"This is the equivalent of a major tax cut – almost the same as right after 9/11 when the government sent checks to everybody," says Dennis Jacobe, chief economist for the Gallup Organization in Washington. "What's nice is that it particularly helps middle- and lower-income people who were hurt the most when prices were soaring."

If consumers feel more comfortable with their energy bills, this could help retailers in the coming holiday period – already forecast to have only modest gains. Lower energy prices might also help offset some of the downturn in housing sales and auto sales, says Mr. Jacobe. "It increases the chances of a soft landing," he adds.

But prices could snap back quickly if a hurricane hits the Gulf of Mexico or the winter turns out to be fierce, energy experts warn. The Energy Information Administration (EIA), for example, in making its forecasts, is assuming that January will not have the moderate temperatures of the winter of 2006. "Last winter was the warmest on record," says Neil Gamson, an economist at EIA.

In its September forecast, EIA predicts consumers will pay 10 percent less for natural gas but will see their consumption increase by 7 percent. The result would be a 4.4 percent reduction in spending for 64 million households – about half of all residences that require heating.

The EIA's estimate for the nation's 9 million heating-oil customers is not as optimistic. It estimates prices will rise 9.2 percent and consumption will increase 6.2 percent, for a total increase in expenditures of 16 percent.

EIA will update this forecast on Oct. 10 when it issues its official winter forecast.

Many variables affect whether consumers see any savings, industry representatives warn. For example, natural-gas utilities typically start buying their supply in March or April. The purchases continue through the summer with the gas going into storage.

"You can't just take prices today or the past week and assume customers will save 40 or 50 percent," says Paul Wilkinson of the American Gas Association in Washington. "We know for the first six months of the year, prices were actually higher than they were for first six months of last year."

Indeed, for the first six months, the price of natural gas was $7.05 per thousand cubic feet (MCF), compared with $5.91 per MCF last year. However, after hurricane Katrina snarled production in the Gulf of Mexico, natural-gas prices soared to $15 per MCF. It's now down to $4.65 MCF on the spot market.

Weighing on the market is a substantial inventory, now at 3.1 trillion cubic feet, which is 13.4 percent above the five-year average. "We should hit an all-time record on storage," predicts Mr. Wilkinson.

Complicating the weather forecast this year is a weak El Niño, the current and trade-wind pattern in the Pacific that affects weather in the US. Typically, an El Niño creates more rain in the Southwest and Southeast and on the East Coast, but the correlation is less certain during a weak pattern, says Ken Reeves, director of forecasting at AccuWeather in State College, Pa.

For low-income people, the prospect of energy-price reductions, or even stability, is welcome. Last year, 6 million households applied for grants under the Low Income Home Energy Assistance Program (LIHEAP). "Lower prices are better for low-income people than an increase in LIHEAP funding," says Mark Wolfe of the National Energy Assistance Directors' Association. Natural-gas users could save $200 to $250 this winter if the weather cooperates, he estimates.

Some consumers doubt the lower prices are here to stay. In Franklin, Mich., Frank Zaski says he thinks the price dip is temporary, and he doesn't expect it to affect him. Last summer, his utility, Consumers Energy, had stored natural gas. As a result, it didn't have to pay higher rates after the hurricanes in the Gulf of Mexico. In fact, its rates were the second lowest in the US, according to the utility. This summer it again stored natural gas, but it missed out on the sharp drop. "It kind of irons it out," says Mr. Zaski.

Users of home heating oil may not see the same savings as natural-gas users, because the price of oil has not fallen as far. "We're about where we were pre- Katrina," says John Huber of the National Oilheat Research Alliance in Alexandria, Va. After peaking this summer at $2.05 a gallon, the wholesale price of heating oil has dropped to about $1.65 a gallon.