Order Code RL34714
Winter Fuels Markets
October 21, 2008
Robert Pirog
Specialist in Energy Economics
Resources, Science, and Industry Division
Winter Fuels Markets
Summary
The Energy Information Administration in its Short-Term Energy and Winter
Fuels Outlook (STEWFO) for the 2008-2009 winter heating season warned
consumers of the likelihood of higher heating costs. Average expenditures for those
heating with natural gas might see their expenditures rise by more than 18%. Home
heating oil expenditures were forecast to rise by 23%, propane expenditures by 11%
and electric heating expenses by 10%. The forecasted increases in total expenditures
result from higher prices for all energy sources, as well as the expectation of a colder
winter than the past several years.
Oil markets have experienced downward volatility recently, with the price of
crude oil falling almost 50% compared to the peak price reached in June 2008. If the
downward trend in oil prices continues through the winter 2008-2009 heating season,
or stabilizes at a lower level, the increased expenditure estimates of the STEWFO
might not materialize. This is because the price of oil is a major factor in all the home
heating prices surveyed in the STEWFO. The price of oil directly affects the prices
of heating oil and propane, which are petroleum products. The price of oil indirectly
affects the price of natural gas, and also, therefore, electricity through a historical
price parity relationship.
The key risk factors for the STEWFO estimates are likely to be the extent to
which the U.S. economy continues to experience an economic slowdown that results
in further declines in the price of crude oil. Additionally, the variability of the
weather could affect the expenditure estimates.
The Low Income Energy Assistance Program (LIHEAP), the primary federal
program to assist with home heating costs, has been funded at higher levels than last
year, and its eligibility requirements have been expanded. As a result, this program
appears to be able to provide aid to consumers should heating costs escalate.
This report will be updated.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Heating Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Propane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Heating Expenditure Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. U.S. Average Winter Fuels Expenditure Projections,
Winter 2007-2008 to 2008-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Average Household Natural Gas Consumption, Prices,
Winter 2004-2005 to 2008-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 3. Average Household Heating Oil Consumption, Prices,
Winter 2004-2005 to 2008-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 4. Average Household Propane Consumption, Prices,
Winter 2004-2005 to 2008-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 5. Average Household Electricity Consumption, Prices,
Winter 2004-2005 to 2008-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Winter Fuels Markets
The Energy Information Administration (EIA), in its October 2008 Short-Term
Energy and Winter Fuels Outlook (STEWFO), warned consumers that not only might
they expect the prices of natural gas, heating oil, propane, and electricity to be higher
in the winter of 2008-2009 compared to those of 2007-2008, but that the National
Oceanic Atmospheric Administration’s (NOAA’s) projections forecast a 2.4% colder
winter compared to last year.1 According to the STEWFO, the effect of these two
factors will be that American consumers might expect to experience sharply higher
home heating costs this winter. For the United States as a whole, STEWFO
projections are that natural gas customers might expect to see their expenditures rise
by 18.1%, heating oil consumers by 23.1%, propane consumers by 11.3%, and
electricity consumers by 10.4%.2
Although these projected increases in themselves are likely to put pressure on
consumer budgets, their effects could be even greater in an environment of
deteriorating national economic conditions. A mixture of higher costs for home
heating, combined with growing joblessness and declining economic growth, is likely
to increase the importance of the Low Income Home Energy Assistance Program
(LIHEAP).
Even though the STEWFO projections for winter energy costs indicate
increasing costs, the projected increases are lower than they might have been had not
the price of oil declined by about one third from the peak levels reached in the third
quarter of 2008. Reduced oil consumption, related to relatively high prices, as well
as slowing economic conditions, are expected to keep the price of oil below peak
levels. However, the oil market remains in a potentially tight demand and supply
balance with relatively low excess capacity available.
This report analyzes the key factors affecting the various winter fuels markets,
including consumption, production, reserves, and storage volumes.
Background
Table 1 provides a summary profile of the winter heating picture for the winter
of 2008-2009 based on U.S. averages. Within the U.S. averages, regional differences
1 The winter heating season is the period from October 1 through March 31.
2 Energy Information Administration, Short Term Energy and Winter Fuels Outlook, Table
WFO1, October 2008. Available at [http://www.eia.doe.gov].
CRS-2
can be important. In addition, the NOAA heating degree day projections differ by
region.3
Table 1. U.S. Average Winter Fuels Expenditure Projections,
Winter 2007-2008 to 2008-2009
(percentage growth)
Natural Gas
Heating Oil
Propane
Electricity
Consumption
1.4
4.8
1.8
1.7
Price
16.5
17.4
9.3
8.5
Expenditure
18.1
23.1
11.3
10.4
Number of
0.9
-2.9
-1.1
2.0
Households
Source: Energy Information Administration, Short-Term Energy and Winter Fuels Outlook, 2008.
Note: Percentage growth reflects forecast changes for the winter of 2008-2009 compared to the winter
of 2007-2008.
Regionally, EIA expects natural gas expenditures increase the most in the South,
at 25.7%, and least in the West, at 12.8%. Expenditures in the Northeast and the
Midwest are expected to increase by 18.8% and 16.8%, respectively. Heating oil
expenditures are expected to be above average in the Northeast, where the largest
proportion of heating oil consumers are, at 24.2%, and in the South where
expenditures are expected to rise by 31.1%. Expenditure increases in the Midwest,
at 11.8% and the West, at 9.8%, are well below average. Propane expenditures are
projected to rise by 12.1% in the Northeast, and 15.5% in the South, while increasing
by 9.8% in the Midwest, and 5.3% in the West. Electricity expenditures are
projected to rise by 14.5% in the Northeast, 5.1% in the Midwest, 12.5% in the
South, and 6.9% in the West.
Differences in regional expenditure projections are due to regional fuel price
differentials, varying intensities of consumption during the winter season, and
regional variability in the NOAA forecast for heating degree days.
Due to market dynamics, the prices used in the STEWFO may overstate the
forecasted increases in expenditures. For example, while the STEWFO uses $3.90
as the U.S. average price per gallon in the home heating oil market, the price reported
by the EIA for the week of October 6, 2008 was $3.67, or 6% less. If oil prices
continue to fall, or stabilize at lower levels, the STEWFO estimates could be high.
3 Heating degree days are a measure of the number of degrees per day that the daily average
temperature (the mean of the maximum and minimum recorded temperatures per day) is
below a specified base temperature. Heating degree days are used to estimate the energy
needed for heating.
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Natural Gas
The U.S. natural gas market is a regional market, drawing supplies from
domestic sources, 83% in 2007, as well as imports, largely via pipeline from Canada
which accounted for about 16%. In addition, a small part of domestic supply is
imported in the form of liquefied natural gas (LNG) which is part of a small world-
wide market that is important to some countries, Japan, for example, and is expected
to grow in importance in others, including the United States.
Consumers of natural gas include households and commercial customers that
largely use natural gas for space heating. Electric power generators, especially those
operating plants that satisfy peak demand loads, use natural gas to power generators.
Industrial consumers use natural gas as a raw material, as for example in fertilizers,
and as a heat source in industrial processes. Household, commercial, and electric
power demand are those consumers that are likely to be affected by winter
conditions.
Table 2. Average Household Natural Gas Consumption, Prices,
Winter 2004-2005 to 2008-2009
(thousand cubic feet, mcf)
04-05
05-06
06-07
07-08
08-09a
Consumption
66.8
64.7
66.0
67.2
68.1
Price ($/mcf)
$11.04
$14.58
$12.35
$12.72
$14.82
Source: Energy Information Administration, Short-Term Energy and Winter Fuels Outlook, 2008.
a. Data for winter 08-09 are projected.
Table 2 presents average household natural gas consumption and price data for
the winter heating seasons, 2004-2005 through 2008-2009. On a per household
basis, natural gas consumption has been relatively stable. Prices spiked in winter
2005-2006, and are projected to exceed earlier peaks in 2008-2009. The price-
consumption relationship suggests that natural gas demand is price inelastic, meaning
that consumption does not vary sharply with variations in price. An inelastic
relationship is likely because home heating and cooking are likely considered to be
necessities by households, and, in general, existing metering does not provide
consumers easy access to quantities used, and costs generated.
On the national level, natural gas consumption rose by 6.5% in 2007 compared
to 2006. This increased consumption was led by the electric power sector with a
10.5% increase, and households with a 8.2% increase. The commercial sector
increased consumption by 6.1% and industrial consumers increased consumption by
2.2%. The increase in household consumption is largely related to the increasing
CRS-4
proportion of households using natural gas. About 52% of U.S. households use
natural gas as their primary heating source.4
U.S. natural gas production is projected to rise by 6.7% in 2008 and by 4.2% in
2009. These increases follow a 4.3% increase in production in 2007. Physical
supply from production is expected to be adequate for the winter of 2008-2009.
While some hurricane damage did result from the storms of 2008, resulting in a
production shut-in of about 165 billion cubic feet of natural gas, total output is still
expected to increase in 2008 and 2009.5
Because natural gas consumption, especially by households, is cyclic and
weather related, peaking during the winter heating season, and to a lessor extent
during the summer, accumulation of stored gas takes place at other times. Stored
natural gas is then released into the supply system during peak periods to augment
production. Although the amount in storage at the beginning of the 2008-2009
winter heating season, 3.110 billion cubic feet, was less than last year at the
comparable time, it was still 50 billion cubic feet above the five-year average from
2003 through 2007.
Key factors in determining the accuracy of the STEWFO projections are likely
to be the weather, the effect of what appears to be a deteriorating economic
condition, and the level of oil prices.
A colder winter than anticipated will drive up household consumption and costs,
especially in the normally colder climate areas. A warmer winter will drive
consumption and costs down. The level of economic activity factor is open to several
interpretations. Loss of jobs and income would tend to depress consumption, but
natural gas used for heating and cooking is a necessity for most consumers. Also, it
is unknown how deep the widely anticipated recession is likely to be. Oil prices are
loosely linked to natural gas prices. Historically, the linkage was through fuel
substitution; however, fuel oil is now only a minor competitor to natural gas in terms
of fuel substitution. More recently, the price linkage is based on energy content. Oil
prices have been volatile, reaching a high of over $147 per barrel in the summer of
2008, but falling into the $80 per barrel range at the beginning of the winter 2008-
2009 heating season. The combination of high oil prices and slowing economic
conditions reduced the demand for gasoline in the United States during 2008. If the
price of oil does not spike to summer 2008 levels, or higher, during the 2008-2009
heating season it is likely that the STEWFO price projections, related to the oil price
linkage, will remain valid.
Heating Oil
Home heating oil is a middle distillate, derived from the same part of the oil
refining process as diesel fuel. As a result, the price of home heating oil is closely
4 Energy Information Administration, Natural Gas Monthly, and Short-Term Energy and
Winter Fuels Outlook.
5 Energy Information Administration, Short-Term Energy and Winter Fuels Outlook,
October 2008, p.7.
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related to the price of oil as well as the price of diesel fuel. Approximately 7% of
U.S. households heat with oil, and most of these consumers are in the Northeast,
where 31% of total consumers use heating oil as their primary heating fuel.
Table 3. Average Household Heating Oil Consumption, Prices,
Winter 2004-2005 to 2008-2009
(gallons)
04-05
05-06
06-07
07-08
08-09a
Consumption
610.2
574.9
580.9
585.7
614.0
Price
$1.93
$2.45
$2.49
$3.31
$3.89
Source: Energy Information Administration, Short-Term Energy and Winter Fuels Outlook, 2008.
a. Data for winter 2008-2009 are projected.
EIA expects heating oil expenditures per household to rise by $449, or 23%
during the winter 2008-2009. Projected increases in the Northeast and the South are
larger, at 24.2% and 31.1% respectively.
Diesel fuel has been more expensive than gasoline recently, and at the beginning
of the 2008-2009 winter heating season averaged about $0.40 per gallon more than
gasoline. This price differential has resulted from U.S. refiners emphasis on gasoline
production, and a high level of world demand for diesel fuel. The cost of gasoline,
diesel fuel, and heating oil are all directly related to the price of crude oil. The
Energy Information Administration (EIA) estimates that about 73% of the cost of
gasoline is crude oil cost, and 64% of the cost of diesel fuel and heating oil is crude
oil cost.
Inventories of home heating oil were affected by Hurricanes Gustav and Ike.
At the start of the winter heating season, inventories were at approximately 122
million barrels. While this level is some 12 million barrels less than the available
amount at the beginning of the 2007-2008 winter heating season, it is still near the
five-year average. As a result, price spikes are not expected to arise from inventory
problems.
The key risk factor for consumers of home heating oil is the price of oil. Oil
prices have been volatile in 2008. The STEWFO uses a projected oil price of $112
per barrel for 2008 and 2009. If the price stays in the $80 per barrel range, observed
at the beginning of the 2008-2009 winter heating season, heating oil expenditures
could be less than projected. If the price of oil spikes to levels above $112 per barrel
the STEWFO could underestimate expenditures. With a deteriorating economic
condition, lower oil and petroleum product prices, and an unstable, tight world oil
market the price level is uncertain.
CRS-6
Propane
Propane provides primary home heating for approximately 6,500 households in
the United States, or 6% of the total households supplied with fuels covered in this
report. Propane consumers are projected to experience an 11%, or $188 increase in
expenditures this winter heating season.
Table 4. Average Household Propane Consumption, Prices,
Winter 2004-2005 to 2008-2009
(gallons)
04-05
05-06
06-07
07-08
08-09a
Consumption
668.3
655.4
669.0
682.1
694.3
Price
$1.65
$1.95
$2.01
$2.45
$2.68
Source: Energy Information Administration, Short-Term Energy and Winter Fuels Outlook, 2008.
a. Data for winter 2008-2009 are projected.
EIA expects the number of propane consumers to decline by about 1.1% during
2008 and 2009. However, expenditure increases for this heat source are less than
those expected for natural gas and home heating oil consumers. Consumption is
expected to increase, but the price increases expected for propane, about 9%, are less
than those expected for natural gas, 16.5%, and heating oil, 17.4%.
Propane supply is unique compared to the other fuels covered in this report, in
the sense that it is a by-product, and not directly produced. The production of
gasoline as well as natural gas give rise to propane supplies. As a result, when the
availability of those fuels is high, so is the supply of propane. Propane production
and inventories are expected to be adequate to meet demand during the winter 2008-
2009 heating season.
Many of the same factors influence expected propane prices that affect natural
gas and home heating oil prices. However, in this case, the relationship is somewhat
indirect because of the by-product nature of propane. Propane prices are, unlike the
other fuels covered in this report, affected by distance and dispersion of the
consumer. This is because the distribution process usually requires deliveries of
relatively small quantities, by truck, to individual consumers.
Electricity
Electricity output is related to natural gas pricing and availability because it uses
natural gas as a production input.6 Electricity also competes with natural gas as a
final consumer heating source. Approximately 35% of U.S. households use
6 Natural gas fueled approximately 20% of U.S. generating capacity in 2006. Coal supplied
49% of electricity, nuclear power, 19%, hydro, 11%, and other renewables 2% in 2006.
CRS-7
electricity as their primary heating source. Regionally, only 12% of households in
the Northeast use electricity, while 59% use electricity in the South.
Table 5. Average Household Electricity Consumption, Prices,
Winter 2004-2005 to 2008-2009
(kilowatt hours)
04-05
05-06
06-07
07-08
08-09a
Consumption
8,246
8,156
8,215
8,231
8,373
Price
$0.088
$0.096
$0.101
$0.104
$0.113
Source: Energy Information Administration, Short-Term Energy and Winter Fuels Outlook, 2008.
a. Data for winter 2008-2009 are projected.
On average, electricity consumers can expect to pay 10% more for winter
heating in 2008-2009 than in 2007-2008. This increase is as a result of 8.5% higher
prices for electricity as well as higher usage rates due to the expected colder
temperatures.
EIA expects overall electricity demand growth in 2008 to be about 1% and flat
during 2009. As a result, little in the way of new demand will stress the generation
and distribution system. Electricity prices are directly affected by the cost of raw
materials, notably natural gas prices which are expected to increase by 36%, and coal
prices which are expected to increase by 12% compared to last year.7
Risk Factors
The primary risk factors concerning the STEWFO are the weather and economic
conditions. Total household expenditures on heating are equal to the price that must
be paid times the quantity of fuel used. The weather, measured by the number of
heating degree days, largely determines quantity of fuel used. Conservation, in the
form of reducing the temperature inside the house can also reduce the quantity of fuel
consumed, but for a given desired temperature, heating degree days is the key factor.
The 2008-2009 winter heating season is expected to be colder than recent winter
seasons. If the NOAA forecast estimates turn out to over or under state the number
of heating degree days, the quantities demanded of heating fuels will fall, or rise.
The other component of total expenditures, price of fuel, is determined by a
complex web of related prices and other economic variables. In a period of
deteriorating economic conditions, the key relationship may be that between the level
of economic activity, measured by the gross domestic product growth rate, and the
price of crude oil on world markets. At the beginning of the 2008-2009 winter
heating season the price of crude oil has been observed to be below $70 per barrel,
a decline of almost 50% compared to the recent peak prices.
7 Energy Information Administration, Short-Term Energy and Winter Fuels Outlook,
October 2008, p.8.
CRS-8
A lower price of crude oil directly reduces the price of home heating oil and
propane. Natural gas prices that are linked to crude oil prices, historically and by
energy content, also could be lower as a result of lower oil prices. This result is
especially likely in a market environment of adequate storage, domestic supply
growth, and reduced need for LNG imports. Because natural gas is a primary fuel in
electricity generation, a link also exists between oil, natural gas, and electricity
prices.
Heating Expenditure Assistance
The Low Income Home Energy Assistance Program (LIHEAP) is the primary
federal government program to supplement home heating expenditures.8 This
program is composed of two parts: funding for block grants to states, and emergency
contingency funds. For FY2008, the block grant portion of the program was funded
at $1.98 billion and the emergency contingency funds at $590.3 million. Initial
budget proposals for FY2009 had LIHEAP funding falling by over 20%.
The FY2009 funding level for LIHEAP, as set in P.L.110-329, signed on
September 30, 2008 more than doubles the FY2008 amounts. The block grant
portion of the program will receive $4.509 billion, with the emergency contingency
component of the program receiving $590 million. Normally, the emergency
contingency funds are released at the discretion of the President, however this year,
the law required all LIHEAP funds to be released within thirty days of enactment.
In addition, the legislation provides for the expansion of eligibility in the program to
150% of poverty, or 75% of the state median income. Previously, the standards had
been 150% of poverty, or 60% of state median income.
CITGO, the United States based subsidiary of the Venezuelan national oil
company PDVSA, has a separate, and non-U.S. governmental, Low Cost Heating Oil
Program. This program is operated in conjunction with Citizens Energy Corporation,
a non-profit organization. During the winter heating season 2007-2008 the program
provided an estimated 112 million gallons of home heating oil to about 224,000
households in 23 states. The fuel is discounted by 40% of the delivered price.
Household can receive a maximum allocation of 100 gallons through the program,
about one sixth of the estimated quantity needed for the 2008-2009 season.9
Conclusion
The STEWFO forecasts that Americans will face increased need for home
heating fuels during the winter 2008-2009 heating season due to colder temperatures
as well higher prices for fuel. If accurate, the result is likely to be increased
expenditures for what most households view as a necessity.
8 CRS Report RL31865, The Low Income Home Energy Assistance Program(LIHEAP):
Program and Funding, by Libby Perl.
9 Citgo data, available at [http://www.citgo.com].
CRS-9
While increased heating expenses are generally a burden to consumers, the
winter 2008-2009 heating season might provide even greater challenges due to
deteriorating economic conditions, possibly resulting in increasing unemployment,
slow income growth, and higher prices for food and other goods. On the other hand,
the economic slowdown is likely to moderate the cost increases projected in the
STEWFO.
A positive factor is the expanded funding available to LIHEAP which may be
able to help those least able to pay the increased costs.