U.S. Home Heating Oil Price and Supply During Winter 2000-2001: Policy Options

U.S. Home Heating Oil Price and Supply During Winter 2000-2001: Policy Options

Order Code RL30781
CRS Report for Congress
Received through the CRS Web
U.S. Home Heating Oil Price and Supply During
Winter 2000-2001: Policy Options
Updated January 11, 2001
Robert L. Bamberger
Specialist in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

U.S. Home Heating Oil Price and Supply During Winter
2000-2001: Policy Options
Summary
During the winter of 1999-2000, historically low stocks of home heating oil,
weather that disrupted fuel shipments, and refinery outages contributed to a sharp
increase in the price of home heating oil. As the winter of 2000-2001 approached,
inventories of home heating oil remained low, and concern has grown about the
effect that higher crude prices, colder weather, and anticipated refinery maintenance
might have on home heating oil price and supply during the current winter. In the
middle of January 2001, prices were roughly $.40/gallon higher than levels of one year
earlier. At issue is whether supplies will remain adequate and affordable, and what
possible responses are in place or under consideration if shortages develop and push
prices higher.
A drawdown of crude oil from the Strategic Petroleum Reserve is one option to
address shortages. However, to provide an alternative that would more specifically
target home heating oil, President Clinton, in late July of 2000, authorized
establishment of a 2 million barrel Northeast Heating Oil Reserve (NHOR) situated
in New York and New Jersey. The FY2001 Interior Appropriations (P.L. 106-291)
included $8 million for funding the regional reserve, and Congress permanently
authorized the NHOR in the Energy Policy and Conservation Act Amendments of
2000 (P.L. 106-469).
Opponents of establishing a regional home heating oil reserve were concerned
that the NHOR would be used in circumstances that did not fully warrant it, and that
this would discourage private stockbuilding and distort markets. To address this
concern, P.L. 106-649 gives the President discretion to tap the NHOR when the price
differential between crude oil and home heating oil increases by more than 60% over
its five-year rolling average for seven consecutive days, and the differential is
continuing to increase. The intention behind this approach is to make the threshold
for use of the regional reserve high enough so that oil marketers and distributors are
not discouraged from building their own stocks. To the extent that a crude shortage
is also contributing to product shortages and high prices, it could be useful to tap the
NHOR for refined product while crude is also drawn from the larger SPR. Some have
argued, however, that a drawdown or swap of SPR oil should be coordinated with a
larger drawdown of stocks worldwide.
Others oppose use of strategic reserves, arguing for reliance upon markets to
price and allocate fuel as a more efficient means of coping with spot shortages and
price spikes. Policy, from this perspective, should address instead the consequence
of high prices on those least able to pay while markets are left to sort out contributing
causes for those prices. The Low-Income Home Energy Assistance program
(LIHEAP) was originally established in 1981 by Title XXVI of P.L. 97-35 and has
been reauthorized several times. It is a block grant program under which the federal
government gives states, the District of Columbia, U.S. territories and
commonwealths, and Indian tribal organizations annual grants to operate
multi-component home energy assistance programs for needy households.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Home Heating Oil Stocks and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
One Thing Leads to Another (1999-2000) . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Strategic Petroleum Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Establishment of a Regional Home Heating Oil Reserve . . . . . . . . . . . . . . . . . . . 7
Drawdown Authority for the Northeast Heating Oil Reserve (NHOR) . . . . 8
Other Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Strategic Petroleum Reserve: Drawdown and Swaps . . . . . . . . . . . . . 12
Coordinated Drawdown of Worldwide Stocks . . . . . . . . . . . . . . . . . . . . . 13
Massachusetts Initiative to Build Private Stocks . . . . . . . . . . . . . . . . . . . . 13
Low-Income Home Energy Assistance Program (LIHEAP) . . . . . . . . . . . 14
List of Tables
Table 1. Home Heating Oil Stocks by Petroleum Administration for Defense District
(PADD): Recent Weeks Compared With 2000 . . . . . . . . . . . . . . . . . . . . . . 3
Table 2. Residential Heating Oil Prices by Region . . . . . . . . . . . . . . . . . . . . . . . 4
Table 3. Energy Guidelines for Release of Heating Oil Reserve . . . . . . . . . . . . 11

U.S. Home Heating Oil Price and Supply During
Winter 2000-2001: Policy Options
Introduction
The nation has experienced a persistent period of tight supply for energy,
accompanied by steep increases in prices, that began to spread across seasons and
fuels in the late spring of 1999. As the summer of 2000 ended, crude oil prices
continued to escalate despite boosts in production by the Organization of Petroleum
Exporting Countries (OPEC) cartel. Crude prices began to exceed $30 per barrel
(bbl) in June 2000. Historically low stocks of home heating oil escalated concern over
the effect that higher crude prices, colder weather, and anticipated refinery
maintenance might have on home heating price and supply during the winter. This is
particularly important for New England. Nationwide, heating oil is relied upon for
space heating in 9% of residential homes, but in the Northeast, 36% of homes depend
upon heating oil to provide warmth.1 For the moment, supplies are adequate. Record
imports of heating oil and diesel fuel (both of which are middle distillates), estimated
at 965,000 barrels daily during the week ending January 5, 2001, eased upward
pressure on prices.2 Heating oil stocks, which in late summer 2000 had been nearly
30 million barrels lower than one year earlier, were slightly more than 8 million barrels
lower from year-earlier levels by the first week of January 2001. However, prices are
more than $.40/gallon higher than levels of one year ago. At issue is whether supplies
will remain adequate and affordable, and what possible responses are in place or under
consideration if shortages develop and push prices even higher.
One measure in place this winter that was not available during the winter of
1999-2000 is the Northeast Heating Oil Reserve (NHOR), authorized by Congress
in the Energy Policy and Conservation Act Amendments of 2000 (P.L. 106-469).
Terminals in New Jersey and Connecticut hold two million barrels of home heating
oil that can be drawn down if the price of home heating oil rises sharply in relationship
to crude oil prices. The drawdown formula was unusually explicit, partly to settle
objections that the NHOR might be used in circumstances that did not fully warrant
drawing upon it. The NHOR holds refined product and is considered an adjunct to the
larger Strategic Petroleum Reserve (SPR), a stockpile which holds over 550 million
barrels of crude oil that can be tapped if shortages of crude are partly responsible for
inadequate heating oil supplies. In addition to the SPR and the NHOR, state
governors may allocate funds from the Low Income Home Energy Assistance
1 U.S. Department of Energy. Energy Information Administration. Office of Energy Markets
and End Use. A Look at Residential Energy Consumption in 1997. DOE/EIA-06392 (97);
p. 1-2.
2 “Record Imports Ease US Heating Oil Market,” appearing in: Oil Daily, Vol. 51, No. 8,
Thursday, January 11, 2001: p. 1-2.

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Program (LIHEAP) to residents whose quality of life is threatened by sharply higher
heating bills. LIHEAP was established in 1981.
This report briefly summarizes the underlying conditions for current home
heating oil supply and price, and provides an overview of current policy to address
heating oil shortages this winter. More generalized policies to boost energy supply
or moderate prices are not addressed in great detail.
Home Heating Oil Stocks and Prices
When crude oil is refined, the process yields a range of different products
utilizing “heavier” and “lighter” hydrocarbon components of the crude feedstock.
Home heating oil is referred to as a “middle distillate,” expressly because it comes
from the “middle” part of the barrel. The yield of middle distillates from the barrel has
recently averaged 23%. Depending upon the season, this percentage may be tweaked
slightly to produce more middle distillates and less gasoline or jet fuel, for example.3
Diesel fuel is also a middle distillate, and accounted for nearly 56% of total middle
distillate consumption in 1999 while residential consumption of middle distillates
measured 11% of the total.4 Because the residential and transportation sectors are in
potential competition for the same part of the barrel, any unusual circumstances
affecting the price and supply of one of these fuels may also affect price and supply
of the other until the market achieves equilibration.

Total stocks of middle distillates fell below the three-year average range
beginning in late November 1999, and have remained below range ever since.5
Typically, distillate stocks begin to fall in December of each winter as seasonal
demand exceeds current refinery production. Distillate stocks generally continue to
decline into April. Replenishing these stocks begins in earnest in the summer. The
objective, obviously, is to enter the heating season with adequate stocks; one of the
problems during the current and previous winter is that stocks were at historic lows
in the United States.
Table 1 presents recent measures of home heating oil stocks, which analysts
follow closely. When, at the beginning of December 2000, home heating oil stocks
began to firm slightly, it raised some hopes that the growth in stocks during late
November might signal that distributor and homeowner inventories of home heating
oil were, for the moment, ample and that there might be less call on primary
inventories and stocks until later in the season. This would allow primary stocks to
3 U.S. Department of Energy. Energy Information Administration. Petroleum: An Energy
Profile, 1999. July 1999. DOE/EIA-0545 (99): p. 30.
4 U.S. Department of Energy. Energy Information Administration. Fuel Oil and Kerosene
Sales, 1999. September 2000. DOE/EIA-0535 (99): p. 3-5.
5 U.S. Department of Energy. Energy Information Administration. Weekly Petroleum Status
Report. For the most recent information on total distillate stocks, go to:
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status
_report/current/pdf/figure04.pdf

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build later into the winter than has been typical. While the trend, week-to-week, has
not been altogether consistent, the disparity between current home heating oil stocks
and year-earlier levels has narrowed.6 The gap, which approached 30 million barrels
at the end of summer 2000, had narrowed to slightly more than 8 million barrels by
early January 2001.
Table 1. Home Heating Oil Stocks by Petroleum Administration for
Defense District (PADD): Recent Weeks Compared With 2000
(million barrels)
District/Date
12/08/00
12/15/00
12/22/00
12/29/00
01/05/01
One Year Ago:
01/05/00
East Coast
23.8
25.2
25.3
24.3
25.1
30.5
(PADD I
Total)
PADD IX
4.5
4.5
4.6
5.1
5.1
7.2
PADD IY
15.6
16.6
16.6
15.4
15.5
19.2
PADD IZ
3.7
4.2
4.1
3.9
4.5
4.1
Midwest
8.7
8.2
8.4
8.3
7.8
9.2
(PADD II)
Gulf Coast
11.8
11.9
11.6
12.1
10.2
11.2
(PADD III)
Rocky
0.4
0.4
0.4
0.4
0.5
0.5
Mountain
(PADD IV)
West Coast
2.6
2.3
2.6
2.9
2.5
2.9
(PADD V)
U.S. Total
47.3
48.1
48.4
47.5
46.0
54.2
Source: U.S. Department of Energy. Energy Information Administration. Distillate
Watch. January 10, 2001. [http://www.eia.doe.gov/distillate_watch.pdf]
Whatever the state of stocks, severe weather and unforeseen pressures on
supplies and the delivery system can always trigger spot shortages and additional price
increases. The average U.S. price for heating oil for the week ending January 8, 2001,
was $1.568 per/gallon on the East Coast (PADD 1), more than 40 cents above the
$1.157 average for the entire month of January 2000.7
6 There can also be inconsistencies between the weekly numbers reported by DOE’s Energy
Information Administration and the American Petroleum Institute. For the week ending
December 15, 2000, EIA reported an addition of 800,000 barrels to heating oil stocks, while
API reported a drawdown of roughly the same magnitude. See: “Bush Calls For OPEC
supply as Crude Sinks,” appearing in: Oil Daily, Vol. 50, No. 244, December 21, 2000.
7 U.S. Department of Energy. Energy Information Administration. Weekly Petroleum Status
Report (for week ending December 8). Distillate Watch: January 10, 2001.

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Table 2. Residential Heating Oil Prices by Region
(cents per gallon)
1999/2000 Heating Season
Region
October 99
November
December 99
January 00
February 00
March 00
99
Average
100.2
103.6
111.5
140.5
156.6
137.7
East Coast (PADD I)
100.9
104.3
112.5
114.5
161.4
139.8
New England (PADD IX)
97.2
100.7
109.1
145.1
158.7
134.6
Central Atlantic (PADD IY)
104.5
108.0
116.1
147.5
166.4
144.3
Lower Atlantic (PADD IZ)
94.0
96.7
103.8
118.5
136.9
133.6
Midwest (PADD II)
94.4
97.8
103.3
107.5
117.2
119.9
2000/01 Heating Season
Region
10/02
10/09
10/16
10/23
10/30
11/06
11/13
11/20
11/27
12/04
12/11
12/18
12/25
1/01
1/08
Average
145.6
146.0
152.6
150.6
150.5
149.8
150.6
154.5
156.4
156.0
156.1
154.5
154.0
155.0
154.2
East Coast (PADD I)
147.0
147.5
154.4
152.2
152.1
151.5
152.5
156.7
158.8
158.5
158.8
157.1
156.7
157.7
156.8
New England
144.8
145.6
153.0
150.2
150.4
149.2
150.7
155.0
157.4
156.4
156.5
154.6
153.5
154.4
153.5
(PADD IX)
Central Atlantic
150.1
150.4
157.2
155.1
154.9
154.4
155.1
159.6
161.6
161.8
162.2
160.6
160.5
161.6
160.6
(PADD IY)
Lower Atlantic
136.8
136.5
141.7
141.6
141.0
142.2
142.8
144.7
145.4
145.2
145.8
145.1
145.9
147.0
146.6
(PADD IZ)
Midwest (PADD II)
134.2
133.9
138.5
138.4
137.9
137.2
136.0
137.1
138.1
137.2
135.7
134.1
133.6
134.3
134.4
P = Preliminary data.
Source: Department of Energy, based on data collected by the Energy Information Administration from state energy offices.
PADD IX: Connecticut, Maine, New Hampshire, Rhode Island, Vermont
PADD IY: Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania
PADD IZ: Florida, Georgia, North Carolina, South Carolina, Virginia, West Virginia

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One Thing Leads to Another (1999-2000)
The current market conditions affecting home heating oil price and supply are
one more chapter in a string of fuel supply episodes beginning in early 1999. Crude
prices began to escalate in March 1999 when the member countries of the
Organization of Petroleum Exporting Countries (OPEC) reduced production. Oil
prices began making a sharp recovery from the low teens at the beginning of the year
to more than $22/bbl by September 1999, and crossed $30/bbl in mid-February 2000.
One of the strongest incentives for oil importers and refiners to build stocks is the
expectation that it will be more costly to do so later than at the present time. But,
importers and refiners anticipated that prices would shortly soften and did not wish
to risk being burdened with high-priced inventory on which they might not be able to
recover their costs when prices fell, as projected. As a consequence, they relied in
greater measure on existing crude stocks and product inventories, and did not
replenish stocks as aggressively as they might have otherwise.
Prices not only did not fall, but the recovery of the Asian economies, and general
domestic and worldwide prosperity, added to demand for energy and began to strain
the infrastructure for refining and delivering refined product. By the winter of 1999-
2000, it became apparent that there was little cushion in the distribution system to
buffer consumer prices from unexpected additional stresses on the system.
Unfortunately, there were several additional stresses. These included prolonged
freezing temperatures that made certain ports less accessible, compounding
distribution problems. Accidents temporarily idled some refinery capacity.
Warning of high home heating oil prices in the winter in the Northeast, Senator
Schumer had made, on September 21, 1999, the first of several requests to Secretary
of Energy Richardson to authorize a drawdown from the Strategic Petroleum Reserve
to blunt price increases.
The Strategic Petroleum Reserve
To help prevent a repetition of the economic dislocation caused by the 1973-74
Arab oil embargo, Congress authorized the Strategic Petroleum Reserve (SPR) in the
Energy Policy and Conservation Act (EPCA, P.L. 94-163), enacted at the end of
1975. Filling of the Reserve began in 1978. The SPR comprises four underground
storage facilities, hollowed out from naturally occurring salt domes, located in Texas
and Louisiana. The current capacity of the SPR is roughly 690 million barrels. In
early January 2001, the SPR held 541 million barrels.
Some urged aggressive use of the SPR during the dislocations of last winter and
last summer. Use of the Reserve, however, has been controversial, and dependent
upon interpretation of the drawdown authorities. The Energy Policy and Conservation
Act (EPCA) authorizes drawdown of the Reserve upon a finding by the President
that there is a “severe energy supply interruption.” This is deemed to exist if three
conditions are joined: If “(a) an emergency situation exists and there is a significant
reduction in supply which is of significant scope and duration; (b) a severe increase
in the price of petroleum products has resulted from such emergency situation; and

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(c) such price increase is likely to cause a major adverse impact on the national
economy.” 8
Congress enacted additional drawdown authority in 1990 (Energy Policy and
Conservation Act Amendments of 1990, P.L. 101-383) after the Exxon Valdez oil
spill, which interrupted the shipment of Alaskan oil, triggering spot shortages and
price increases. The intention was to provide for an SPR drawdown under a less
rigorous finding. This section, 42 U.S.C. § 6241(h), would allow the President to use
the SPR for a short period without having to declare the existence of a “severe energy
supply interruption” or the need to meet obligations of the United States under the
international energy program. Under this provision, a drawdown may be initiated in
the event of a circumstance that “constitutes, or is likely to become, a domestic or
international energy supply shortage of significant scope or duration” and where
“action taken ... would assist directly and significantly in preventing or reducing the
adverse impact of such shortage.” This authority allows for a limited use of the SPR.
No more than 30 million barrels may be sold over a maximum period of 60 days, and
this limited authority may not be exercised at all if the level of the SPR is below 500
million barrels. Though this authority has never been formally used, it may have been
the model for a swap of 30 million barrels of SPR oil ordered by President Clinton in
September 2000.9
Many read the authorities as precluding the use of the SPR to influence price;
rather, the SPR is intended to be used to ameliorate supply deficiencies that have
caused a price increase sufficient to threaten the economy. At issue in the debate over
SPR use since the fall of 1999 has been whether there was indeed a supply deficiency
and a corollary increase in prices that warranted federal intervention in oil markets,
whether such an intervention could help, and how it would be received by
international and domestic producers. This debate was caught up in a lingering
stalemate during the 106th Congress over extension of the EPCA authorities
governing the SPR. Those authorities expired at the end of March 2000, and an
extension was not enacted until November 22, 2000 (P.L. 106-469).
During the roughly 7 months that no formal authorities were in place, the Clinton
Administration’s position was that the existence of an annual appropriation for the
SPR conveys Congress’ intention to maintain the SPR irrespective of whether the
statutes have lapsed. The existence of legislative proposals in both the House and
Senate to fund the SPR in FY2001 and to reauthorize the program were also
interpreted by DOE counsel as further evidence of Congress’ intention toward the
SPR.
However, the Clinton Administration initially was reluctant to use the SPR. In
response to calls for a drawdown, such as Sen. Schumer’s during the fall and winter
of 1999-2000, the Administration argued that the high prices prevailing would
encourage increased production of home heating oil, a shift of refined product stocks
8 42 U.S.C. § 6241(d)(2).
9 For additional background on the swap, see CRS Issue Brief IB87050, Strategic Petroleum
Reserve, as well as p.12 of this report.

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to the Northeast, and additional product imports that would arrive in due course.
These developments, it was argued, would alleviate the supply problem long before
an SPR drawdown would. The Clinton Administration’s contention was that an SPR
drawdown, while it might have a modest and brief effect on the price of crude, would
have a negligible impact on home heating oil prices; only increased supply of refined
product (or lower demand) would soften prices. In short, it was argued that high
prices in this particular instance were the consequence of a number of temporary
factors that could not be resolved any faster by intervention. In the meantime, some
governors requested and received additional funds from LIHEAP, the Low-Income
Home Energy Assistance Program administered by the Department of Health and
Human Services.
What was at first a fairly localized problem became increasingly generalized.
Home heating oil and diesel fuel are both “middle distillates” and highly similar to
each other. When the price for home heating oil began to escalate, so, too, did the
price of diesel fuel, because it was a competing use for the same part of the crude
barrel. By early summer, the focus upon supply and price began to shift to gasoline,
especially in the Midwest, where shortages of special blending components drove
prices briefly over $2.00/gal. As it became increasingly likely that the experience of
winter 1999-2000 might repeat itself during the winter to come, the Clinton
Administration changed its position toward use of the SPR.
Establishment of a Regional Home Heating Oil Reserve
The sharply lower level of middle distillate stocks going into the winter of 1999-
2000 had clearly contributed to the surge in heating oil prices. When crude and
product stocks failed to recover during the course of 2000, momentum began to
establish a regional reserve of home heating oil that could provide relief to New
England in the event of shortages. The Energy Policy and Conservation Act (EPCA,
P.L. 94-163) included authority for the Secretary of Energy to establish regional
reserves as part of the broader Strategic Petroleum Reserve (SPR); however, the SPR
Plan originally presented to Congress in 1977 opted for centralized rather than
regional reserves, with no forfeit to the option to establish regional reserves at a later
date..
President Clinton endorsed establishment of a regional reserve in his radio
address on April 18, 2000, but requested that Congress specifically authorize such a
reserve for the Northeast. The reauthorization of the EPCA authorities governing the
SPR seemed a likely vehicle for such language, but the House and Senate could not
resolve their differences over several provisions in the legislative proposals. On July
10, 2000, the Clinton Administration announced its intention to proceed with
establishment of a regional home heating oil reserve on an interim basis. In the
absence of an EPCA reauthorization, DOE initiated development of a regional reserve
after DOE’s General Counsel made the determination that congressional consideration
of FY2001 appropriations for the SPR was sufficient authority to proceed. The same
day, the Administration submitted to Congress an amendment to the Strategic

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Petroleum Reserve Plan to give the regional reserve permanent status.10 The proposed
amendment provided for a regional distillate reserve, not to exceed two million
barrels. The FY2001 Interior Appropriations (P.L. 106-291) included $8 million for
funding the regional reserve.
DOE invited bids for the provision of storage facilities and distillate. Crude oil
from the SPR will be provided in exchange for the product and facilities. On August
20, 2000, DOE announced that the regional reserve would be situated at three sites:
[1] Equiva Trading would provide 500,000 barrels of storage at a terminal in New
Haven, Connecticut; [2] Morgan Stanley Capital Group, Inc., would provide an
additional 500,000 barrels of storage at its own site in New Haven; and [3] 1 million
barrels would be stored in a Woodbridge, New Jersey, terminal (considered part of
the New York Harbor) operated by Amerada Hess. The terminals in New Haven can
distribute product by tanker, barge, tank truck or connection to the Buckeye Pipeline.
The New Jersey site, near Perth Amboy, distributes heating oil by barge.
On August 24, 2000, DOE accepted a bid from Equiva to provide 1 million
barrels of distillate to the two sites in New Haven, and on August 29, announced that
the remaining 1 million barrels of home heating oil would be provided to the Amerada
Hess storage terminal by Morgan Stanley Capital Group, Inc. The Northeast Heating
Oil Reserve (NHOR) was filled by the middle of October 2000.
Permanent authorization for an NHOR of up to 2 million barrels was enacted in
the Energy Policy and Conservation Act of 2000 (P.L. 106-469). The legislation gives
the Secretary of Energy latitude to acquire storage capacity and refined product by
purchase, contract, exchange or lease. The legislation also resolved a simmering
controversy over the language that would govern tapping of the regional reserve.
Drawdown Authority for the Northeast Heating Oil Reserve (NHOR)
Opponents of establishing a regional reserve feared that the regional reserve
would be tapped at times when its use was not fully warranted. There was concern
as well that the potential availability of the reserve could be a disincentive for the
private sector to maintain inventories as aggressively as it would if there were no
reserve. Critics of the proposal, noting the sharp increase in product imports that
quickly resulted from high prices in the winter of 1999-2000, predicted that
anticipated use of a government reserve to hold down prices would hold down the
supply response as well.
On the other hand, there was also a growing perception that, in the face of
growing demand for energy, inadequate refining capacity and delivery systems were
a major factor in the tightness the nation was experiencing with gasoline and home
heating oil supply. This came to be an argument against releasing crude from the SPR
because the calming effect upon markets would be limited without the capacity to
refine the crude into needed product. Advocates of the regional reserve argued that
a reserve of refined product would provide far more immediate and direct relief.
10 To view the amendment in full, go to: [http://www.fe.doe.gov/spr/planamendment6.html].

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They contended that the benefits from measures that would prevent the sort of price
increases experienced in home heating oil ultimately are benefits shared by consumers
of diesel fuel and gasoline, too.11
Corollary to these different perspectives, the design of language governing
drawdown of the regional reserve became a major issue. In the Plan amendment it
sent to Congress on July 10, 2000, the Clinton Administration proposed that
drawdown would be governed by the same authorities that govern a drawdown from
the SPR. However, a more precise trigger was enacted in the Energy Policy and
Conservation Act of 2000 (P.L. 106-469). Originally proposed by Senator
Murkowski, the language predicates drawdown of the Northeast Heating Oil Reserve
in the event of a regional shortage of “significant scope and duration.” Another
qualifying condition is “a dislocation in the heating oil market.”
By statute, this is measured as an instance when the price differential between
crude oil and home heating oil increases by more than 60% over its five-year rolling
average for seven consecutive days, and the differential is continuing to increase.
DOE interprets this to mean that “the price differential must continue to exceed the
60-percent threshold for two consecutive weekly (Monday) observations (thus
satisfying the 7-day requirement in the law); and the price differential must be
increasing as of the most recent observation.”12 The intention behind this approach is
to make the threshold for use of the regional reserve high enough so that oil marketers
and distributors are not discouraged from stockbuilding.
DOE has posted to the Internet a table that sets out all the measures that go into
the calculation of whether the threshold for use of the NHOR has been satisfied (see
Table 3). These include the most recently reported average prices for home heating
oil in PADD1, the current and historic differentials, and the differential that would
satisfy the 60% requirement. DOE starts with the price for crude oil, and calculates
a per gallon price for the crude feedstock that goes into the refinery; this is shown in
the column “Heating Oil/Crude Oil Differential.” That figure is subtracted from the
average price of home heating oil given in the column “Avg. PADD 1x/1y.” This
calculation establishes the differential in cents per gallon between crude oil and
heating oil; this is given in the column “5-Year Average Differential.”
The current differential is compared with the “5-year Average Differential,” and
the percentage difference between the two is calculated as a “Current vs. Average
Differential.” The last column shows the differential that would satisfy the 60%
requirement.
However, as with the SPR itself, drawdown of the NHOR is still discretionary
upon satisfaction of the trigger’s qualifying conditions. The trigger’s design did not
perhaps envision the dynamic that characterized markets during mid-December 2000
11 For further discussion of the problems with energy infrastructure that have contributed to
energy supply and price difficulties during this period, see: CRS Report RL30777, “Petroleum
Prices: Analysis of Supply and Demand,” by Lawrence Kumins.
12 See [http://www.fe.doe.gov/spr/heatingoil/heatingoil_salebasis.html]

CRS-10
and the first weeks of 2001. Crude prices fell roughly $5/bbl owing to perceptions
of adequate crude supplies and growing perceptions that the OPEC nations would
need to contemplate a production cut early in 2001. At the same time, the anticipated
arrival of Arctic air in the Pacific Northwest, Upper Midwest, and Atlantic and New
England coast was maintaining pressure on refined product prices. The average price
of home heating oil rose fractionally the week of December 11 – by roughly one-third
of one cent – then fell by 1.8 cents the week ending December 18 . But, owing to the
much larger drop in crude prices, the differential breached 60% both weeks, reaching
61.4% and 61.0%, respectively.
However, DOE added a note to the Internet indicating that the circumstances
responsible for the breech of 60% did not satisfy the statutory requirements for a
possible drawdown from the NHOR. When posting the data for the first week, DOE
added a note that the differential of 61.4% was attributable to the decline in crude
prices and not to the sort of “dislocation” required by the statute. A week later, DOE
noted that the differential declined for the week ending December 18 – meaning, that
even had DOE observed a dislocation in markets behind the calculation for the week
ending December 11, the decline in the differential the second week would have failed
to met the stipulation for a possible drawdown.13 A further decline in crude prices the
week ending December 25, 2000, sent the differential even higher, to 67.1%. Once
again, however, while the differential increased, it would not have been a “qualifying”
week toward a possible drawdown because the average price of heating oil in New
England and the Middle Atlantic fell by slightly more than one-half cent.
The differential fell sharply during the first two weeks of 2001 – well below
60.0% – but not because of any sharp swings in crude or heating oil prices. The
decline in this instance can be attributed to the change in the “5-Year Average
Differential,” which rose from 54.9 cents in December to 63.0 cents for January.
(For the most recent version of this table, go to
[http://www.fe.doe.gov/spr/heatingoil/heatingoil_salebasis.html].)

13 DOE’s note for the week ending December 18, 2000, reads: DOE analyses indicate that the
Current Versus Average Differential for the last two weeks reflects a drop in crude oil prices
relative to heating oil prices. The 12/18/00 posting, while exceeding 60%, also represents a
decrease in the differential from the previous week. Therefore, the current posting does not
satisfy the guidelines of the Energy Act of 2000. The Department is also not observing “a
dislocation in the heating oil market,” as specified in the statute. Ibid.

CRS-11
Table 3. Energy Guidelines for Release of Heating Oil Reserve
(cents per gallon, except where noted)
Residential Heating Oil Price
Average WTI Crude
(cents per gallon)
Oil Spot Price
(Previous Week)
Avg.
Dollar
Cents
Heating
5-year
Percentage
Differential
PADD
PADD
PADD
per
per
Oil/
Average
Difference
Required for
Week
1x
1y
1x/1y
barrel
gallon
Crude Oil
Differential
between
Release
Differential
Current and 5-
Year
Average
Differential
10/2/00
144.8
150.1
147.5
31.13
74.1
73.3
50.3
45.8
80.5
10/9/00
145.6
150.4
148.0
31.27
74.4
73.6
50.3
46.2
80.5
10/16/00
153.0
157.2
155.1
33.90
80.7
74.4
50.3
47.8
80.5
10/23/00
150.2
155.1
152.6
33.48
79.7
72.9
50.3
45.0
80.5
10/30/00
150.4
154.9
152.6
33.92
80.8
71.9
50.3
42.9
80.5
11/6/00
149.2
154.4
151.8
32.78
78.0
73.8
52.2
41.3
83.5
11/13/00
150.7
155.1
152.9
33.46
79.7
73.2
52.2
40.3
83.5
11/20/00
155.0
159.6
157.3
35.00
83.3
74.0
52.2
41.7
83.5
11/27/00
157.4
161.6
159.5
35.86
85.4
74.1
52.2
42.0
83.5
12/4/00
156.4
161.8
159.1
34.10
81.2
77.9
54.9
41.8
87.9
12/11/00
156.5
162.2
159.4
29.69
70.7
88.7
54.9
61.4
87.9
12/18/00
154.6
160.6
157.6
29.05
69.2
88.4
54.9
61.0
87.9
12/25/00
153.5
160.5
157.0
27.38
65.2
91.8
54.9
67.1
87.9
1/1/01
154.4
161.5
158.0
26.52
63.1
94.9
63.0
50.5
100.9
1/8/01
153.5
160.6
157.1
27.8
66.2
90.9
63.0
44.1
100.9
1/15/01
63.0
100.9
1/22/01
63.0
100.9
1/29/01
63.0
100.9
2/5/01
66.9
107.0
2/12/01
66.9
107.0
2/19/01
66.9
107.0
2/26/01
66.9
107.0
3/5/01
59.9
95.8
3/12/01
59.9
95.8
3/19/01
59.9
95.8
For data that may be more current than found here, go to: [http://www.fe.doe.gov/spr/heatingoil/heatingoil_salebasis.html].
The following data items are used in calculation to determine the occurrence of a dislocation in the heating oil market:
Residential heating oil price - as measured by the Energy Information Administration’s State Heating Oil and Propane Program and published in the
Weekly Petroleum Status Report from October through March. For purposes of the Northeast Heating Oil Reserve. the average retail (residential)
heating oil price for the Northeast is computed as the average of the published price for Petroleum Administration for Defense District (PADD) 1x (New
England) and PADD 1y (Central Atlantic). See Tables 1 and 2 for a listing of the states included in each PADD.
Crude oil price - spot price for West Texas Intermediate crude oil at Cushing, Oklahoma, as reported by Reuters Ltd., and republished by the Energy
Information Administration in the Weekly Petroleum Status Report. For purposes of these calculations, the unweighted average price for the previous
week is calculated from the reported daily closing prices.
5-year Rolling Average Differential - calculated for each month in the heating season (October through March) as the unweighted average price
differential for that month over the previous 5 years.

CRS-12
It is impossible to predict what effect a drawdown from the NHOR might have
on home heating oil prices because any number of factors – including a reduction in
supply from abroad, loss of refining capacity, or deliverability problems – could
underlie the need for a drawdown. Experiences in the marketplace suggest, however,
that supplemental supply of even 100,000 b/d of a scarce fuel or feedstock can have
an enormous soothing effect upon a market that is experiencing imbalances in supply
and demand.
Other Policy Options
The Strategic Petroleum Reserve: Drawdown and Swaps
To the extent that tapping the SPR lowers crude prices, some relief probably
would be reflected eventually in the price of refined products such as home heating
oil. However, the SPR itself is not as direct a tool to affect home heating oil prices
as the NHOR which, by directly targeting home heating oil supply, would likely have
a more immediate effect on heating oil price. It is possible to imagine a scenario where
a crude shortage has led to product shortages and high prices, such that there might
be need to tap the NHOR for refined product while crude is also drawn from the
larger SPR to spell refiners. As has been noted, the conditions that must be met for
a drawdown of the SPR are much less specific than for the NHOR, and much more
subject to interpretation. The Clinton Administration resisted calls for an SPR
drawdown during the winter of 1999-2000. However, owing to growing concern
about the fresh pressure that escalating crude prices, colder weather, and anticipated
refinery maintenance might have on home heating price and supply during the winter
of 2000-2001, President Clinton, on September 22, 2000, announced a swap of 30
million barrels of oil from the SPR.
On the assumption that roughly 10% of the typically refined barrel of crude
becomes home heating oil, the Clinton Administration argued that the swap should
add 3 million barrels to product stocks. The swap was controversial, in part, because
opponents noted that refineries were already operating at near capacity, so it did not
stand to reason that adding crude to the market could appreciably accelerate
additions to product stocks. But, others contended that there was a legitimate need
to call upon SPR supply, that, by increasing supply, it would exert some stabilizing
influence.
Contracts were awarded on the basis of how much oil bidders offered to return
to the SPR between August 1 and November 30, 2001. In effect, bidders based their
offers on their best models of what it would cost them to acquire replacement crude,
weighed against the benefit to them of having additional supply at the beginning of
this winter. The preponderant risk in the transaction appears to be borne by the oil
companies or refiners who place bids. The volume a refiner has promised to return,
and the price at the time the refiner acquired the replacement crude, will clearly affect
the refiner’s effective return on participating in the swap. However, in the absence
of congressional appropriations to acquire oil for the SPR in recent years, the Reserve
receives under the swap a net acquisition that it would not have otherwise had. In
that sense, it is not especially material whether or not the quantity of oil returned to

CRS-13
the SPR is at price parity with the quantity originally borrowed. Under the contracts
accepted by DOE by November 2000, a total of 31.5 million barrels would be
returned to the SPR in 2001.
Coordinated Drawdown of Worldwide Stocks
Criticism of the SPR swap was also fueled by reports that higher prices for home
heating oil in Europe were likely to draw product refined from the swapped crude to
overseas markets. Senator Murkowski, Chairman of the Senate Energy Committee,
issued a press release on October 6 underscoring the irony that oil from the U.S. SPR
might relieve European, rather than domestic markets. While it can be argued that, in
a world market, it does not greatly matter where the product goes, the principal issue
here was the reluctance among some European nations to draw upon their own
strategic stocks. Officials in Spain and France called for a coordinated stock
drawdown by the European Union in light of the U.S. action, but opinion was divided
among the membership, and countries more receptive to such a drawdown were
disinclined to act independently. An advantage of any European drawdown would be
that these stocks are held in the form of refined products, as well as crude, and would
reach product markets faster. European Union distillate stocks are reported to cover
100 days’ demand.14 On October 16, 2000, Secretary of Energy Richardson indicated
that several domestic refiners had agreed to temporarily cease exporting home heating
oil.
Massachusetts Initiative to Build Private Stocks
In an even more local variation on the regional heating oil reserve, in November
2000, the State of Massachusetts awarded contracts to seven companies to purchase
34 million gallons of home heating oil (about 800,000 barrels) by December 8, 2000.
Under the program, the firms will add these purchases to their stocks and cannot
introduce these stocks to the market until January 15, 2001. If the sales price is less
than the purchase price, the state will reimburse the oil companies. If the sales price
is higher than the acquisition price, the companies will split the proceeds with the
state. The Massachusetts legislature has earmarked $5 million for the program.
The program’s intention is to locate additional stocks closer to the consumption
point than are the supplies held in the NHOR. Wintertime demand for home heating
oil in Massachusetts is estimated at 4.3 million gallons per day, and the state Division
of Energy Resources indicates that the initiative will boost statewide inventories of
home heating oil by 60% over base levels.15
14 See: “Euro SPR Release Would Be Tricky But Effective,” appearing in Petroleum
Intelligence Weekly, Vol. XXXIX, No. 40, Oct. 2, 2000: p. 1-2.
15 See: “Massachusetts aims to build private heating oil stocks, appearing in: Platt’s Oilgram
News,Vol. 78, No. 227, November 26, 2000: p. 2. See also: State of Massachusetts.
Massachusetts Division of Energy Resources. “State Energy Agency Surpasses Heating Oil
Goal.” November 30, 2000: [http://www.state.ma.us/doer/pub_info/nr001130.htm]

CRS-14
Low-Income Home Energy Assistance Program (LIHEAP)
As has been noted, some have opposed use of strategic reserves, arguing for
reliance upon markets to price and allocate fuel as a more efficient means of coping
with spot shortages and price spikes. Some taking this point of view will suggest that
policy should address instead the consequence of high prices on those least able to
pay while markets are left to sort out contributing causes for those prices.
The Low-Income Home Energy Assistance program (LIHEAP) was originally
established in 1981 by Title XXVI of P.L. 97-35 and has been reauthorized several
times. It is a block grant program under which the federal government gives states,
the District of Columbia, U.S. territories and commonwealths, and Indian tribal
organizations annual grants to operate multi-component home energy assistance
programs for needy households. In recent years, LIHEAP has been funded at $1.1
billion, plus $300 million for weather emergencies. By mid-February 2000, President
Clinton had released the entire $300 million in LIHEAP emergency funding that was
appropriated for FY2000. The Clinton Administration submitted an emergency
supplemental request to Congress for $600 million in additional LIHEAP funds.
Supplemental emergency LIHEAP funding for FY2000 was ultimately included in the
FY2001 Military Construction Appropriation bill (H.R. 4425/P.L. 106-246). Of those
FY2000 supplemental emergency funds, a total of $444 million has been released by
the President, including the most recent release on September 23, 2000, of $400
million, allocated to all states for assisting low-income households facing significant
price increases for heating oil, natural gas, and propane prices this coming winter.
The Consolidated Appropriations Act, 2001 (H.R. 4577), presented to the
President on December 15, 2000, provides $1.4 billion for LIHEAP in FY2001 and
$300 million in contingency money; however, forward funding for the program that
had been included for FY2002 was cut to help meet overall spending targets. (For
additional background, see CRS Report 94-211, “The Low-Income Home Energy
Assistance Program (LIHEAP).”)