**Testimony of**

**Howard Gruenspecht**

**Acting Administrator**

**Energy Information Administration**

**before the**

**Select Committee on Energy Independence and Global Warming**

**U. S. House of Representatives\
**

#### September 25, 2008

Mr. Chairman and Members of the Committee, I appreciate the opportunity
to appear before you today to discuss the short-term energy outlook for
the United States, particularly for the upcoming winter.

The Energy Information Administration (EIA) is the independent
statistical and analytical agency within the Department of Energy that
produces objective, timely, and relevant data, projections, and analyses
to assist policymakers, help markets function efficiently, and inform
the public. We do not promote, formulate, or take positions on policy
issues, and our views should not be construed as representing those of
the Department of Energy or the Administration.

**Winter 2008-09 Outlook**

Our most recent *Short-Term Energy Outlook*, released on September 9^th^
before Hurricane Ike hit the Gulf Coast, forecasts that residential
heating oil prices during the upcoming heating season (October though
March) will average \$4.13 per gallon, an increase of about 25 percent
over last heating season.  Residential natural gas prices over the same
period are projected to average \$14.93 per thousand cubic feet (Mcf)
compared with \$12.72 per Mcf during the last heating season, an
increase of about 17 percent.

Natural gas is used as the primary heating fuel by a majority (52
percent) of U.S. households, while oil is the primary heating fuel for 7
percent of households. The percentages of households using electricity
and propane for heating are 35 percent and 6 percent, respectively.
Heating oil use is heavily concentrated in the Northeast, where it is
used by nearly one-third of households.

Fuel expenditures for individual households are highly dependent on
weather conditions, the size and efficiency of individual homes and
their heating equipment, and thermostat settings. While cross-fuel
comparisons of average heating expenditures can be misleading because of
differences in the extent to which each fuel is used in colder and
milder areas of the country, the change in U.S.-average projected
expenditures relative to the prior winter for each heating fuel provides
a broad guide to expected movements in heating costs.

Although all of the major heating fuels are expected to register sizable
increases in total average expenditures, heating oil customers are
likely to be particularly hard hit, with heating fuel expenditures for
the average household using oil as its primary heating fuel expected to
increase by \$585 (30 percent) over last winter.  The corresponding
average expenditure increases for households heated with natural gas,
propane, and electricity are \$162 (19 percent), \$217 (13 percent), and
\$86 (10 percent), respectively (**Figure 1**).

Heating oil prices are expected to be significantly higher than last
winter since crude oil prices are much higher, reflecting the limited
increase in non-OPEC oil supply relative to demand over the past year.
Natural gas prices are significantly higher due to high oil prices, low
liquefied natural gas (LNG) imports, and the significant year-over-year
storage deficit earlier in 2008. The rest of my testimony discusses
these factors and others that will have an important impact on
residential expenditures this upcoming winter.

**Heating Oil**

The main reason heating oil prices are expected to be so much higher
this winter than last is because crude oil prices are expected to be
significantly higher. While retail heating oil prices are expected to be
about 85 cents per gallon higher this winter (October through March)
than last winter, crude oil is expected to be the equivalent of about
\$28 per barrel or 68 cents per gallon higher (shown graphically in
**Figure 2**). After rising by about 370,000 barrels per day (bbl/d)
during the first half of 2008, global oil consumption is projected to
rise by about 970,000 bbl/d in the second half of 2008 and by 920,000
bbl/d in all of 2009 compared with year-earlier levels. Lower
consumption in countries belonging to the Organization for Economic
Cooperation and Development (OECD) is expected to be more than offset by
continued non-OECD consumption growth, led by China, the Middle East,
Latin America, and India. While global oil demand is increasing, supply
from countries outside the Organization of the Petroleum Exporting
Countries (OPEC) has not kept pace, with non-OPEC supply growth expected
to be nonexistent in 2008. When non-OPEC supply growth fails to match
growth in global demand, markets rebalance by OPEC countries increasing
production and/or consuming countries drawing down inventory levels.
Both of these actions tend to increase crude oil prices: drawing down
inventory levels leaves markets more vulnerable to changes in supply and
demand, while OPEC production increases cut into spare capacity unless
capacity increases faster than production, which was not the case in
2008. As a result, current spare production capacity remains
historically low (**Figure 3**).

Increases in heating oil prices above those due to higher crude oil
costs largely reflect tighter markets for diesel fuel/heating oil
worldwide. Diesel fuel and heating oil markets are connected since both
products are very similar except for the fact that diesel fuel contains
less sulfur than heating oil. World diesel-fuel demand growth is coming
both from increasing transportation use and increasing use of distillate
as a fuel for electricity generation, particularly in developing
countries where electricity demand is outstripping generating
capability. Generally, oil product demand in non-OECD countries, where
oil demand is growing fastest, is more heavily weighted towards
distillate fuel than is product demand in the United States. This has
led to heating oil prices increasing even more than the sharp run-up in
crude oil prices this upcoming winter compared to last winter.

In addition, as of September 22, Hurricanes Gustav and Ike have removed
over 41 million barrels of production from refineries that were shut
down, with additional product lost due to other refineries that have
reduced inputs due to limited crude oil availability is included.
Because of port closures and pipeline outages, crude oil flows through
the petroleum system have been curtailed over the last few weeks and it
may take another week or two to get flows moving again at normal rates
throughout the entire system.

Beyond the upcoming winter, crude oil prices are expected to moderate as
sluggish growth rates in consumption from OECD countries and prospects
for increased supplies from non-OPEC producers in the coming year should
lead to weakened market conditions.  Lower demand for OPEC oil and a
rebound in global surplus production capacity is expected to provide the
market with a potential cushion against supply disappointments over the
near term. The main upside price risk is that the slowdown in global oil
demand growth is temporary and that demand will recover.  Important
downside price risks include weaker demand growth due to the lagged
impact of higher oil prices and weaker economic activity than
anticipated.

**Natural Gas Markets**

Natural gas prices are also expected to be higher this winter than last.
In addition to high oil prices and low LNG imports, strength in spot
prices through the first half of 2008 was the result of
colder-than-normal temperatures during the first quarter (particularly
in the Midwest), which contributed to consumption growth and a
substantial year-over-year decline in working inventories.

At the end of March 2008, working gas in underground storage was 356
billion cubic feet (Bcf) below the March 2007 level and 27 Bcf below the
5-year average. Cold weather continuing well into April contributed to a
growing storage deficit. By the end of the first half of the year,
natural gas price pressures peaked with the natural gas spot price
reaching \$13.71 per thousand cubic feet (Mcf) on July 2, 2008. More
recently, however, spot prices have declined, averaging \$8.49 per Mcf
in August. Taken together, robust domestic production of natural gas
(**Figure 4**) and limited consumption growth in the electric power
sector due to mild summer temperatures allowed for the rebuilding of
natural gas storage levels. As a result, estimated working gas
inventories at the end of August surpassed the corresponding 5-year
average for the first time since February, although this level was still
147 Bcf below end-of-August 2007.

Despite strong domestic production growth (actual data through June
shows an increase in marketed natural gas production of 8.6 percent) and
the resulting inventory builds compared to the first half 2007, damage
caused by Hurricanes Gustav and Ike remains a concern. As of September
22, production shut-ins for the Federal Gulf of Mexico totaled almost
133 Bcf, or about 86 percent of total output, and recovery could last
well into October.

In 2009, domestic natural gas production growth is expected to continue,
although not at the rate of growth measured in the first half of 2008.
Natural gas consumption is expected to be slightly higher next year, but
fragile economic conditions add significant uncertainty to the forecast.
As a result of expectations for continued supply strength and moderate
consumption growth, natural gas spot prices are projected to average
\$8.55 per Mcf in 2009, a decrease of \$1.16 per Mcf from the expected
average for 2008.

**Conclusion**

We will be updating the forecasts presented in this testimony in the
October edition of the *Short-term Energy Outlook* (to be released
October 7), which will also include an expanded discussion of the
upcoming 2008-2009 winter heating season.

This concludes my statement, Mr. Chairman, and I will be happy to answer
any questions you and the other Members may have.

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