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# OAR Box 1669 Prepped byCharmelle Mathews



### Document

Number: 

# £8) 11-1- 6
Docket Number: 

# A-98-1 3

Printed 9/23/20089:36:49AM

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# A'f?-/3 ar-jr- k P. 2

* 

### America n Petroleu m Institut e 

# Heatin g Oi l i n th e Unite d State s m - 

## 5 

## #53 !
tPAAIHOtX^ '

PolicyAnalysi s an d Strategi c Plannin g Departmen t Augus t 199 8P. 3



# Heatin g Oi l i n th e Unite d State s

Jim Lockhart'

PolicyAnalysi s an d Strategi c Plannin g Departmen t Augus t 199 8

*Economic

Analyst, American

Petroleum

Institute. The contents of

this paper are for the purposes

of study and discussion

of government

legislative

or regulatory

proposals

and do not necessarily represent

the views of the American

Petroleum Institute or any of its members.

Document

formatted

for publication

by Lisa Ewing, Staff Assistant, American

Petroleum

Institute.


# 2-P. 4P. 5



# Tabl e o fContent s

I

. Overvie w1 III

. Suppl y
. 7 IV

. Price s 1 0 V

. Comparativ e Heatin g Cost s 1 2 VI

. Inventories , th e Possibilit yo fSuppl y Disruptions , an d th e Rol e o f Governmen t 1 5 Source s 1 9



# HP. 6

I V 

# s*

# I
. Overvie w P. 7

I n 1997 , heatin g oi l price s average d $1,01 4 pe r gallon , abou t one-hal fcen t lowe rtha n i n 1996

. Price s fel l steadil ydurin g 199 7 fro m thei rpea k of $1,13 6 durin g Januar

yt o a lo wof$0,94 5 i n August , endin g th e yea rat $0,979

. Figur e 1 Nationa l Averag e Heatin g Oi l Price s $1.2 0
$1.1 0 c 3 $1.0 0
o $0.9 0
$0.8 0 . 9

, ^ \ 5
.

. *— •
. m

—o— 1995

- -• - - 199 6 —A—199 7 a \*_ -

. A 4* JB ^^ A _ J 3

$0.7 0 Ja n Feb Ma

rAp rMa

yJu n Ju l Au g Se p Oc t No vDe c Mont h Source : Burea u ofLabo rStatistic s Hom e heatin g oi l account s fo rjus t les s tha n 2 0 percen t o fal l th e distillat e oi l sol d i n th e Unite d States , an d 3 t o 4 percen t o fal l petroleu m used

. I n 1996 , home s an d businesse s purchase d mor e tha n 1 0 billio n gallon s o fheatin g oil , mos t ofi t concentrate d i n Ne

wEnglan d an d th e Mid
Atlanti cstates

. Heatin g oi l was use d i n a n estimate d 10. 7 millio n household s an d mor e tha n 500,00 0 commercia l buildings

. Tota l <- expenditure s o n heatin g oi l i n 199 6 wer e more tha n 1 0 billio n dollars

. Fina l deman d figure s fo r199 7 ar e not ye t available , bu t deman d fo rheatin g oi l i s estimate d t o hav e bee n belo waverage , du e t o a verymil d winter

. Deman d fo rheatin g oi l i n 199 6 wa s slightl yhighe rdu e t o unusuall ycoo l weathe r durin g th e firs t thre e an d las t thre e month s i n th e Northeaster n U.S

. I n all , thi s col d spel l durin g 199 6 i s estimate d t o hav e increase d th e tota l deman d fo rheatin g oi l b yabou t 5 0 millio n gallons

. Durin g th e winte rmonth s of1997 , domesti c refiner s supplied , o n average , mor e tha n 14 1

^P. 8

millio n gallon s o fdistillat e oi l a day , o r93. 6 percen t o fth e distillat e consume d durin g thi s period

. I n Januar yan d February , inventorie s o f distillat e adde d nearl y1 5 millio n gallon s t o supplie s eac h day

. Ove ral l o fth e winte rmonths , inventorie s accounte d fo rabou t 3. 8 percen t o fal l deliveries

. Th e fina l 2. 7 percen t o fdeliverie s cam e fro m ne t imports

. Tabl e 1 belo wshow s th e recen t pric e o fheatin g oi l fo rth e countr ya s a whol e an d fo rsom e selecte d citie s i n th e Northeast

. Difference s i n price s betwee n citie s i n th e Northeas t ar e largel y du e t o difference s i n th e cost s o ftransporting , storin g an d marketin g heatin g oi l fro m cit yt o city

. Tabl e 1 Pric e ofDistillat e Fue l Oil , 1996-9 7 Avg
. U.S

. Ne

wYor k Philadelphi a Bosto n 199 6 Ja n $1,00 7 $1,13 8 $0,98 2 $1,02 2 Fe b $1,00 1 $1,10 8 $0,97 5 $1,01 9 Ma r$1,02 0 $1,12 5 $0,99 1 $1,06 9 Ap r$1,06 5 $1,17 1 $1,04 1 $1,12 7 May$1,03 8 $1,11 4 $1,00 6 $1,10 1 Ju n $0,96 9 $1,05 5 $0,89 2 $1,01 3 Ju l $0,93 5 $1,02 3 $0,85 6 $0,96 9 Au g $0,93 4 $1,02 9 $0,87 5 $0,96 2 Se p $0,98 0 $1,08 1 $0,90 9 $0,99 9 Oct $1,06 3 $1,16 8 $1,00 4 $1,10 3 Nov$1,09 7 $1,20 4 $1,05 4 $1,14 0 De c$ 1 12 1 $ 1 22 4 $ 1 08 2 $1,16 8 [Avxi; r
. 6 "Il^?^S^^^} i 2o TFll^^l^^_^^^E.e^ 1
1997 Ja n $1,13 6 $1,24 0 $1,07 7 $1,17 4 Fe b $1,12 7 $1,22 9 $1,05 0 $1,16 8 Ma r$1,07 9 $1,18 5 $0,98 9 $1,10 7 Ap r$1,04 6 $1,13 5 $0,96 9 $1,09 3 May$1,03 1 $1,15 3 $0,96 6 $1,06 2 Ju n $1,00 1 $1,12 0 $0,91 4 $1,03 9 Ju l $0,95 7 $1,04 2 $0,88 0 $0,98 8 Au g $0,94 5 $1,03 2 $0,87 4 $0,97 0 Se p $0,94 5 $1,03 3 $0,87 9 $0,96 1 Oct $0,95 6 $1,04 2 $0,88 7 $0,97 9 No v$0,97 0 $1,06 3 $0,88 9 $0,98 6 De c $ 0 97 9 $ 1 07 8 $ 0 89 9 $0,99 4 Avg , 9 7 '

^ $101.' * $T113

_

J $ 0 939 V g#$1:04 3 Source : Burea u o fLabo rStatistic s 2 

# 7P. 9



# II
. Deman d
Heatin g oi l i s th e primar

ysourc e o

fspac e heatin g fo rmillion s ofbusinesse s an d residences , concentrate d i n th e Northeast

. Betwee n 199 0 an d 1996 , th e annua l deman d fo r heatin g oi l fo rcommercia l an d residentia l us e range d betwee n 9 an d 1 1 billio n gallon s a year
. At th e sam e time , far m us e average d betwee n 3 an d 3. 5 billio n gallon s a year
. Thi s i s show n i n Figure 2 below

. Figur e 2

Sale s o fHeatin g Oi l

( A c J O O o in c o a

198 6 198 7 198 8 198 9 199 0 199 1 199 2 199 3 1994 199 5 199 6

t Resdientia l m

Commercial r

_Far m Source : U

S DOBBA, Fuel

Oil and Kerosene

Sales, 1996
A s a country , th e U.S

. nowuse s les s heatin g oi l tha n i t di d i n th e 1970's , whe n deman d wa s at it s peak

. A s Figure 3 shows , annua l domesti cus e o fheatin g oi l i s dow n b

yabou t 1 0 billio n gallon s fro m it s pea k

i n 1976

. -

o " 5 2 5 2 0
1 5 1 0 Figur e 3 Long-Ter m Heatin g Oi l Us e (1947-1997 )

1 1 i
. i I.I. I i
. i
. i
. i
. i
. i
. i
. 194 7 195 5 196 3 197 1 197 9 1987 Source : API, Basic PetroleumDatabook 199 5P.1 0

Th e declin e i n heatin g oi l us e reflect s th e increase d availabilityofnatura l ga s i n th e Northeast , th e developmen t ofmore efficien t electri cheatin g systems , an d th e investmen t i n energ yconservatio n b

yhome s an d businesses , al l ofwhic h coincide d wit h hig h oi l prices

. Currently , heatin g oi l us e i s abou t th e sam e a s i t wa s i n th e lat e 1950's

. Commercia l an d residentia l heatin g oi l accounte d fo r3. 6 percen t o fal l petroleu m consume d domesticall yi n 1996 , dow n fro m 4. 6 percen t te n years before

. Commercia l an d residentia l us e represent s onl yabou t 2 0 percen t o fth e more tha n 5 0 billio n gallon s oftota l distillat e use d eac h year , dow n fro m 2 5 percen t te n years ago
. Far m us e ofdistillate , includin g heatin g oil , accounte d fo ranothe r6 percen t ofal l distillat e used

. Construction , th e military , industry , electri cutilities , an d transportatio n accounte d fo rth e res t o fdistillat e consumption

. Recently , truckin g us e ha s bee n th e fastes t growin g segmen t ofdistillat e demand , accountin g fo ronl y4 0 percen t ofdistillat e oi l sol d i n 1986 , bu t mor e tha n 5 2 percen t i n 1996

. A s Figure 4 illustrates , heatin g oi l us e i s concentrate d i n a relativel ysmal l par t o fth e country

. Ninetypercen t o fdomesti cus e an d 7 0 percen t o fcommercia l us e i s concentrate d i n Ne wEngland , th e Mid-Atlanti cStates , an d th e Grea t Lake s states

. Figur e 4

Sale s o fHeatin g Oi l B yRegion , 199 6

Ne w Englan d

MdWes t 14 %

Mi d Atlanti c 43 % Source : U S DOBBA , Fuel Oil and Kerosene

Sales, 1996



# < ?P.1 1

Ther e ar e severa l reason s fo rth e geographi c concentratio n o fheatin g oi l use
. Natura l ga s - th e typ e o fheatin g mos t commonl yuse d i n residence s - wa s no t a s widel yavailabl e i n th e Northeas t a s i t wa s i n othe rpart s o fth e countr y unti l quit e recently

. I n addition , earlie relectri c heatin g system s wer e ver yinefficien t agains t th e colde rclimat e o fth e region

. Nationally , residence s whic h us e oil-hea t mak e u p abou t 1 1 percen t o fal l households , whil e accountin g fo r nearl y4 0 percen t o fth e household s i n th e Mid
Atlanti can d Ne wEngland

. Tabl e 2 list s th e state s wher e commercia l an d residentia l us e i s highest

. Tabl e 2 Use o fHeatin g Oi l i n th e 1 5 state s wit h th e Highes t Deman d (Million s o fGallons ) 

# ssmflEs s
Ne wYor k Pennsylvani a Massachusett s Ne wJerse y Connecticu t Main e Virgini a Marylan d Nort h Carolin a Ne wHampshir e Michiga n Ohi o Wisconsi n Minnesot a Rhod e Islan d Residentia l

" , .6707'7
- '
1228. 9 882. 5 782. 6 518. 7 562. 7 321. 8 245. 9 247. 7 181. 5 197. 9 164. 4 160. 9 164. 8 147. 0 148. 3 Commercia l

: 3433.6* 4
662. 0 262. 2 240. 3 210. 7 126. 1 103. 3 144. 8 139. 4 120. 3 53. 3 75. 2 56. 9 41. 7 43. 2 34. 4 Tota l

10141. 3

— * , J._». 4 _1.«%i_.V

. 1890. 9 1144. 7 1022. 9 729. 4 688. 8 425. 1 390. 7 387. 1 301. 8 251. 2 239. 6 217. 8 206. 5 190. 2 182. 7
Source : U S DOE7EIA , Fuel Oil and Kerosene

Sales, 1996 O n average , a single-famil yresidenc e wit h a heatin g oi l furnac e use d abou t 75 0 gallon s o f fue l oi l i n 1993

. Assumin g tha t consumptio n pe r househol d i n 199 7 wa s roughl yth e sam e a s i t wa s i n 1993 , th e owne ro fth e averag e single
famil yresidenc e woul d hav e pai d roughl y$76 0 fo rheatin g oi l i n 1997

.



## /OP.1 2

Th e relationshi p betwee n unusuall ycol d weathe r an d oil-hea t consumptio n i s obvious , bu t difficul t to asses s quantitatively

. I n general , a on e percen t increas e i n th e numbe rofheatin g degree-day s i s estimate d t o increas e consumptio n b

yabou t two-third s ofon e percent

. However , th e pric e ofdistillate , whic h depend s o n th e worl d suppl yan d pric e o fcrud e oil , als o influence s heatin g oi l use
. Ongoin g conversion s ofhome s heate d b yoi l t o othe rheatin g systems , primaril ynatura l gas , are expecte d t o influenc e futur e heatin g oi l consumption

. I n NewEnglan d alone , mor e tha n 7,50 0 home s converte d fro m oi l heat t o natura l ga s i n 1996

. At th e sam e time , however , man y newhome s ar e constructe d wit h oil-burnin g furnaces

. Thirty-tw o percen t ofal l ne whouses , o r3 5 thousan d homes , were constructe d i n th e Northeas t i n 199 6 wit h oi l heat systems

. Thes e newhomes , a s wel l a s th e retiremen t o f building s tha t rel yo n heatin g oi l a s th e primary sourc e ofheating , offse t th e conversio n o f existin g home s an d businesse s t o othe rfuels

.

/ /P.1 3



# . Suppl y
Heatin g oi l i s a smal l par t oftota l distillat e deliveries , an d th e suppl yofheatin g oi l i s influence d directl yb

yth e suppl yofal l distillat e oil

. Virtuall yal l th e heatin g oi l consume d eac h winte ri s distillat e oil , whic h ha s bee n produce d i n a domesti crefiner

yfo rimmediat e use , imported , o rtake n fro m inventories

. Sinc e heatin g oi l i s a blend , i t ma yals o contai n smal l amount s ofothe rproducts , suc h a s kerosen e an d kerosen e je t fuel

. Althoug h mos t heatin g oi l i s produce d a s high
sulfu rdistillat e oil , i t ma

yals o contai n low-sulfu r distillat e meetin g th e specification s fo rhighway use
. Th e Clea n Ai rAct Amendment s o f199 0 requir e on-highwaytransportation , primaril y heav ytrucks , t o us e a distillat e fue l wit h a sulfu r conten t o fles s tha n .0 5 percent

. Low-sulfu r distillat e meetin g th e requirement s fo ron highwayus e currentl ymake s u p abou t 6 0 percen t ofth e tota l distillat e sold

. Sinc e th e introductio n o flow-sulfu rdistillat e int o th e marke t i n 1994 , th e amoun t oflow-sulfu rdiese l use d eac h yea rexceed s th e estimate d deman d fro m on-highwa ytrucking

. Thi s suggest s that at leas t som e low-sulfu rdistillat e i s sol d a s heatin g oil

. I n 199 6 an d 1997 , th e wholesal e pric e o flow
sulfu rdiese l was , o n average , betwee n 2 an d 3 cent s a gallo n more tha n high-sulfu rdistillate

. ^ Thi s discourage d th e us e oflow-sulfu rdistillat e a s heatin g oi l bybusinesse s an d residences

. However , stron g deman d fo rheatin g oi l ca n eliminat e o reve n revers e th e lowsulfu rpric e premium , a s i t di d durin g th e mos t ofth e winte r month s o f1996

. Mos t distillat e oi l i s produce d at a domesti c refineryan d immediatel ypasse d o n t o th e retai l market

. I n th e las t fiv e years , refiner yproductio n durin g th e winte rmonth s ha s accounte d fo r9 5 percen t ofal l distillat e use d i n th e sam e month

. Stoc k draw s have accounte d fo ranothe r5 percen t o fth e distillat e use
. Ne t imports , o n average , have playe d a n insignifican t rol e i n th e tota l suppl yofdistillate s durin g th e winter

.

/ ^Tabl e 3 Source s o fWinte rDistillat e Supply , 1993-199 7

(Million s o fGallon s pe rDay ) P.1 4

199 3 Ja n Fe b Ma r Oc t No v De c Refiner y

Productio n
122. 4 118. 2 122. 6 144. 1 145. 9 142. 0 Ne t

Import s
-4. 4 -3. 2 3. 4 0. 2 -5. 4 -12. 3 Stoc k

Draw s
13. 4 30. 5 17. 6 -19. 0 -5. 3 11. 2 Fina l Deliverie s
131. 3 145. 5 143. 6 125. 3 135. 2 141. 0
.1994 " Ja n Fe b Ma r Oc t No v De c \v_ ? T r-^T . - r vr ~ -. . > , V 7

. Y ; - 130. 8 126. 8 130. 0 134. 5 137. 3 135. 7 -7. 2

1. 7 4. 1 -4. 1 -1. 9 -4. 1 31. 7

21. 9 4. 7 -1. 7 -1. 9 2. 9 155. 3

150. 4 138. 9 128. 8 133. 6 134. 5

Ja n Fe b Ma r Oc t No v De c 128. 3

124. 1 132. 6 133. 1 140. 3 140. 4 7. 2

3. 2 -1. 2 -3. 2 1. 1 -2. 6 * r' . _

6. 8 27. 1 9. 1 0. 5 -5. 7 7. 1 142. 3

154. 4 140. 4 130. 4 135. 8 144. 9

Ja n Fe b Ma r Oc t No v De c - i__K^_* >
_*** r-4twA«*rf M

___ > -*

. i
- 130. 6 1. 1 132. 1 0. 6 130. 6 4. 8 152. 3 -2. 3 152. 9 1. 4 149. 6 2. 0 

### •-s r 22. 8 23. 6 9. 6 0. 3 -9. 8 -6. 7 154. 6

156. 3 145. 0 150. 4 144. 6 142. 7

Ja n Fe b Ma r Oc t No v De c 131. 0

129. 7 136. 8 146. 5 148. 8 150. 3 6. 7

5. 8 6. 0 3. 4 0. 5 1. 7 21. 1

8. 1 5. 6 3. 8 -6. 0 2. 0 

# I

158. 8 143. 7 147. 6 153. 7 143. 3 153. 9
Source : U S DOE/EIA , Petroleum Supply Annual, annually , 1993-199 7 I n Tabl e 3 above , stoc k

draw s refe rt o th e supplie s o fheatin g oi l take n fro m inventorie s hel d b yrefinerie s an d larg e distributio n centers , bu t not t o thos e hel d byconsumer s o rretailers

. Th e stocks hel d byprimarysuppliers , althoug h accountin g fo ra relativel ysmal l par t oftota l 

# /

3P.1 5

deliverie s durin g th e winter , ca n b e ver y important

. Fo rexample , i n Januar y1994 , more tha n 3 0 millio n gallon s ofdistillat e were draw n fro m primar

ystorage

. I n th e las t fe wyears , th e percentag e o fwinte r distillat e suppl ytake n fro m stocks has declined

. Thi s declin e accompanie d th e increas e ofothe r type s ofdistillat e demand , suc h a s on-highway trucking , whic h d o not have a strongl yseasona l patter n ofdemand

. Thus , th e rati o ofseasona l heatin g oi l deman d t o tota l distillat e deman d i n th e winte rmonth s ha s bee n falling

. Les s relianc e o n stocks als o i s a

t leas t i n par

t du e t o improvement s i n inventor ymanagemen t an d othe rcost-reducin g innovation s byrefiners an d bul k dealers

. Whil e ne t import s ofdistillat e hav e typicall ybee n a tin ypar t o fsupply , the yaccounte d fo rmor e tha n tw o percen t oftota l winte rdeliverie s i n 1997

. Th e U. S i s commonl ybot h a n importe r an d a n exporte rofdistillat e fue l durin g th e winter

. Import s are concentrate d i n th e Northeast , wher e heatin g oi l deman d i s strongest , whil e th e Wes t Coas t tend s t o b e a ne t exporter

. Althoug h mos t heatin g oi l i s consume d o n th e East Coast , t o a larg e exten t i t i s refine d elsewhere

. I n 1996 , a tota l of19. 6 billio n gallon s o fdistillat e wer e sol d o n th e East Coast

. Durin g th e sam e year , approximatel y11. 3 billio n gallon s wer e shippe d fro m th e state s alon g th e Gul f* Coas t t o th e Eas t Coast

. Consumers bu yheatin g oi l fro m independen t retailers , wh o compet e wit h on e anothe rt o provid e th e lowes t cos t an d th e bes t service

. I n 1992 , ther e wer e more tha n 5,00 0 fue l oi l dealers nationwide , employin g abou t 4 4 thousan d people

. Wit h 86 8 fue l oi l dealers , New Yor k ha d more dealers tha n an yothe rstate

. Massachusett s followe d wit h 642

.



# /t

# IV
. Price s
Th e inflation-adjuste d pric e o fheatin g oi l i n th e mi d 1990' s wa s les s tha n hal fth e pric e that i t wa s durin g 1981 , whe n heatin g oi l price s wer e at thei rpeak

. Mos t ofth e year-to-yea rchang e i n heatin g oi l price s i s du e t o change s i n th e pric e ofcrud e oil ; however , th e level s ofheatin g oi l inventorie s an d th e relativ e severityofwinters als o influenc e prices

.
Figur e 5 Retai l Pric e o fFue l Oil , 1965-1997 , Inflatio n Adjuste d t o 199 7 Dollar s $2.5 0

$0.0 0

. 1965 1969 1973 197 7 198 1 1985 1989 1993 1997 Source : Burea u o

fLabo rStatistics
. Inflatio n adjuste d b yAPI
. A s Figur e 5 shows , th e rea l pric e o fheatin g oi l more tha n double d fro m 1974 t o 1981

. By1981 , th e averag e pric e fo rheatin g oi l ha d rise n t o more tha n $2.2 0 a gallo n i n 199 7 dollars

. Whil e natura l ga s price s als o ros e durin g th e las t hal f ofth e 1970's , i n 198 1 th e residentia l cos t o f* heatin g oi l was , o n average , more tha n twic e th e cos t o fnatura l ga s fo rth e sam e hea t content

. Afte rpeakin g i n 1981 , th e rea l pric e o fheatin g oi l fel l a s worl d crud e price s decline d fro m thei r record levels

. Fro m 198 1 t o 1988 , heatin g oi l price s fell , i n rea l terms , byabou t 5 0 percent

. Followin g slightl yhighe rprice s i n 1990 , price s tende d t o fal l throug h 1995

. Heatin g oi l price s the n ros e i n 1996 , mainl ydu e t o highe rcrud e prices

. Price s fel l agai n i n 1997 , accompanyin g a 2 5 percen t declin e i n worl d crud e price s fro m Januar yt o December ; an d continue d t o fal l i n th e firs t month s o f1998

.

1 0 

## / £P.1 7

Ove rth e long-ru n th e averag e yearl ypric e of heatin g oi l ha s bee n closel ytie d to th e averag e cos t ofcrude

. Tabl e 4 show s th e relationshi p betwee n th e pric e ofcrud e oi l an d th e wholesal e an d retai l price s ofheatin g oil

. Th e retai l price s i n Tabl e 4 d o not includ e taxes

. Tabl e 4 Component s o fHeatin g Oi l Prices , 1978-199 7 Inflatio n Adjuste d t o 199 7 Dollar s pe rGallo n

197 8 197 9 198 0 198 1 198 2 198 3 198 4 198 5 198 6 198 7 198 8 198 9 199 0 199 1 199 2 199 3 199 4 199 5 199 6 199 7 Cos t of Crud e $0,73 0 $0,93 3 $1,30 2 $1,48 1 $1,26 2 $1,11 2 $1,05 3 $0,95 0 $0,50 7 $0,60 2 $0,47 4 $0,55 4 $0,65 0

. $0,53 5 $0,50 2 $0,43 4 $0,40 2 $0,43 2 $0,50 4 $0,45 4 holesal e

Price $0,90 8 $1,25 8 $1,56 4 $1,72 3 $1,52 0 $1,31 3 $1,26 8 $1,15 8 $0,71 2 $0,74 5 $0,64 2 $0,73 1 $0,85 6 $0,73 3 $0,66 2 $0,60 4 $0,54 8 $0,53 8 $0,65 4 $0,58 9 Retai l

Price $1,20 6 $1,55 6 $1,89 7 $2,10 8 $1,92 9 $1,73 7 $1,68 5 $1,57 1 $1,22 4 $1,13 5 $1,10 3 $1,16 5 $1,30 5 $1,20 1 $1,06 8 $1,01 2 $0,95 7 $0,91 3 $1,01 2 $0,98 4 Refiner' s

Marqi n $0,17 8 $0,32 5 $0,26 2 $0,24 2 $0,25 8 $0,20 1 $0,21 5 $0,20 7 $0,20 4 $0,14 2 $0,16 8 $0,17 8 $0,20 6 $0,19 8 $0,16 0 $0,17 0 $0,14 6 $0,10 6 $0,14 9 $0,13 5 Marketing

Cos t $0,29 8 $0,29 8 $0,33 3 $0,38 5 $0,40 9 $0,42 4 $0,41 7 $0,41 3 $0,51 3 $0,39 0 $0,46 1 $0,43 4 $0,44 9 $0,46 8 $0,40 6 $0,40 8 $0,40 9 $0,37 5 $0,35 8 $0,39 5 Source : U S DOE/EIA , Petroleum Marketing

Monthly Durin g th e winte ro f1997-1998 , price s o fheatin g oi l wer e betwee n 1 3 an d 1 7 cent s lowe rtha n th e yea rbefore

. Residentia l consumers pai d abou t $ 1 pe rgallo n durin g th e firs t par t o fth e winter ; by th e beginnin g o fMarc h th e pric e ha d falle n t o $0.9 5 a gallon

. Crud e oi l price s were a s muc h a s $ 9 a barre l lowe rtha n durin g th e winte rbefore

. Unusuall ywar m temperatures , particularl yi n th e firs t thre e month s o f1998 , als o mayhav e contribute d t o lowe rheatin g oi l prices

. Tota l distillat e stocks at th e beginnin g o fth e winte r als o were higher , reducin g th e pressur e o n distillat e prices

.

1 1
/ &P.1 8



# V
. Comparative Heatin g Cost s
Tota l heatin g oi l consumptio n bega n t o fal l i n th e 1970's

. Whil e i n th e short-ru n residentia l an d commercia l customer s have littl e opportunityt o chang e howthe yheat , i n th e long-ru n consumer s ca n replac e thei rheatin g syste m an d inves t i n energ yconservation

. Ove rtime , th e percentag e o fhome s an d busines s that us e heatin g oi l change d a s building s wer e refitte d wit h ne wheatin g system s an d ne wstructure s wer e buil t wit h othe rtype s o fheatin g more ofte n tha n the ywer e i n th e past

. Th e perio d o fth e sharpes t declin e i n heatin g oi l us e occurre d durin g th e lat e 1970' s an d earl y1980's , whe n heatin g oi l price s gre wfaste rtha n thos e o f electricit yo rnatura l gas
. On e wa yt o compar e th e cos t o fdifferen t type s o fheatin g i s t o loo k

a t th e pric e o fa uni t o f energ yused , i.e

. th e pric e pe rBTU

. Figure 6 show s ho wth e price s pe rBT U o fth e thre e mos t popula rtype s o fresidentia l heatin g hav e change d ove rth e las t tw o decades

. Figur e 6 Cos t o fHousehol d Energy , 1979-1997 , Inflatio n Adjusted t o 199 7 Dollars 4 0 | 3 5 c 3 0 o = 2 5 ? 2 0 S . 1 5 

### S 1 ° 

## 5 5 .B; a : a .?;m, -D-D .

—o-c-a.o.o.-o.-ff. i - Q

I r ""T 1 I I I I" " I I I r ,... r ...- , , , ,,,. 1 _ 197 9 198 3 198 7 1991 199 5

- Heatin g O

B --••- •- Electricity—_, —Natura l Ga s
Source : Burea u o fLabo rStatistics
. Inflatio n adjuste d b yAPI
. A s th e pric e o foi l increase d wit h th e Ara b Oi l embarg o i n 197 3 an d agai n durin g th e Iran-Ira q war , th e pric e pe rBT U o fheatin g oi l outpace d othe rtype s o ffuel

. I n contras t t o oi l prices , th e well-hea d pric e o fnatura l ga s wa s subject t o stric t pric e controls

. Thi s le d t o a disparityi n
1 2 

# 17P.1 9

heatin g fue l prices

. Byth e en d of1981 , th e averag e residentia l pric e o fheatin g oi l wa s nearl y$1 6 pe rmillio n BT U (199 7 dollars)

. At th e sam e time , residence s wer e payin g mor e tha n $3 5 pe rmillio n BT U fo relectricityan d les s tha n $ 8 fo rnatura l gas ; however , pric e control s le d t o shortages , an d natura l ga s remaine d unavailabl e fo rman yhome s an d businesse s i n th e Northeast

. Sinc e tha t time , th e pric e o fheatin g oi l ha s declined , an d th e differenc e i n pric e pe rBT U betwee n fue l oi l an d natura l ga s ha s narrowed

. By1994 , th e pric e o fheatin g oi l pe rBT U wa s onl y2 percen t more expensiv e tha n th e pric e o f natura l gas
. I n th e las t tw o years , heatin g oi l ha s bee n 6 t o 1 2 percen t mor e costl ype rBT U tha n natura l gas
. I n th e Northeaster n states , residence s hav e pai d abou t th e sam e pe rBT U fo rheatin g oi l a s othe r part s o fth e country , whil e payin g mor e fo r natura l gas
. A s Figur e 7 shows below , fo rth e las t fiv e year s heatin g oi l ha s bee n les s expensiv e pe rBT U tha n natura l ga s i n th e Northeast , whil e remainin g more expensiv e fo r th e countr

ya s a whole

. I n 1997 , natura l ga s i n th e Northeas t was , o n average , 1 6 percen t mor e costl ype rBT U tha n heatin g oil

. Rgur e 7 Hom e Heatin g Fue l Pric e Difference s (Natura l Gas Minu s Heatin g Oil ) Inflatio n Adjuste d t o 199 7 Dollar s
_ .

B Northeas t

•Tota l U S

198 8 198 9 199 0 199 1 199

2 199 3 199 4 199 5 199 6 199 7 Source : Burea u o

fLabo rStatistics
. Inflatio n adjuste d b yAPI
. Whil e th e relativ e cos t o fenerg yfo rdifferen t fuel s i s on e indicato ro fth e relativ e valu e o f alternativ e heatin g systems , th e actua l cos t o f 1 3 / *heatin g a hom e als o depend s o n th e relativ e efficiencyo fth e heatin g syste m an d th e building

. Arecen t Departmen t o fEnerg yrepor t calculate d th e averag e househol d expenditure s fo rheatin g i n 1993

. Thi s report adjuste d heatin g expenditure s bydividin g individua l averag e expenditure s byth e numbe ro fheatin g degree
days an d th e numbe ro fsquar e fee t o fth e residence

. Whe n calculate d i n thi s fashion , th e averag e nationa l pric e pai d fo rfue l oi l wa s lowe r tha n tha t o feithe rnatura l ga s o relectricity

. Th e expenditure s ar e reporte d i n Tabl e 5 below

. Tabl e 5 Househol d Expenditure s b y Space-Heatin g Intensity , 199 3 (Cents/Heatin g Degree-Day*100 0 Sq
. Ft. )

Electricit yNatura l Ga s Fue l Oi l Northeas t Midwes t Sout h Wes t

Source : U S DOE/EIA , Household Energy Consumption and Expenditures, 1993 6. 2

5. 1 8. 2 6. 0 6. 1

4. 0 7. 0 4. 7 5. 2

3. 4 6. 9 5. 0

1 4 

# /< ?P.2 1



# VI
. Inventories , th e PossibilityofSuppl y Disruptions , an d th e Rol e ofGovernmen t
Fo rhome s an d businesse s whic h rel yo n heatin g oil , timel ysuppl yi s essential

. Occasionally , sever e weathe rmaymak e i t difficul t fo rretai l heatin g oi l dealer s t o servic e individua l home s an d businesses

. Thi s sort o fshort-ter m disruptio n i s possibl e fo rmos t service s use d by consumers , includin g phon e service s an d electricity

. Nationally , however , th e suppl yo f heatin g oi l i s remarkabl ydependable , an d illustrate s th e efficien t operatio n o fa n unregulate d market

. Lowe rinventorie s i n recen t years le d t o som e concer n tha t heatin g oi l stock s migh t b e inadequat e t o mee t deman d durin g a perio d o f heav yuse
. Th e leve l o fdistillat e oi l inventorie s a t th e en d o fSeptembe rha s decline d sinc e th e lat e 1970' s an d earl y1980's

. A t tha t time , inventorie s goin g int o th e winte rheatin g seaso n usuall y exceede d 20 0 millio n barrels

. Byth e en d o fth e 1980's , inventorie s goin g int o th e winte rmonth s wer e typicall ybetwee n 12 0 an d 15 0 millio n barrels

. I n 1996 , inventorie s a t th e en d o f Septembe rwer e onl y11 5 millio n barrels , th e lowes t the yha d bee n a t thi s poin t i n th e yea rin " decades

. Th e declin e i n inventorie s reflect s th e reductio n i n th e rol e playe d bystoc k draw s i n meetin g winte rdistillat e supply

. I n 197 8 an d 1979 , abou t 6 0 millio n gallon s wer e consume d ou t o f inventorie s eac h daydurin g Januar yan d February

. By1996 , stoc k draw s wer e onl y2 3 millio n gallon s a daydurin g thes e months

. Althoug h domesti csuppl yi s les s relian t o n stocks , th e domesti cindustr ycontinue s t o buil d inventorie s i n orde rt o mee t winte rheatin g demand

. Durin g period s o funexpectedl ystron g demand , suc h a s a prolonge d col d sna p i n th e Northeast , distillat e inventorie s playa ver y
1 5 

# P Oimportan t rol e i n insurin g a n uninterrupte d suppl y o fheatin g oi l t o home s an d businesses

. Ther e i s a limi t t o th e amoun t o fheatin g oi l tha t ca n b e take n ou t ofstorage

. I fdistillat e inventorie s dro p belo wa certai n level , know n a s th e minimu m operatin g level , ther e coul d b e disruption s i n th e suppl ynetwork , resultin g i n shortages

. Whil e th e concep t o fa minimu m operatin g leve l i s widel yaccepted , ther e i s uncertaintyabou t wha t tha t leve l actuall yis

. I n th e mid-1980's , th e Nationa l Petroleu m Counci l estimate d th e minimu m operatin g leve l fo r distillat e t o b e 8 5 millio n barrels

. Technologica l improvement s an d marketin g innovation s hav e reduce d th e require d level s o f inventorie s throughou t th e suppl ynetwork

. Inventorie s o ftota l distillat e hav e falle n a s lo wa s 8 9 millio n barrel s a t th e en d o fMarc h i n 1996 , wit h n o sig n o fdisruption

. I n 1997 , gasolin e inventorie s fel l abou t 2 0 millio n barrel s lowe r tha n th e NP C estimat e o fth e minimu m operatin g leve l fo rtha t fuel , als o wit h n o indication s o f suppl yfailure

. Th e actua l minimu m operatin g leve l fo rdistillat e inventorie s ma ywel l b e considerabl ylowe rtha n th e recent-yea rlow

. Th e leve l ofinventorie s kep t availabl e b yprimary supplier s an d retai l marketer s i s no t regulated

. Eac h individua l markete rchoose s t o kee p th e leve l o finventor

ytha t wil l maximiz e tha t marketer' s busines s prospects

. Suppliers fac e stif fpenaltie s i n th e competitiv e marke t fo rfailin g t o correctl yestimat e th e leve l o finventorie s tha t the ywil l need

. I finventorie s ar e to o high , marketer s payunnecessar ystorag e costs , reducin g profits

. I finventorie s ar e to o low , the y los e customer s t o thei rcompetitors

. Thus , marke t incentive s insur e tha t private , unregulate d supplier s o fdistillat e adequatel y prepar e fo reac h winter

. Sinc e th e en d o fWorl d Wa rII , n o disruption s hav e occurre d i n servic e du e t o a n inadequat e suppl yo fheatin g oi l o n th e nationa l level

. Consumer s als o ar e concerne d abou t th e effec t tha t stron g deman d an d lo wstock s mayhav e o n prices

. Price s fo rheatin g oi l ten d t o b e highes t whe n th e deman d fo rheatin g oi l i s at it s peak , 1 6 & \an d lo winventorie s maycontribut e t o short-ter m pric e spikes

. Som e legislators have suggeste d requirin g a minimu m leve l o fstorage , perhap s limite d t o th e Northeast , t o guard agains t potentia l shortfall s an d pric e spikes

. Suc h a progra m wa s no t necessar yi n th e past , an d woul d interfer e wit h th e fre e functionin g o f th e market

. Aprogra m tha t mandate s a give n leve l ofreserve s likel ywoul d rais e th e cos t t o consumers , sinc e i t woul d rais e th e expense s o f suppliers

. Consumers hav e othe rway s o f protectin g themselve s agains t sudde n pric e increase s durin g winte rcol d snaps
. Fo r example , man yheatin g oi l retailers allo w customers t o loc k

int o a singl e pric e a t th e start o fth e season , protectin g th e consume ragains t sudde n pric e spikes

. I n addition , consumer s ca n choos e whe n t o hav e thei rtanks filled , an d usuall yca n bu ysom e o fth e heatin g oi l the y requir e off-seaso n at a lowe rprice

. Poore rconsumers , wh o mayb e particularl y vulnerabl e t o rapi d change s i n heatin g costs , receiv e som e federa l assistanc e fro m th e Lo w Incom e Hom e Energ yAssistanc e Progra m (LIHEAP) , sponsore d byth e U.S

. Departmen t o f Healt h an d Huma n Services

. LIHEA P provide s bloc k grant s t o hel p eligibl e low-incom e household s mee t thei rhom e energ yneeds

. I n 1995 , LIHEA P helpe d ove r5 millio n household s mee t thei rhom e heatin g costs

. Ove rth e las t 5 0 years , th e experienc e i n th e - domesti cheatin g oi l marke t ha s show n tha t a n unregulate d grou p o fsupplier s ca n efficientl y mee t th e need s o fthei rcustomers

. I fanything , efficiencyi n thi s marke t ha s continue d t o improve , implyin g tha t customer s wil l continu e t o receiv e supplie s whe n an d wher e needed , i n adequat e quantitie s t o fulfil l thei rneeds

.

17 

# £<£
.P.2 4

1 8 

# &3

# Source s
America n Ga s Association , Residential Natural Gas Marketing

Survey, 1996, October , 1997

. America n Petroleu m Institute , Basic Petroleum Databook, Vol

. XVII, No

. 2 , July , 1997 , Sectio n 7 , Tabl e 9

. U.S

. Departmen t ofCommerce , Censu s Bureau , Characteristics

of New Housing 1996, C25/96
- A , Jun e 1997 , Tabl e 10

.

, 1992 Census of Retail Trade± http://www

. census.qov/Drod/www/titles.html#C21

. (July , 1998. ) U.S

. Departmen t o fEnergy , Energ yInformatio n Administration , Fuel

Oil and Kerosene

Sales 1996, Septembe r1997

. DOE/EIA-053 5 (96) , Table s 1 3 an d 16

.

, Household

Energy Consumption

and Expenditures

1993, Octobe r1995 , DOE/EIA
032 1 (93) , Chapte r5

.

, Petroleum

Marketing

Monthly, May , 1998 , DOE/EIA-038 0 (98/05) , Tabl e 1 , Tabl e 4 an d Tabl e 15

.

, Petroleum

Supply Annual, 1993-1997, Vol

. 2 , DOE/EIA-034 0 (93-97 ) 2 , Tabl e 3 , fo r, eac h month

. U.S

. Departmen t o fLabor , Burea u o fLabo r Statistics , "Averag e Pric e Series, " Fue l Oil , Pe r Gallo n - APU000072511

. http://146.142.4.24/ cqi-bin/survevmost?a p (July , 1998. ) Thi s websit e als o provide d th e CP I dat a use d t o convert price s t o curren t dollars

. U.S

. Departmen t o fHealt h an d Huma n Services , Administratio n fo rChildre n an d Families , "Lo w Incom e Hom e Energ yAssistanc e Progra m (LIHEAP), " http://www.acf.dhhs.gov/proqrams/ liheap/liheap.ht m (July

. 1998. )

1 9 

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