P.1 

OAR Box 1669 

Prepped by Charmelle Mathews 

Document Number: 

£8) 11-1-6 

Docket Number: 

A-98-13 

Printed 9/23/2008 9:36:49 AM Sheet 98 of 110 
A'f?-/3 

ar-jr-k 

P.2 

* 

American 

Petroleum 

Institute 

Heating Oil in the 

United States 

m - 5 #53! 

tPAAIHOtX^' 

Policy Analysis and Strategic 

Planning Department 

August 1998 
P.3 

Heating Oil in the 

United States 

Jim Lockhart' 

Policy Analysis and Strategic 

Planning Department 

August 1998 

*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.4 
P.5 

Table of Contents 

I. Overview 1 

III. Supply .7 

IV. Prices 10 

V. Comparative Heating Costs 12 

VI. Inventories, the Possibility of Supply 

Disruptions, and the Role of 

Government 15 

Sources 19 

H 
P.6 

IV 

s* 
I. Overview 

P.7 

In 1997, heating oil prices averaged $1,014 per 

gallon, about one-half cent lower than in 1996. 

Prices fell steadily during 1997 from their peak of 

$1,136 during January to a low of $0,945 in 

August, ending the year at $0,979. 

Figure 1 

National Average Heating Oil Prices 

$1.20 

$1.10 

c 

3 $1.00 

o 

$0.90 

$0.80 

. 9 , 

^ \ 5 . 

. *— • 

. m 

—o—1995 

- -•- - 1996 

—A—199 7 

a

\*_-

. A 

4* 

JB ^^ A _ 

J3 

$0.70 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 

Month 

Source: Bureau of Labor Statistics 

Home heating oil accounts for just less than 20 

percent of all the distillate oil sold in the United 

States, and 3 to 4 percent of all petroleum used. 

In 1996, homes and businesses purchased more 

than 10 billion gallons of heating oil, most of it 

concentrated in New England and the MidAtlantic states. Heating oil was used in an 

estimated 10.7 million households and more 

than 500,000 commercial buildings. Total <-

expenditures on heating oil in 1996 were more 

than 10 billion dollars. 

Final demand figures for 1997 are not yet 

available, but demand for heating oil is estimated 

to have been below average, due to a very mild 

winter. Demand for heating oil in 1996 was 

slightly higher due to unusually cool weather 

during the first three and last three months in the 

Northeastern U.S. In all, this cold spell during 

1996 is estimated to have increased the total 

demand for heating oil by about 50 million 

gallons. 

During the winter months of 1997, domestic 

refiners supplied, on average, more than 141 

^ 
P.8 

million gallons of distillate oil a day, or 93.6 

percent of the distillate consumed during this 

period. In January and February, inventories of 

distillate added nearly 15 million gallons to 

supplies each day. Over all of the winter months, 

inventories accounted for about 3.8 percent of all 

deliveries. The final 2.7 percent of deliveries 

came from net imports. 

Table 1 below shows the recent price of heating 

oil for the country as a whole and for some 

selected cities in the Northeast. Differences in 

prices between cities in the Northeast are largely 

due to differences in the costs of transporting, 

storing and marketing heating oil from city to city. 

Table 1 

Price of Distillate Fuel Oil, 1996-97 

Avg. U.S. New York Philadelphia Boston 

1996 

Jan $1,007 $1,138 $0,982 $1,022 

Feb $1,001 $1,108 $0,975 $1,019 

Mar $1,020 $1,125 $0,991 $1,069 

Apr $1,065 $1,171 $1,041 $1,127 

May $1,038 $1,114 $1,006 $1,101 

Jun $0,969 $1,055 $0,892 $1,013 

Jul $0,935 $1,023 $0,856 $0,969 

Aug $0,934 $1,029 $0,875 $0,962 

Sep $0,980 $1,081 $0,909 $0,999 

Oct $1,063 $1,168 $1,004 $1,103 

Nov $1,097 $1,204 $1,054 $1,140 

Dec $1 121 $1 224 $1 082 $1,168 

[Avxi;r.6 "Il^?^S^^^}i 2oT Fll^^l^^_^^^E.e^1 

1997 

Jan $1,136 $1,240 $1,077 $1,174 

Feb $1,127 $1,229 $1,050 $1,168 

Mar $1,079 $1,185 $0,989 $1,107 

Apr $1,046 $1,135 $0,969 $1,093 

May $1,031 $1,153 $0,966 $1,062 

Jun $1,001 $1,120 $0,914 $1,039 

Jul $0,957 $1,042 $0,880 $0,988 

Aug $0,945 $1,032 $0,874 $0,970 

Sep $0,945 $1,033 $0,879 $0,961 

Oct $0,956 $1,042 $0,887 $0,979 

Nov $0,970 $1,063 $0,889 $0,986 

Dec $0 979 $1 078 $0 899 $0,994 

Avg, 97 ' ^ $101.'* $T113_ J $0 939V g#$1:043 

Source: Bureau of Labor Statistics 

2 

7 
P.9 

II. Demand 

Heating oil is the primary source of space 

heating for millions of businesses and 

residences, concentrated in the Northeast. 

Between 1990 and 1996, the annual demand for 

heating oil for commercial and residential use 

ranged between 9 and 11 billion gallons a year. 

At the same time, farm use averaged between 3 

and 3.5 billion gallons a year. This is shown in 

Figure 2 below. 

Figure 2 

Sales of Heating Oil 

(A 

c 

JO 

O 

o 

in 

c 

o 

a 

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 

t Resdiential m Commercial r_ Farm 

Source: US DOBBA, Fuel Oil and Kerosene Sales, 1996 

As a country, the U.S. now uses less heating oil 

than it did in the 1970's, when demand was at its 

peak. As Figure 3 shows, annual domestic use 

of heating oil is down by about 10 billion gallons 

from its peak in 1976. -

o 

"5 

25 

20 

15 

10 

Figure 3 

Long-Term Heating Oil Use (1947-1997) 

11 i . i I.I. I i . i . i . i . i . i . i . 

1947 1955 1963 1971 1979 1987 

Source: API, Basic Petroleum Databook 

1995 
P.10 

The decline in heating oil use reflects the 

increased availability of natural gas in the 

Northeast, the development of more efficient 

electric heating systems, and the investment in 

energy conservation by homes and businesses, 

all of which coincided with high oil prices. 

Currently, heating oil use is about the same as it 

was in the late 1950's. 

Commercial and residential heating oil 

accounted for 3.6 percent of all petroleum 

consumed domestically in 1996, down from 4.6 

percent ten years before. Commercial and 

residential use represents only about 20 percent 

of the more than 50 billion gallons of total 

distillate used each year, down from 25 percent 

ten years ago. Farm use of distillate, including 

heating oil, accounted for another 6 percent of all 

distillate used. Construction, the military, 

industry, electric utilities, and transportation 

accounted for the rest of distillate consumption. 

Recently, trucking use has been the fastest 

growing segment of distillate demand, 

accounting for only 40 percent of distillate oil 

sold in 1986, but more than 52 percent in 1996. 

As Figure 4 illustrates, heating oil use is 

concentrated in a relatively small part of the 

country. Ninety percent of domestic use and 70 

percent of commercial use is concentrated in 

New England, the Mid-Atlantic States, and the 

Great Lakes states. 

Figure 4 

Sales of Heating Oil By Region, 1996 

New 

England 

MdWest 

14% 

Mid Atlantic 

43% 

Source: US DOBBA, Fuel Oil and Kerosene Sales, 1996 

<? 
P.11 

There are several reasons for the geographic 

concentration of heating oil use. Natural gas -

the type of heating most commonly used in 

residences - was not as widely available in the 

Northeast as it was in other parts of the country 

until quite recently. In addition, earlier electric 

heating systems were very inefficient against the 

colder climate of the region. Nationally, 

residences which use oil-heat make up about 11 

percent of all households, while accounting for 

nearly 40 percent of the households in the MidAtlantic and New England. Table 2 lists the 

states where commercial and residential use is 

highest. 

Table 2 

Use of Heating Oil in the 15 states with 

the Highest Demand 

(Millions of Gallons) 

ssmflEss 

New York 

Pennsylvania 

Massachusetts 

New Jersey 

Connecticut 

Maine 

Virginia 

Maryland 

North Carolina 

New Hampshire 

Michigan 

Ohio 

Wisconsin 

Minnesota 

Rhode Island 

Residential 

", .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 

Commercial 

: 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 

Total 

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: US DOE7EIA, Fuel Oil and Kerosene Sales, 1996 

On average, a single-family residence with a 

heating oil furnace used about 750 gallons of 

fuel oil in 1993. Assuming that consumption per 

household in 1997 was roughly the same as it 

was in 1993, the owner of the average singlefamily residence would have paid roughly $760 

for heating oil in 1997. 

/O 
P.12 

The relationship between unusually cold weather 

and oil-heat consumption is obvious, but difficult 

to assess quantitatively. In general, a one 

percent increase in the number of heating 

degree-days is estimated to increase 

consumption by about two-thirds of one percent. 

However, the price of distillate, which depends 

on the world supply and price of crude oil, also 

influences heating oil use. 

Ongoing conversions of homes heated by oil to 

other heating systems, primarily natural gas, are 

expected to influence future heating oil 

consumption. In New England alone, more than 

7,500 homes converted from oil heat to natural 

gas in 1996. At the same time, however, many 

new homes are constructed with oil-burning 

furnaces. Thirty-two percent of all new houses, 

or 35 thousand homes, were constructed in the 

Northeast in 1996 with oil heat systems. These 

new homes, as well as the retirement of 

buildings that rely on heating oil as the primary 

source of heating, offset the conversion of 

existing homes and businesses to other fuels. 

/ / 
P.13 

. Supply 

Heating oil is a small part of total distillate 

deliveries, and the supply of heating oil is 

influenced directly by the supply of all distillate 

oil. Virtually all the heating oil consumed each 

winter is distillate oil, which has been produced 

in a domestic refinery for immediate use, 

imported, or taken from inventories. Since 

heating oil is a blend, it may also contain small 

amounts of other products, such as kerosene 

and kerosene jet fuel. 

Although most heating oil is produced as highsulfur distillate oil, it may also contain low-sulfur 

distillate meeting the specifications for highway 

use. The Clean Air Act Amendments of 1990 

require on-highway transportation, primarily 

heavy trucks, to use a distillate fuel with a sulfur 

content of less than .05 percent. Low-sulfur 

distillate meeting the requirements for onhighway use currently makes up about 60 

percent of the total distillate sold. Since the 

introduction of low-sulfur distillate into the market 

in 1994, the amount of low-sulfur diesel used 

each year exceeds the estimated demand from 

on-highway trucking. This suggests that at least 

some low-sulfur distillate is sold as heating oil. 

In 1996 and 1997, the wholesale price of lowsulfur diesel was, on average, between 2 and 3 

cents a gallon more than high-sulfur distillate. ^ 

This discouraged the use of low-sulfur distillate 

as heating oil by businesses and residences. 

However, strong demand for heating oil can 

eliminate or even reverse the low sulfur price 

premium, as it did during the most of the winter 

months of 1996. 

Most distillate oil is produced at a domestic 

refinery and immediately passed on to the retail 

market. In the last five years, refinery production 

during the winter months has accounted for 95 

percent of all distillate used in the same month. 

Stock draws have accounted for another 5 

percent of the distillate use. Net imports, on 

average, have played an insignificant role in the 

total supply of distillates during the winter. 

/ ^ 
Table 3 

Sources of Winter Distillate Supply, 1993-1997 

(Millions of Gallons per Day) 

P.14 

1993 

Jan 

Feb 

Mar 

Oct 

Nov 

Dec 

Refinery 

Production 

122.4 

118.2 

122.6 

144.1 

145.9 

142.0 

Net 

Imports 

-4.4 

-3.2 

3.4 

0.2 

-5.4 

-12.3 

Stock 

Draws 

13.4 

30.5 

17.6 

-19.0 

-5.3 

11.2 

Final 

Deliveries 

131.3 

145.5 

143.6 

125.3 

135.2 

141.0 

.1994" 

Jan 

Feb 

Mar 

Oct 

Nov 

Dec 

\v_? T r-^T. - r v r~ 

-.. > ,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 

Jan 

Feb 

Mar 

Oct 

Nov 

Dec 

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 

Jan 

Feb 

Mar 

Oct 

Nov 

Dec 

- i__K^_*> _ ***r -4twA«*rfM ___> -*. 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 

•-sr 

22.8 

23.6 

9.6 

0.3 

-9.8 

-6.7 

154.6 

156.3 

145.0 

150.4 

144.6 

142.7 

Jan 

Feb 

Mar 

Oct 

Nov 

Dec 

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: US DOE/EIA, Petroleum Supply Annual, annually, 1993-1997 

In Table 3 above, stock draws refer to the 

supplies of heating oil taken from inventories 

held by refineries and large distribution centers, 

but not to those held by consumers or retailers. 

The stocks held by primary suppliers, although 

accounting for a relatively small part of total 

/3 
P.15 

deliveries during the winter, can be very 

important. For example, in January 1994, more 

than 30 million gallons of distillate were drawn 

from primary storage. 

In the last few years, the percentage of winter 

distillate supply taken from stocks has declined. 

This decline accompanied the increase of other 

types of distillate demand, such as on-highway 

trucking, which do not have a strongly seasonal 

pattern of demand. Thus, the ratio of seasonal 

heating oil demand to total distillate demand in 

the winter months has been falling. Less reliance 

on stocks also is at least in part due to 

improvements in inventory management and 

other cost-reducing innovations by refiners and 

bulk dealers. 

While net imports of distillate have typically been 

a tiny part of supply, they accounted for more 

than two percent of total winter deliveries in 

1997. The U.S is commonly both an importer 

and an exporter of distillate fuel during the 

winter. Imports are concentrated in the 

Northeast, where heating oil demand is 

strongest, while the West Coast tends to be a 

net exporter. 

Although most heating oil is consumed on the 

East Coast, to a large extent it is refined 

elsewhere. In 1996, a total of 19.6 billion gallons 

of distillate were sold on the East Coast. During 

the same year, approximately 11.3 billion gallons 

were shipped from the states along the Gulf * 

Coast to the East Coast. 

Consumers buy heating oil from independent 

retailers, who compete with one another to 

provide the lowest cost and the best service. In 

1992, there were more than 5,000 fuel oil 

dealers nationwide, employing about 44 

thousand people. With 868 fuel oil dealers, New 

York had more dealers than any other state. 

Massachusetts followed with 642. 

/t 
IV. Prices 

The inflation-adjusted price of heating oil in the 

mid 1990's was less than half the price that it 

was during 1981, when heating oil prices were at 

their peak. Most of the year-to-year change in 

heating oil prices is due to changes in the price 

of crude oil; however, the levels of heating oil 

inventories and the relative severity of winters 

also influence prices. 

Figure 5 

Retail Price of Fuel Oil, 1965-1997, 

Inflation Adjusted to 1997 Dollars 

$2.50 

$0.00 

. 1965 1969 1973 1977 1981 1985 1989 1993 1997 

Source: Bureau of Labor Statistics. Inflation adjusted by API. 

As Figure 5 shows, the real price of heating oil 

more than doubled from 1974 to 1981. By 1981, 

the average price for heating oil had risen to 

more than $2.20 a gallon in 1997 dollars. While 

natural gas prices also rose during the last half 

of the 1970's, in 1981 the residential cost of * 

heating oil was, on average, more than twice the 

cost of natural gas for the same heat content. 

After peaking in 1981, the real price of heating 

oil fell as world crude prices declined from their 

record levels. From 1981 to 1988, heating oil 

prices fell, in real terms, by about 50 percent. 

Following slightly higher prices in 1990, prices 

tended to fall through 1995. Heating oil prices 

then rose in 1996, mainly due to higher crude 

prices. Prices fell again in 1997, accompanying a 

25 percent decline in world crude prices from 

January to December; and continued to fall in 

the first months of 1998. 

10 

/£ 
P.17 

Over the long-run the average yearly price of 

heating oil has been closely tied to the average 

cost of crude. Table 4 shows the relationship 

between the price of crude oil and the wholesale 

and retail prices of heating oil. The retail prices 

in Table 4 do not include taxes. 

Table 4 

Components of Heating Oil Prices, 1978-1997 

Inflation Adjusted to 1997 Dollars per Gallon 

1978 

1979 

1980 

1981 

1982 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

Cost of 

Crude 

$0,730 

$0,933 

$1,302 

$1,481 

$1,262 

$1,112 

$1,053 

$0,950 

$0,507 

$0,602 

$0,474 

$0,554 

$0,650 

. $0,535 

$0,502 

$0,434 

$0,402 

$0,432 

$0,504 

$0,454 

holesale 

Price 

$0,908 

$1,258 

$1,564 

$1,723 

$1,520 

$1,313 

$1,268 

$1,158 

$0,712 

$0,745 

$0,642 

$0,731 

$0,856 

$0,733 

$0,662 

$0,604 

$0,548 

$0,538 

$0,654 

$0,589 

Retail 

Price 

$1,206 

$1,556 

$1,897 

$2,108 

$1,929 

$1,737 

$1,685 

$1,571 

$1,224 

$1,135 

$1,103 

$1,165 

$1,305 

$1,201 

$1,068 

$1,012 

$0,957 

$0,913 

$1,012 

$0,984 

Refiner's 

Marqin 

$0,178 

$0,325 

$0,262 

$0,242 

$0,258 

$0,201 

$0,215 

$0,207 

$0,204 

$0,142 

$0,168 

$0,178 

$0,206 

$0,198 

$0,160 

$0,170 

$0,146 

$0,106 

$0,149 

$0,135 

Marketing 

Cost 

$0,298 

$0,298 

$0,333 

$0,385 

$0,409 

$0,424 

$0,417 

$0,413 

$0,513 

$0,390 

$0,461 

$0,434 

$0,449 

$0,468 

$0,406 

$0,408 

$0,409 

$0,375 

$0,358 

$0,395 

Source: US DOE/EIA, Petroleum Marketing Monthly 

During the winter of 1997-1998, prices of heating 

oil were between 13 and 17 cents lower than the 

year before. Residential consumers paid about 

$1 per gallon during the first part of the winter; by 

the beginning of March the price had fallen to 

$0.95 a gallon. Crude oil prices were as much as 

$9 a barrel lower than during the winter before. 

Unusually warm temperatures, particularly in the 

first three months of 1998, also may have 

contributed to lower heating oil prices. Total 

distillate stocks at the beginning of the winter 

also were higher, reducing the pressure on 

distillate prices. 

11 

/ & 
P.18 

V. Comparative Heating 

Costs 

Total heating oil consumption began to fall in the 

1970's. While in the short-run residential and 

commercial customers have little opportunity to 

change how they heat, in the long-run 

consumers can replace their heating system and 

invest in energy conservation. Over time, the 

percentage of homes and business that use 

heating oil changed as buildings were refitted 

with new heating systems and new structures 

were built with other types of heating more often 

than they were in the past. The period of the 

sharpest decline in heating oil use occurred 

during the late 1970's and early 1980's, when 

heating oil prices grew faster than those of 

electricity or natural gas. 

One way to compare the cost of different types 

of heating is to look at the price of a unit of 

energy used, i.e. the price per BTU. Figure 6 

shows how the prices per BTU of the three most 

popular types of residential heating have 

changed over the last two decades. 

Figure 6 

Cost of Household Energy, 1979-1997, 

Inflation Adjusted to 1997 Dollars 

40 

| 35 

c 30 

o 

= 25 

? 20 

S. 15 

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 _ 

1979 1983 1987 1991 1995 

- Heating OB --••-• - Electricity —_, — Natural Gas 

Source: Bureau of Labor Statistics. Inflation adjusted by API. 

As the price of oil increased with the Arab Oil 

embargo in 1973 and again during the Iran-Iraq 

war, the price per BTU of heating oil outpaced 

other types of fuel. In contrast to oil prices, the 

well-head price of natural gas was subject to 

strict price controls. This led to a disparity in 

12 

17 
P.19 

heating fuel prices. By the end of 1981, the 

average residential price of heating oil was 

nearly $16 per million BTU (1997 dollars). At the 

same time, residences were paying more than 

$35 per million BTU for electricity and less than 

$8 for natural gas; however, price controls led to 

shortages, and natural gas remained unavailable 

for many homes and businesses in the 

Northeast. 

Since that time, the price of heating oil has 

declined, and the difference in price per BTU 

between fuel oil and natural gas has narrowed. 

By 1994, the price of heating oil per BTU was 

only 2 percent more expensive than the price of 

natural gas. In the last two years, heating oil has 

been 6 to 12 percent more costly per BTU than 

natural gas. 

In the Northeastern states, residences have paid 

about the same per BTU for heating oil as other 

parts of the country, while paying more for 

natural gas. As Figure 7 shows below, for the 

last five years heating oil has been less 

expensive per BTU than natural gas in the 

Northeast, while remaining more expensive for 

the country as a whole. In 1997, natural gas in 

the Northeast was, on average, 16 percent more 

costly per BTU than heating oil. 

Rgure 7 

Home Heating Fuel Price Differences 

(Natural Gas Minus Heating Oil) 

Inflation Adjusted to 1997 Dollars _. 

B Northeast 

• Total US 

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 

Source: Bureau of Labor Statistics. Inflation adjusted by API. 

While the relative cost of energy for different 

fuels is one indicator of the relative value of 

alternative heating systems, the actual cost of 

13 

/ * 
heating a home also depends on the relative 

efficiency of the heating system and the building. 

A recent Department of Energy report calculated 

the average household expenditures for heating 

in 1993. This report adjusted heating 

expenditures by dividing individual average 

expenditures by the number of heating degreedays and the number of square feet of the 

residence. When calculated in this fashion, the 

average national price paid for fuel oil was lower 

than that of either natural gas or electricity. The 

expenditures are reported in Table 5 below. 

Table 5 

Household Expenditures by 

Space-Heating Intensity, 1993 

(Cents/Heating Degree-Day*1000 Sq. Ft.) 

Electricity Natural Gas Fuel Oil 

Northeast 

Midwest 

South 

West 

Source: US 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 

14 

/<? 
P.21 

VI. Inventories, the 

Possibility of Supply 

Disruptions, and the 

Role of Government 

For homes and businesses which rely on heating 

oil, timely supply is essential. Occasionally, 

severe weather may make it difficult for retail 

heating oil dealers to service individual homes 

and businesses. This sort of short-term 

disruption is possible for most services used by 

consumers, including phone services and 

electricity. Nationally, however, the supply of 

heating oil is remarkably dependable, and 

illustrates the efficient operation of an 

unregulated market. 

Lower inventories in recent years led to some 

concern that heating oil stocks might be 

inadequate to meet demand during a period of 

heavy use. The level of distillate oil inventories at 

the end of September has declined since the late 

1970's and early 1980's. At that time, inventories 

going into the winter heating season usually 

exceeded 200 million barrels. By the end of the 

1980's, inventories going into the winter months 

were typically between 120 and 150 million 

barrels. In 1996, inventories at the end of 

September were only 115 million barrels, the 

lowest they had been at this point in the year in" 

decades. 

The decline in inventories reflects the reduction 

in the role played by stock draws in meeting 

winter distillate supply. In 1978 and 1979, about 

60 million gallons were consumed out of 

inventories each day during January and 

February. By 1996, stock draws were only 23 

million gallons a day during these months. 

Although domestic supply is less reliant on 

stocks, the domestic industry continues to build 

inventories in order to meet winter heating 

demand. During periods of unexpectedly strong 

demand, such as a prolonged cold snap in the 

Northeast, distillate inventories play a very 

15 

PO 
importan

t role in insuring an uninterrupted supply 

of heating oil to homes and businesses. 

There is a limit to the amount of heating oil that 

can be taken out of storage. If distillate 

inventories drop below a certain level, known as 

the minimum operating level, there could be 

disruptions in the supply network, resulting in 

shortages. While the concept of a minimum 

operating level is widely accepted, there is 

uncertainty about what that level actually is. In 

the mid-1980's, the National Petroleum Council 

estimated the minimum operating level for 

distillate to be 85 million barrels. 

Technological improvements and marketing 

innovations have reduced the required levels of 

inventories throughout the supply network. 

Inventories of total distillate have fallen as low as 

89 million barrels at the end of March in 1996, 

with no sign of disruption. In 1997, gasoline 

inventories fell about 20 million barrels lower 

than the NPC estimate of the minimum operating 

level for that fuel, also with no indications of 

supply failure. The actual minimum operating 

level for distillate inventories may well be 

considerably lower than the recent-year low. 

The level of inventories kept available by primary 

suppliers and retail marketers is not regulated. 

Each individual marketer chooses to keep the 

level of inventory that will maximize that 

marketer's business prospects. Suppliers face 

stiff penalties in the competitive market for failing 

to correctly estimate the level of inventories that 

they will need. If inventories are too high, 

marketers pay unnecessary storage costs, 

reducing profits. If inventories are too low, they 

lose customers to their competitors. Thus, 

market incentives insure that private, 

unregulated suppliers of distillate adequately 

prepare for each winter. Since the end of World 

War II, no disruptions have occurred in service 

due to an inadequate supply of heating oil on the 

national level. 

Consumers also are concerned about the effect 

that strong demand and low stocks may have on 

prices. Prices for heating oil tend to be highest 

when the demand for heating oil is at its peak, 

16 

& \ 
and low inventories may contribute to short-term 

price spikes. Some legislators have suggested 

requiring a minimum level of storage, perhaps 

limited to the Northeast, to guard against 

potential shortfalls and price spikes. 

Such a program was not necessary in the past, 

and would interfere with the free functioning of 

the market. A program that mandates a given 

level of reserves likely would raise the cost to 

consumers, since it would raise the expenses of 

suppliers. Consumers have other ways of 

protecting themselves against sudden price 

increases during winter cold snaps. For 

example, many heating oil retailers allow 

customers to lock into a single price at the start 

of the season, protecting the consumer against 

sudden price spikes. In addition, consumers can 

choose when to have their tanks filled, and 

usually can buy some of the heating oil they 

require off-season at a lower price. 

Poorer consumers, who may be particularly 

vulnerable to rapid changes in heating costs, 

receive some federal assistance from the Low 

Income Home Energy Assistance Program 

(LIHEAP), sponsored by the U.S. Department of 

Health and Human Services. LIHEAP provides 

block grants to help eligible low-income 

households meet their home energy needs. In 

1995, LIHEAP helped over 5 million households 

meet their home heating costs. 

Over the last 50 years, the experience in the -

domestic heating oil market has shown that an 

unregulated group of suppliers can efficiently 

meet the needs of their customers. If anything, 

efficiency in this market has continued to 

improve, implying that customers will continue to 

receive supplies when and where needed, in 

adequate quantities to fulfill their needs. 

17 

£<£. 
P.24 

18 

&3 
Sources 

American Gas Association, Residential Natural 

Gas Marketing Survey, 1996, October, 1997. 

American Petroleum Institute, Basic Petroleum 

Databook, Vol. XVII, No. 2, July, 1997, Section 

7, Table 9. 

U.S. Department of Commerce, Census Bureau, 

Characteristics of New Housing 1996, C25/96-

A, June 1997, Table 10. 

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

census.qov/Drod/www/titles.html#C21. (July, 

1998.) 

U.S. Department of Energy, Energy Information 

Administration, Fuel Oil and Kerosene Sales 

1996, September 1997. DOE/EIA-0535 (96), 

Tables 13 and 16. 

, Household Energy Consumption and 

Expenditures 1993, October 1995, DOE/EIA0321 (93), Chapter 5. 

, Petroleum Marketing Monthly, May, 

1998, DOE/EIA-0380 (98/05), Table 1, Table 4 

and Table 15. 

, Petroleum Supply Annual, 1993-1997, 

Vol. 2, DOE/EIA-0340 (93-97) 2, Table 3, for , 

each month. 

U.S. Department of Labor, Bureau of Labor 

Statistics, "Average Price Series," Fuel Oil, Per 

Gallon - APU000072511. http://146.142.4.24/ 

cqi-bin/survevmost?ap (July, 1998.) This 

website also provided the CPI data used to 

convert prices to current dollars. 

U.S. Department of Health and Human Services, 

Administration for Children and Families, "Low 

Income Home Energy Assistance Program 

(LIHEAP)," http://www.acf.dhhs.gov/proqrams/ 

liheap/liheap.htm (July. 1998.) 

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