The Energy Information Administration (EIA), in its October 2008 Short-Term Energy and Winter Fuels Outlook (STEWFO), warned consumers that not only might they expect the prices of natural gas, heating oil, propane, and electricity to be higher in the winter of 2008-2009 compared to those of 2007-2008, but that the National Oceanic Atmospheric Administration's (NOAA's) projections forecast a 2.4% colder winter compared to last year. According to the October STEWFO, the effect of these two factors will be that American consumers might expect to experience sharply higher home heating costs this winter. The December 2008 revision of the STEWFO, demonstrating the importance of the price of oil to American consumers, reduced forecasted winter heating expenditures. For the United States as a whole, the revised STEWFO projections are that natural gas customers might expect to see their expenditures rise by 0.2%, heating oil consumers might see their expenditures fall by 19.6%, propane expenditures might fall by 12.4%, and electricity expenditures might rise by 7.9%. The projected increases in natural gas and electricity costs are likely to put pressure on consumer budgets, and their effects could be even greater in an environment of deteriorating national economic conditions. Even reduced home heating oil and propane expenditures might be a burden when combined with job losses and reduced incomes. These conditions are likely to increase the importance of the Low Income Home Energy Assistance Program (LIHEAP). Reduced oil consumption, related to relatively high prices, as well as slowing economic conditions, are expected to keep the price of oil below peak levels. The oil market demand and supply balance has become more favorable for consumers with relatively large amounts of excess capacity available. Over the coming months oil markets are likely to experience an increase in demand due to lower prices, as well as a reduction of demand due to declining economic growth and production. The market price will respond to the balance between these offsetting factors. This report analyzes the key factors affecting the various winter fuels markets, including consumption, production, reserves, and storage volumes. Table 1 provides a summary profile of the winter heating picture for the winter of 2008-2009 based on U.S. averages. Within the U.S. averages, regional differences can be important. In addition, the NOAA heating degree day projections differ by region. Regionally, the EIA expects natural gas expenditures to increase the most in the South, at 7.7%, and least in the West, at -8.3%. Expenditures in the Northeast are expected to increase by 5.7% and decline in the Midwest by 3.5%. Heating oil expenditures are expected to decline by 19.4% in the Northeast, where the largest proportion of heating oil consumers are located, and in the South by 11.6%. Expenditures on heating oil are forecasted to fall by 24.8% in the Midwest, 31.7% and in the West, well above the national average. Propane expenditures are projected to fall by 9.8% in the Northeast, and 7.7% in the South, 15.2% in the Midwest, and 18.3% in the West. Electricity expenditures are projected to rise by 10.5% in the Northeast, 4.1% in the Midwest, 11.5% in the South, and decline by 0.5% in the West. Differences in regional expenditure projections are due to regional fuel price differentials, varying intensities of consumption during the winter season, and regional variability in the NOAA forecast for heating degree days. Due to volatile market dynamics, the prices used in the STEWFO may not yield the forecasted declines in expenditures. For example, while the STEWFO uses $2.53 as the U.S. average price per gallon in the home heating oil market, the price reported by the EIA for the week of December 1, 2008 was $2.68, or 5.6% more. If oil prices continue to fall, or stabilize at lower levels, the STEWFO estimates could be high. The U.S. natural gas market is a regional market, drawing supplies from domestic sources, 83% in 2007, as well as imports, largely via pipeline from Canada, which accounted for about 16%. In addition, a small part of domestic supply is imported in the form of liquefied natural gas (LNG), which is part of a small world-wide market that is important to some countries, Japan, for example, and is expected to grow in importance in others, including the United States. Consumers of natural gas include households and commercial customers that largely use natural gas for space heating. Electric power generators, especially those operating plants that satisfy peak demand loads, use natural gas to power generators. Industrial consumers use natural gas as a raw material, as for example in fertilizers, and as a heat source in industrial processes. Household, commercial, and electric power generators are those consumers most likely to be affected by winter conditions. Table 2 presents average household natural gas consumption and price data for the winter heating seasons, 2004-2005 through 2008-2009. On a per household basis, natural gas consumption has been relatively stable. Prices spiked in winter 2005-2006, and are projected to exceed earlier peaks in 2008-2009. The price-consumption relationship suggests that natural gas demand is price inelastic, meaning that consumption does not vary sharply with variations in price. An inelastic relationship is likely because home heating and cooking are typically considered to be necessities by households, and, in general, existing metering does not provide consumers easy access to quantities used and costs generated. On the national level, natural gas consumption rose by about 6.5% in 2007 compared to 2006. This increased consumption was led by the electric power sector with a 10.5% increase, and households with a 8.2% increase. The commercial sector increased consumption by 6.1% and industrial consumers increased consumption by 2.2%. The increase in household consumption is largely related to the increasing proportion of households using natural gas. About 52% of U.S. households use natural gas as their primary heating source. U.S. natural gas production is projected to rise by 6.7% in 2008 and by 4.2% in 2009. These increases follow a 4.3% increase in production in 2007. Physical supply from production is expected to be adequate for the winter of 2008-2009. While some hurricane damage did result from the storms of 2008, resulting in a production shut-in of about 165 billion cubic feet of natural gas, total output is still expected to increase in 2008 and 2009. Because natural gas consumption, especially by households, is cyclic and weather related, peaking during the winter heating season, and to a lesser extent during the summer, accumulation of stored gas takes place at other times. Stored natural gas is then released into the supply system during peak periods to augment production. Although the amount in storage at the beginning of the 2008-2009 winter heating season, 3.110 trillion cubic feet, was less than last year at the comparable time, it was still 50 billion cubic feet above the five-year average from 2003 through 2007. Key factors in determining the accuracy of the STEWFO projections are likely to be the weather, the effect of what appears to be a deteriorating economic condition, and the level of oil prices. A colder winter than anticipated will drive up household consumption and costs, especially in the normally colder climate areas. A warmer winter will drive consumption and costs down. The level of economic activity factor is open to several interpretations. Loss of jobs and income would tend to depress consumption, but natural gas used for heating and cooking is a necessity for most consumers. Also, it is unknown how deep the current recession is likely to be. Oil prices are loosely linked to natural gas prices. Historically, the linkage was through fuel substitution; however, fuel oil is now only a minor competitor to natural gas in terms of fuel substitution. More recently, the price linkage is based on energy content. Oil prices have been volatile, reaching a high of over $147 per barrel in the summer of 2008, but falling into the $80 per barrel range at the beginning of the winter 2008-2009 heating season. Home heating oil is a middle distillate, derived from the same part of the oil refining process as diesel fuel. As a result, the price of home heating oil is closely related to the price of oil as well as the price of diesel fuel. Approximately 7% of U.S. households heat with oil, and most of these consumers are in the Northeast, where 31% of total consumers use heating oil as their primary heating fuel. EIA expects average heating oil expenditures per household to fall by $383, or 23.5%, during the winter of 2008-2009. Projected declines in the Northeast are 19.4%, and 11.6% in the South, 24.8% in the Midwest, and 31.7% in the West. Diesel fuel, a product almost identical to home heating oil, has been more expensive than gasoline recently, and at the beginning of the 2008-2009 winter heating season averaged about $0.40 per gallon more than gasoline. This price differential has resulted from U.S. refiners emphasis on gasoline production, and a high level of world demand for diesel fuel. The costs of gasoline, diesel fuel, and heating oil are all directly related to the price of crude oil. The Energy Information Administration (EIA) estimates that about 73% of the cost of gasoline is crude oil cost, and 64% of the cost of diesel fuel and heating oil is crude oil cost. Inventories of home heating oil were affected by Hurricanes Gustav and Ike. At the start of the winter heating season, inventories were at approximately 122 million barrels.