Series of bad moves blamed for spike in oil prices : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Series of bad moves blamed for spike in oil prices

By Scott Allen, Globe Staff, 2/9/2000

s a search for villains intensifies in New England's worst heating oil crisis since the 1980s, energy analysts say the real culprit may be ''a classic case of market failure'' in which just about everything that could go wrong did go wrong in the region's shaky oil distribution system.

From the OPEC ministers who slashed the world oil supply to refiners who cut back on heating oil reserves just as winter approached, the Northeast simply wasn't prepared for a sudden cold spell, according to federal assessments. When the mercury plummeted in January, there wasn't enough heating oil to go around, nearly doubling the price in less than a month.

Today, thousands of vulnerable people are struggling to stay warm, especially in Boston, where Citizens Energy Corp. was forced to stop accepting new applications for fuel aid to the poor and elderly last week. One New Hampshire oil company left its customers out in the cold altogether, stopping all deliveries because it couldn't afford the escalating wholesale prices.

Now, attorneys general across the region are looking for evidence that oil dealers may have gouged their customers, and US Energy Secretary William Richardson is scheduled to come to Boston next week for a strategy session on how to deal with the home heating oil crisis.

Consumer advocates, meanwhile, called on state and federal officials yesterday to put major oil companies on the hot seat, charging that their lack of foresight hurt thousands.

''American oil refiners have a lot of questions to answer,'' said Larry Chretien, executive director of the Boston Oil Consumers Alliance, which provides discount oil to about 6,000 members. ''They were making a whole bunch of gasoline for sport utility vehicles, but they weren't making any [heating] oil.''

But it may already be too late to change the course of the current price panic, which appeared to ease yesterday as the price of newly delivered oil in New York Harbor fell sharply. Even if Richardson releases federally owned oil to be processed into heating oil, it wouldn't be available for up to a month.

Instead, federal and state investigators may have to concentrate on figuring out how to avoid the next crisis, something that may be hard to do as long as New England relies on such an unstable commodity as heating oil to warm homes.

So far, Vermont Representative Bernard Sanders has filed a bill in Congress that would set up a reserve supply in New York Harbor to avoid future shortages. Others have suggested that wholesale oil companies be required to keep a larger reserve.

However, the idea of a fuel reserve has run into opposition in the past because of the cost to maintain it, which Sanders estimated at $225 million over the next 20 years. Some critics say the reserve system would drive up oil prices all the time, rather than only during periodic shortages.

''As bad as this has been, I'm not sure it's worse than under some of the alternatives,'' said Massachusetts Energy Resources Commissioner David O'Connor, noting that this is the first sudden price increase since 1990.

The roots of the current crisis go back to last year when, faced with the lowest inflation-adjusted crude oil prices since the Depression, the Oil Producing and Exporting Countries finally persuaded members to reduce worldwide production. The supply cut, coupled with rising energy demand in Asia, caused an increase in the price for all petroleum products from propane to gasoline.

Up until that time, New England had been blessed with remarkably low and stable heating oil prices. Last year, for example, the price of a gallon of heating oil never topped 80 cents, compared to the $2 a gallon that some customers were paying earlier this week.

But the rising world oil prices had a particular effect on home heating oil, unusual among petroleum products in that it is used only in cold weather months and mainly in the Northeast, from Maryland north. Most of the rest of the country relies on natural gas for heat.

Because of the limited market for home heating oil, refiners are loath to produce too much for fear of winding up with unused product in the spring. With crude oil prices running high, refiners cut back on their heating oil stocks, causing US reserves to drop by more than 10 percent in November, when supplies normally rise.

''Far and away the most important decision was made last fall by refiners to limit the amount of home heating oil that they would refine,'' said O'Connor.

Oil industry officials dispute that they cut back on home heating oil production, noting that overall production for this winter is slightly above last year. While reserves did drop, John Felmy of the American Petroleum Institute argues that the drop reflected the industry's concern about having too much oil in storage on New Year's Eve, when Y2K problems had been feared.

But Alice Lippert, a home heating oil analyst at the US Energy Information Administration, said the refiners' low reserves suggest they were expecting a mild winter, an expectation reinforced by the warm temperatures of the last two winters.

At the agency's annual home heating oil conference in October, said Lippert, ''We couldn't get anybody to predict that it was going to be a normal or a colder than normal winter.''

Of course, if refiners were unprepared for a cold winter, so were New Englanders. After several years of relatively low heating oil prices, few were willing to pay a few dollars extra in exchange for a guarantee from their oil delivery company to keep prices stable throughout the year.

As a result, when the temperature began to drop right after Christmas, the entire Northeast was vulnerable to a sudden shortage that invites spiralling prices. In early January, the price of oil delivered to New York Harbor began to soar, sending a chain reaction through wholesalers and retail distributors and finally to customers. From Jan. 17 to Jan. 24 alone, retail heating oil prices in Massachusetts jumped from $1.17 a gallon to $1.74.

The price jump immediately clobbered customers of J.L. Oliver in Berlin, N.H., which had promised to deliver oil for as little as 55 cents a gallon even if the wholesale price jumped. The company stopped making deliveries altogether, forcing the state Office of Energy and Community Services to find new oil suppliers for about 2,500 households.

In addition, Citizens Energy, a nonprofit organization run by former US Representative Joseph P. Kennedy II, suspended applications for an emergency fuel aid program for the poor and elderly, largely because Citizens was paying almost $2 a gallon for oil that it turned around and offered at 40 cents for people in the program.

Even as the heating oil crisis swept the region, at least two other factors made the problem even worse.

First, natural gas companies up and down the Eastern Seaboard, also facing demand increases, began switching certain major customers from gas to oil service. These customers, who received a discount on their gas bills in exchange for agreeing to switch to oil occasionally, increased demand for heating oil just as prices were rising.

In New England, these factories and power plants switching to oil boosted oil demand by only about 2 percent, but oil industry officials said the increase was much greater in New York, New Jersey, and Pennsylvania.

Second, the cold weather also brought ice and rough weather to ports throughout the region, making deliveries of oil that could ease the crisis more difficult, according to Lippert of the Energy Information Agency.

In addition, the attorneys general of Massachusetts and Rhode Island have launched investigations into whether oil wholesalers or even individual home delivery companies may have illegally jacked up prices to take advantage of the crisis.

Initial reviews of price increases in Massachusetts show that home delivery companies may have actually lost money, as wholesale prices jumped 58 percent while their prices to consumers went up only 55 percent.

However, Rhode Island Attorney General Sheldon Whitehouse is zeroing in on the nine biggest wholesale companies that provide the oil to the home delivery companies. Yesterday was the deadline for these companies - including Mobil Oil, Sprague Energy, and others - to provide financial information that could show whether they profiteered or not.

''I want to determine whether legitimate market forces are driving this increase, what they are, whether anyone is taking unfair or deceptive advantage, and what we can do to prevent such steep price hikes in the future,'' said Whitehouse.

Even if no gougers are caught, however, O'Connor, the Massachusetts energy commissioner, said the current crisis is a wakeup call for the oil industry to plan better for winter heating season. Already, momentum is building for some sort of government-mandated oil reserve, and pressure is likely to build when Energy Secretary Richardson visits Boston next week.

Moreover, the oil industry may pay in another way: natural gas suppliers are expecting a rush of home heating oil customers to switch to them once the ground is thawed enough to bury new gas lines.

Ultimately, Chretien, director of the Boston Oil Consumers Alliance, agrees that there is plenty of blame to go around for the oil price fiasco, from OPEC to consumers who had grown to expect low oil prices indefinitely.

Though Chretien wants more accountability for the major businesses in the oil supply chain, he concludes, ''We have met the enemy and he is us.''

This story ran on page A01 of the Boston Globe on 2/9/2000.

-- Homer Beanfang (, February 09, 2000


Fascinating article...thanks for posting it!

Seems to mostly implicate "Just In Time" carried to an extreme in the oil industry. But absolutely no mention of ANY of the refinery problems that have been a focus of attention in this forum.

One puzzling sentence though: "While reserves did drop, John Felmy of the American Petroleum Institute argues that the drop reflected the industry's concern about having too much oil in storage on New Year's Eve, when Y2K problems had been feared."

I don't get the reasoning here: why would having TOO MUCH IN STORAGE be considered a problem during Rollover?

Scratching my head, --Andre in southcentral Pennsylvania

-- Andre Weltman (, February 09, 2000.

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Heating oil crisis widens: Alternative fuel demand up by Jules Crittenden and Cosmo Macero Jr.

Wednesday, February 9, 2000

As the Legislature grappled with whether and how to provide low-income fuel assistance to counter skyrocketing heating oil prices yesterday, non-oil heating dealers reported a surging interest in firewood, stoves and gas conversions.

While there were signs yesterday the oil crisis might ease, officials warned that the market is too volatile for anyone to count on relief any time soon.

The state Senate voted a $10 million package of fuel aid to low-income families, but that was sidelined by a procedural challenge from the House of Representatives and hints that the Senate's largesse may not be matched in the House.

``Evidently they instituted their own rules,'' said House Ways and Means Chairman Paul Haley (D-Weymouth), noting that the Senate does not have the authority to initiate spending bills. He said the House is ``obviously . . . interested in trying to relieve the burden'' on low-income families, but it will take a week for the House to assemble its own fuel aid plan.

Sources close to Gov. Paul Cellucci have indicated that the governor is in favor of the emergency assistance. But Haley said it is unclear, however, whether $10 million is the appropriate amount or exactly how many families it would help. ``Where's the analysis?'' he asked.

The two-week-old crisis of low oil supplies and high demand has left poor people in fear of freezing in their homes and those who are thinking there must be a better way to heat.

``We've seen a 100 percent increase in the number of people requesting conversion to gas heat,'' said Mike Connors of Boston Gas, who said that last January and February the company had about 1,500 requests, but this year it has fielded about 3,000 calls since early January.

``The day they announced oil prices were going up, we had four people in asking about stoves,'' said Dan Kourafas of East Coast Fireplace and Woodstove in Hanover. ``It's obvious why they are here. The first thing they say is, `Freakin' oil prices!' We're selling two or three stoves a day, up from about one or two.''

Meanwhile, firewood dealer Robert Boulay of Beaver Tree Experts in Stoneham said his business is up about 50 percent.

``People are coming in more often and buying smaller amounts,'' Boulay said.

Massachusetts Energy Resources Commissioner David O'Connor said he expects prices to remain high through February, but he said there are signs that they may begin to inch down. Between Monday and yesterday, he said, there was a 60-cent, 30 percent drop in average wholesale prices from about $1.80 to about $1.20 per gallon.

But O'Connor said as dealers sell existing high-priced stocks, it will take about a week for lower prices to filter down to customers, and the market is so volatile that prices could rise again, wiping out the effect of a brief price drop.

``Inventories are so low that a severe weather event could create a shortage and drive prices up again,'' O'Connor said.

He and others say this crisis has its roots in earlier winters. After last year's oil glut, OPEC nations agreed in March to limit production. Prices rose in the spring, and New England dealers avoided buying oil then, waiting for prices to drop.

Lulled by two warm winters and an unusually warm November and December, refineries slowed production and dealers failed to stock up. January's deep freeze caused a supply-and-demand imbalance that drove prices as much as seven times over prices of recent years.

O'Connor said he expects refineries and dealers will try to avoid getting caught short next year. But he said he does not believe this year's crisis will cause mass defections from oil to other fuels.

``The fact that there was a bad winter won't send people away,'' he said. ``There will be a few people . . . who will make the change.''

-- Homer Beanfang (, February 09, 2000.

I've said it before, and I'll say it again. We will find out soon enough the real answer to the problem in the form of pricing come spring... if the prices go down to pre-rollover levels, then we simply had a fixable shortage, not necessarily based on anything related to y2k.

If they do not come down by spring, then what we have is a market manipulation similar to the mid 70's, fed to us in the form of a shortage, possibly exacerbated by y2k failures, the cost of which is being passed on to us, the consumer.

-- OR (, February 09, 2000.

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