Posted at 9:06 p.m. PDT Tuesday, July 4, 2000

Increased heating fuel costs on the horizon BY NEELA BANERJEE New York Times

After a summer of high gasoline prices, consumers may be in for another shock this winter, as the rising cost of heating oil and natural gas threaten to make it significantly more expensive to heat American homes.

With demand for fuel and electricity soaring, natural gas prices have nearly doubled in the last year, to their highest levels in more than a decade. Heating oil prices have risen 10 percent just in the last month. This winter, many homeowners could discover that it costs at least 30 percent more to heat their homes than it did last year.

Even with a new pledge on Monday by Saudi Arabia, the world's leading oil exporter, to increase production to help reduce global petroleum prices, the effects of such a move on U.S. energy costs remain unclear at best.

``What you need to fear is the double whammy,'' said Steven Parla, a natural gas analyst at Credit Suisse First Boston. ``That's when prices rise 30 percent and it's cold, so you use 40 percent more gas.''

While the prices of all fuels have risen recently, natural gas is affected by a variety of factors, including its use in electric power generation and in heavy industry, in addition to home heating. Used in power plants in the summer to churn out electricity to keep air conditioners whirring, natural gas warms slightly more than 50 percent of United States homes in winter, mainly in the Midwest, Sunbelt and Rocky Mountain states, according to 1997 Census figures.

More than 90 percent of new houses in the United States are outfitted to use gas, according to Keyspan, the supplier of natural gas to much of New York City and Long Island. Only about 10 percent of homes burn heating oil, a large proportion of them concentrated in the Northeast, where oil prices rocketed last winter during a stretch of bitter weather.

Closer to winter, rising heating fuel prices are likely to generate political controversy, much as gasoline prices have done recently. Consumer anger over gasoline prices especially in the Midwest, has made the cost of energy an issue in the presidential campaign and led to congressional hearings and federal inquiries. Already, Rep. Jim Leach, R-Iowa has asked the Federal Trade Commission to monitor the increases in heating oil and natural gas. The FTC declined to comment on the request.

The price increases have been caused by an imbalance between supply and demand that probably will not right itself soon.

Energy usage is an important indicator of an economy's health. U.S. industry uses prodigious amounts of oil, gas and electricity each year, while consumers are buying larger houses and cars and other products that demand more fuel. At the same time, critics of the government charge that a series of Republican and Democratic administrations has failed to construct a sound energy policy to take into account shifts in demand and the complexities of the supply of oil and gas. Now, the Clinton administration and Congress are scrambling to find ways to undo or slow the increase in fuel prices.

``When it comes to energy, we only seem to wake up when there's a crisis,'' said Gordian Raacke, executive director of the Citizens Advisory Panel, an energy watchdog group in Long Island.

High fuel prices have yet to slow the economy, and adjusted for inflation, domestic prices are still much lower than can be found in the rest of the world.

Wholesale heating oil prices are now at about 84 cents a gallon, compared with 49 cents a year ago. Wholesale natural gas prices are now at about $4.44 per million British thermal units (Btus), compared with $2.39 one year ago. Some analysts say that natural gas prices will decline, while others contend that they have yet to peak.

A decision to cut back production by the Organization of Petroleum Exporting Countries last year spurred the ascent of crude oil prices, which helped push up heating oil prices. At the same time, demand blossomed. Refineries usually begin in summer to store distillate, which includes heating oil and diesel fuel. But this year, surging demand for diesel has drawn distillate out of refineries as quickly as it flowed in, analysts say.

To worsen matters, a refinery in Kuwait that supplies a disproportionate amount of distillate to world markets was damaged by an explosion last week, which markedly reduced supply at a time of rising demand. The Energy Department reported last week that inventories of distillate were 21 percent lower than last year. This situation was unlikely to change even with the Saudi Arabia announcement Monday about higher production.

Stocks of natural gas are also 10 to 15 percent below levels a year ago. The shortfalls are partly the result of conditions over the last couple of years, when oil and gas prices were so depressed that few energy companies were drilling for new supplies. As prices rose for oil and gas, however, companies speedily resumed drilling. There are 65 percent more active drilling rigs in North America than a year ago, and 75 percent of them are for natural gas, according to the Natural Gas Suppliers Association, a trade group.

Natural gas is used in manufacturing by its primary consumers, heavy industry, including steel and fertilizer producers. But natural gas prices are also reacting to shifts in electricity generation and to increases in power consumption.

About 25 percent of the country's current energy needs are met by natural gas. That proportion is expected to grow to 27 percent to 28 percent in about three years, which analysts say is a huge jump, driven mainly by the use of natural gas in new power plants. Stricter environmental standards for clean fuels have also led to more utility use of natural gas. Ninety percent of power plants to be built over the next decade expected to run on the fuel.

Many so-called peaking plants, which provide additional power during periods of particularly heavy demand, already run on natural gas. And those periods have grown more frequent and intense. Summers are longer and hotter, and more homes use air conditioning. Natural gas not only fires the electricity to run commercial air conditioners but because the gas itself is cold, it often serves as a coolant for the air conditioning unit itself.

``It's double demand,'' said Donato Eassey, natural gas analyst with Merrill Lynch. He explained that the accouterments of the new economy demand more electricity. ``All the laptops, cellular phones, Palm Pilots we use require a huge back office to run them, which requires a lot of energy, and then they need energy for air conditioning to keep those systems cool.''

Such summertime demand has kept natural gas stocks low and pushed prices higher, analysts say. Through summer and into autumn, when utilities adjust their rates to reflect higher use and fuel prices, consumers will have to settle up. Some electricity providers, such as Consolidated Edison Co. in New York, have already warned customers about increases in their electricity bills because of increased demand and costlier fuel.

Despite higher gasoline prices, Americans continue to drive as much as before, and they are expected to heat their homes as warmly as always, albeit with some consternation.

``We don't like it, and there's no reason why supply should be so diminished,'' said Ben Whitley, 48, who paid about $130 a month last winter to heat his Atlanta home with natural gas.

Steep energy prices would hurt low-income Americans, however, especially those on a fixed income. A 78-year-old retiree, Lillian Drummond and her husband live in Chicago, where gasoline exceeds $2 per gallon. With a combined monthly income of $1,500, they count every cent paid for the gasoline they use to drive to the doctor a few times a week. Last winter, the couple spent about $100 a month on natural gas to heat their small, brick one-story house and were spared even steeper payments by the mild weather.

Drummond said she does not know how she or her many neighbors who scrape by every month will pay higher heating bills this year. ``It would be terrible, because I don't know how we would handle it. We barely manage to save anything now,'' she said. ``We keep the thermostat at 60 degrees in the winter and stay under the covers. Any lower and we would freeze.''

High natural gas prices have also begun to frustrate, even erode, certain industries. Steel makers, for example, are scrambling to cut expenses to offset the cost of firing their furnaces with natural gas. About 70 percent of the cost of making nitrogen-based fertilizers, among the most widely used in agriculture, is from natural gas. Already weakened by months of low prices worldwide, some U.S. fertilizer plants have been forced to close or downsize drastically because of high natural gas costs.

Some analysts believe prices of heating oil and natural gas will gradually slide as supply catches up with demand. They point out that the renewed drilling will send more gas into the market. But others caution that the benefits of increased production will only be felt deep into the winter, in January or February at the earliest.

``Gas companies say they thought they are behind in filling supplies, they can catch up,'' Eassey said, ``but from what I see, I'd argue that every day they are falling farther behind.''

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-- Martin Thompson (mthom1927@aol.com), July 05, 2000