Heating bills forecast to rise 10%-15%

Suppliers say wholesale costs of natural gas, oil have soared

`It's going to be tough on people'

September 15, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Just as consumers are recovering from a summer of sticker shock at the gas pump, more high energy costs are on the way - this time for home heating.

The heating season won't start for at least a few more weeks, but suppliers are warning that sharply higher wholesale costs will push prices beyond last winter's biting bills. Residential customers, experts say, can expect to pay 10 percent to 15 percent more because of soaring worldwide crude oil prices and a continuing shortage of natural gas supplies in the United States.

"There's been no good news for the last 2 1/2 years," said David Shinnebarger, chief marketing officer for Star Gas Partnership LLP of Stamford, Conn., which owns Petro, a home heating oil company with customers from Massachusetts to Virginia.

"A lot of customers are apprehensive about their heating oil prices for this winter, driven in large part by awareness of the energy crunch," Shinnebarger said. "They've never seen a market like this where, three years in a row, wholesale costs are up so much. It's causing consumers to be very nervous and shop around."

In a recent outlook, the U.S. Energy Department said households heated by natural gas can expect an increase of 15 percent in heating costs. Heating oil is expected to climb to an average of $1.50 a gallon in the Northwest from an average $1.36 per gallon last winter, the department's Energy Information Administration said.

In Maryland, heating oil prices, which averaged $1.27 a gallon at this time last year, are averaging $1.80, according to the state's Office of Home Energy Programs.

"This has been the first time in the last 10 to 15 years that the price of oil has been up to over $1.50 [a gallon] starting out in the season, and it hasn't dropped below 50 degrees," said Xavier Reed, owner of Can Do Fuel Oil Co. in Baltimore. "It's going to be tough on people."

Natural gas customers of Baltimore Gas and Electric Co. should expect an increase of $40 to $65, about 10 percent, for the November through March heating season, said Laurie Duhan, BGE's director of gas pricing and tariffs.

Last year, a typical customer paid a little less than $610 for gas during that period. This year, assuming a winter of average temperatures, the bill for the five months is expected to range from $650 to $675.

The company's price, which averaged 72 cents per therm last winter, is expected to be a little more than 80 cents per therm.

"Almost the entire change is because of the change in our cost of natural gas," Duhan said.

Supplies tight

The wholesale price of natural gas has risen 20 percent since last winter, and supplies of natural gas remain tight, partly because of the increased use of natural gas to produce electricity. That's hampering the utility's ability to buy and store cheaper gas during the summer, Duhan said.

For heating oil, "the big change is that the prices of crude oil are so much higher this year than last year," said Neil Gamson, an economist with the EIA. "That explains almost all of it."

From October through March, crude oil averaged $33 a barrel, Gamson said. He is expecting crude oil prices to average $41 a barrel this winter.

"That's almost $8 a barrel difference, and that translates into 19 cents a gallon" increase, he said.

The price rise for consumers won't be quite as big as that in the crude oil market because stocks of distillate fuel oil, which is used to make heating oil, remain adequate for the winter, Gamson said.

"If it's colder than normal, things could get worse," Gamson said.

Consumers in the Baltimore area can expect to pay an additional 40 to 50 cents a gallon for heating oil, said Shinnebarger of Star Gas. He said prices last winter for new accounts ranged from $1.29 to $1.49 a gallon in the Baltimore area. This year, prices are $1.59 to $1.79 a gallon.

Consumers who buy heating oil as needed will find themselves at the mercy of market prices, dealers said.

Some dealers are still offering the "price protection" service plans they have offered during less volatile markets. Those plans can include a fixed price for a certain period or a price cap that allows consumers to benefit from a drop in prices while guaranteeing an upper limit.

Rick Phelps, president of Carroll Independent Fuel, which has customers throughout Maryland, says his company is encouraging customers to lock into a plan and is seeing more people choose that option.

"The good thing about a cap is, if prices fall, they're not locked in at a higher number, and they have the security that they'll never exceed the cap," Phelps said.

Despite the risk that prices will continue to rise, the company can offer those options because "we go out and hedge ourselves," he said. "If we sell [oil] at a fixed or capped rate, we will buy under the same type of program from my suppliers."

Shinnebarger said he is advising customers to take the fixed-price option, and many are choosing to lock in at $1.649 for new accounts. For those plans, the company buys the oil in advance.

Under the price-limit plan, the company enters the hedge market and pays a 13-cents- a-gallon premium that is passed on to the consumer. In a market where prices are not likely to fall, that does not appear to be a good option, Shinnebarger said.

Not coming down

"Based on world events, we believe wholesale prices are not going to come down this year," he said.

Other dealers said they have no choice this year but to forgo the fixed or capped plans of years past to ensure that they can meet their overhead costs.

"Nobody will be able to lock down the price because the price will change so dramatically," said Reed. His company was offering a price of $1.59 a gallon Friday.

He said he doesn't see customers trying to beat the high prices by buying fuel ahead of time.

"Most people buy as they need it," Reed said. "Most people are not really prepared to take an extra $500 to $600 to put into oil right now. When the weather changes, that's when the demand changes."

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