Winter Heating Troubles Predicted

December 26, 2005
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Prices at the pump were high in 2005, but prices at the meter became shocking by the fourth quarter. According to the Energy Information Administration (EIA), natural gas production has been declining 30 percent each year for the past few years.

Along with that, U.S. refineries have only been able to meet approximately 88 percent of the country's refined oil demand. And that was before the spate of hurricanes hit the Gulf of Mexico.

When Katrina hit late in August, she sank or severely damaged at least 58 production platforms and drilling rigs. In mid-September, it was estimated that 34 percent of the Gulf's natural gas was shut in. With the lost production, EIA estimates of $11.05 per 1,000 cubic ft for natural gas were not too far off the mark.

Heating oil posed a problem, too. About 47 percent of the nation's oil is refined in the states surrounding the Gulf. Unfortunately, four refineries with the combined capacity of 880,000 barrels of oil per day were so damaged, experts were not sure how long it would take to get them back online. Home oil heating prices were expected to reach an estimated $2.46 a gallon in 2005 as compared to $1.80 in 2004.

There were other heating fuel problems in 2005 that look to cause a ripple effect in 2006. Price hedging, pre-paying for stored fuel at a certain price, was delayed because of unstable fuel prices.

Many companies were waiting for the economy to even out before locking in their winter fuel supply. When Katrina came, prices shot up and those without hedges were forced to pay the higher prices. Another problem is maintenance, or a lack thereof. Refineries often shut down for a few weeks in the fall to do annual maintenance. Most refineries postponed their 2005 scheduled shutdown because of Katrina damage. This built a factor of uncertainty into the refinery system. Refineries that go off-line for maintenance, or due to a lack of maintenance, will most likely cause immediate price increases.

Publication date: 12/26/2005

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