Homes brace for heating oil highs

NEW YORK Wed Nov 7, 2007 8:33am EST

John Fontaine delivers home heating oil at a home in the Boston neighborhood of Jamaica Plain, November 6, 2007. REUTERS/Brian Snyder

John Fontaine delivers home heating oil at a home in the Boston neighborhood of Jamaica Plain, November 6, 2007.

Credit: Reuters/Brian Snyder

NEW YORK (Reuters) - When the first snow falls this winter, 61-year-old Grace Murphy won't be turning on the heat in her Dorchester, Massachussetts home.

With her heating oil tank at empty, she'll be huddled around her gas oven with her husband Paul, 66, and her 88-year old mother.

"I don't buy heating oil because I can't afford to," Murphy said.

As crude oil futures hover just a few dollars shy of $100 a barrel, heating oil prices have set records almost daily during the last week.

Heating oil futures prices in New York, an indication of wholesale prices, climbed to a record over $2.62 a gallon this week, up 50 percent from a year ago. The speed of the increase has taken many people by surprise.

Only 7 percent of U.S. households use heating oil, also known as "red diesel," to heat their homes, but in the cold Northeastern states about 32 percent of households do. Maine has the highest usage with about 80 percent.

Increasingly, new homes in the region use natural gas, but older homes still have heating oil delivered to home fuel tanks, a system devised before natural gas was available in the Northeast.

On Tuesday, the U.S. Energy Information Administration said households in the Northeast will pay a record $3.06 per gallon for heating oil this winter, 66 cents more than last year.

It will cost an average of $1,879 to heat a Northeast home for the season, compared with $1,201 for natural gas.

HEATING OR EATING

For many families, spending on heating means sacrificing other essentials, according to Robert Coard, the president of Action for Boston Community Development Inc (ABCD), an agency that distributes federal fuel assistance to low-income families.

"They say they are having a problem of either heating or eating," he said.

In Murphy's case, spending on heating oil will mean cutting back on medical expenses, and trimming down an already slim food budget. Murphy, a diabetic, has spent months without taking her medication.

Ellen Campbell, a 29-year-old single mother of a five-year old daughter who is one of ABCD's clients, said after spending $350 for rent, her $531 monthly assistance check barely covers all her expenses even when she's not paying for heating oil.

"I just don't know how I'm going to do it ... I'm definitely worried. It's going to be over $3 a gallon. It's crazy," said Campbell, who lives in Boston.

The bad news for people like Murphy and Campbell is that some analysts don't think heating oil prices have hit their peak yet.

"I think the underlying crude price will probably hit $100 in the coming weeks and that will flow through to the retail heating oil price," said Rick Mueller, a crude oil analyst at Energy Security Analysis Inc in Boston.

A confluence of factors, including an increasing appetite for oil worldwide, geopolitical tensions, and OPEC production have boosted oil prices.

Although analysts predict prices will eventually fall, forecasts put it too far off to be of comfort during the frigid winter months.

"Starting the New Year, you should start to see a retracement in prices," said Stephen Schork, an energy analyst with the Schork Group.

NO MORE FIXED-RATES

Making matters worse, this year fewer people have taken advantage of price agreements offered by oil delivery companies because they proved counterproductive in the past two years.

For the last two years, prices have been higher during the warmer spring and summer months, when consumers normally lock into fixed-rate price contracts, than in the winter months. Last winter, for example, prices were near a year low in February, one of the coldest months.

As a result, consumers with locked-in, fixed-price heating oil contracts have gotten burned when market prices plummeted just as their furnaces kicked in.

"Last year, oil heat dealers had to field literally thousands of calls from customers that were concerned and angry and upset that their fixed-price contracts were higher than the street price," said Michael Ferrante of the Massachusetts Oil Heat Council.

Heating oil wholesalers and distributors blame excessive speculation by hedge funds and traders for year-round high prices of heating oil and the failure of fixed-rate contracts.

"They have worked for many, many years," said Ferrante of the fixed-rate plans. "It's only the last two years that we've seen these problems erupt."

Fortunately for consumers, while this winter is expected to be colder than last year, the National Oceanic Atmospheric Administration predicts it will be warmer than the 30-year average.

But even if the winter is 10 percent warmer than forecast, those using heating oil will still end up paying about 10 percent more than last year, according to the Energy Department.

For her part, Murphy said she has stopped trying to figure out what the forecasts and soaring prices mean for her.

"I can't win for losing, so I just give up."

FILED UNDER: