Already reeling from a surge in prices at the gas pump, American consumers are also confronting sharply higher winter heating bills.
At a time when the energy industry is typically busy building stockpiles for winter, Hurricane Katrina knocked out roughly 10 percent of U.S. oil refining and natural gas pipeline capacity. About half that damaged infrastructure will take at least a month to restore, according to the industry’s preliminary estimates. That means it’s all but impossible to predict just how high winter heating bills will go.
As the summer driving season winds down, with winter still months away, home heating costs are already running sharply higher than a year ago. And with some forecasters calling for a colder than normal start for winter, tight supplies could send prices higher still.
“Consumers have got a terrible scenario ahead of them for this particular year,” said George Winslow, a heating oil dealer in Manchester, N.H. “You could be looking at a $900 or $1,000 a month heating bill here in the Northeast, which is just absurd.”
In its September forecast released Wednesday, the Energy Department said it expected heating oil prices to rise by 31 percent this winter, nearly double the 16 percent increase it forceast in August. Natural gas prices are expected to rise even further, by 37 to 50 percent, depending on the region, also up sharply from the previous forecast.
The heating-oil price hikes are already taking effect. The wholesale price of a gallon of heating oil pulled back a bit Tuesday to $2.08 a gallon after hitting a high of $2.21 last week. That’s up from $1.16 a gallon a year ago.
Heating oil consumers mayl be helped by higher-than-normal inventories for this time of year. Heating oil markets will also be heavily stocked this winter by imports, which should blunt the impact of tight U.S. refining capacity.
With winter coming, natural gas producers are also building up supplies for a seasonal pickup in demand, but inventories remain tight. In recent years, natural gas markets have gotten tighter year-round as gas has become the preferred fuel for new electric power plants. Hot weather in much of the country this summer pushed those power generators to the limit, adding to the demand for natural gas.
Even before Katrina struck, the amount of gas in storage was below levels seen this time last year. Some 2.6 billion cubic feet of gas was in storage as of last week, down 50 million cubic feet from a year ago, according to the EIA.
But with damage assessments still under way, it’s clear the storm knocked out a big chunk of the nation’s natural gas infrastructure.
“It's had a devastating effect, some of which will come back on in the days and weeks ahead,” Dan Tutcher, president of Enbridge Energy Company, told CNBC. “But some of which will be delayed probably as long as months and possibly even a year or so,”
Before the hurricane struck, Enbridge pipelines were moving some 2.7 billion cubic feet a day, said Tutcher. Today, the company is transporting a little over 700 million cubic feet.
As a result of outages like these, spot prices for natural gas have hit $11.75 per million Btus, more than double the $4.68 per-million-btu price this time last year.
The outlook for winter heating prices will become clearer in the coming weeks, as the energy industry continues to restore production capacity. A lot, of course, depends on the weather. A mild winter could held ease demand and help keep a lid on prices. But the early signs from long range forecasters are not encouraging. Colder-than-normal weather is forecast in many parts of the country through November, according to Dr. Todd Crawford at WSI Corp.
“Our seasonal forecasting models indicate a rather rude transition to fall across the northern states, particularly in the northern Plains,” he said.
In the past, many heating oil dealers have offered customers fixed contracts for the season. But recent price spikes have made those deals too risky, said Winslow.
About 35 percent of heating oil sold this winter is already locked in by consumers at fixed prices, according to Jack Sullivan, the executive director of the New England Fuel Institute. But if prices pull back, dealers could get squeezed.
“That customer who was paying a fairly high price based upon today's current values … turns to his dealer and says, you know, “Hey, Mr. Dealer, I can get it down the street for less?” (The dealer) has already purchased that product.”
For some low-income families, the bills may be too big to handle. Many are eligible for aid under the federally funded Low Income Home Energy Assistance Program, or LIHEAP. The program, which is administered by local governments and community groups, has about $2 billion in funding to help those in need.
But funding has not kept pace with the recent run-up in energy prices. To fill the need, a number of state and local agencies and private organizations have stepped in to help those who can’t pay the bills, including the National Fuel Funds Network.