Weathering High Oil Prices

Policymakers intent on tapping into the country’s Strategic Petroleum Reserve or boosting production in Iraq to bring down oil prices may just as well turn their attention to changing the weather. The crude oil market is full of uncertainty – political, financial, climatological and otherwise. The result, since economic markets hate uncertainty, is high prices. The news could get even worse for Maine homeowners if this winter brings harsh weather.

The Energy Information Agency predicts that home heating oil in New England will average $1.57 a gallon, significantly higher than last winter’s average of $1.36 a gallon. The agency assumes that homeowners will use slightly fewer gallons of heating oil (696 gallons this winter vs. 728 last year) as high prices drive conservation, but the average overall heating cost is expected to be $1,094, up from $991 last winter. However, the agency warns: “Weather patterns will drive the eventual outcome, but higher overall heating expenditures are likely this winter unless above-normal temperatures prevail.”

As summer gives way to the cool air of fall, refiners calculate when to make less automobile fuel and when to start turning crude oil into home heating oil instead.

If such a switch is followed by unusually warm weather that encourages people to lengthen the season of weekend getaways by car, inventories of heating oil can build up while gasoline is in short supply. That’s good for homeowners and bad for drivers. If cold weather sets in early before a lot of refineries have converted, heating oil supplies could run short while gas is overabundant. That would mean high heating oil prices and lower gas prices.

Political and economic events around the world also affect fuel prices. The uncertainty surrounding the presidential referendum in Venezuela and the continued fighting in Iraq have driven oil prices up, as has the uncertainty surrounding the fate of Yukos, Russia’s largest oil producer which may have its oil exports curtailed due to a disputed tax bill.

At the same time, total crude oil production from the Organization of the Petroleum Exporting Countries in July was 29.8 million barrels per day, only 0.5 million barrels per day below total OPEC capacity. World oil surplus production capacity is near its lowest level in the last 30 years, according to the EIA, partly because of declines in production from Iraq, Nigeria and other unstable places.

Making matters worse, demand for oil and the fuels made from continues to increase. U.S. petroleum demand is expected to increase 1.9 percent this year and another 2.1 percent next year. China, with its growing population and increasing wealth, has so much demand for oil that it is buying up all the oil produced by smaller countries.

So, prepare to bundle up – and hope for a warm winter.