Global unrest, weather drive oil, wood costs

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At Lincoln Paper and Tissue Co., wood chips sit stories high in what should be an easily identifiable sign that industrywide supply levels are returning to normal after a year or so of poor weather conditions and labor shortages that depleted inventories.

At Webber Energy Co., heating oil nearly fills massive storage tanks located throughout the state in what should be a signal that inventory levels are stable for this time of year.

But those companies and others like them paid high premiums for the wood and the heating oil, and the price of each commodity is not going down even though there are small signs of market improvements.

What’s primarily bolstering the prices is fear, a solitary pressure that some industry participants say is creating an artificially high rate of financial return for some market role players that goes way above reasonable product costs and comfortable profit margins.

Worldwide demand has increased, but international energy analysts have fueled a marketplace based on political uncertainty and possible winter weather conditions.

The analysts are the likely financial benefactors of the pumped-up prices, now trading one barrel of crude oil at least 52 times before it arrives at a refinery.

“It’s the fear factor,” said Beth Nagusky, director of the Maine Office of Energy Independence and Security in Augusta. “I think it’s a combination – the increased demand, increased trading and political instability. It’s all working together to keep up the price.”

Pressurized energy markets are forcing consumers to shift their energy demands to wood: biomass for renewable electricity generators and for mills that produce the power they use; and firewood for households looking for less-expensive alternative heat sources.

“There are some people who are looking at the $2 [per gallon] price of oil and are saying, ‘My goodness, I’m not going to make it,'” said Peter Lammert, a utilization and forestry manager with the Maine Forest Service.

Wood remains the best buy, according to Nagusky. A cord of seasoned firewood would have to cost $285 to be the equivalent of $2 per gallon heating oil, both burning in optimal efficiency furnaces.

Dry firewood – if any still is being sold – is running above $160 a cord.

“Since wood isn’t $285 a cord, wood is still cheaper,” she said.

The move by homeowners and businesses to burn more wood is placing increased demands on wood vendors for all grades and species.

People who harvest wood are finding a friendly market.

“The guy comes out of the woods and says, ‘Who wants it – you with the firewood business or you at the mill? I want so much for it, who’s got it?'” said Ron Lovaglio, regional manager of Sappi Fine Paper. “When people get used to more money, it’s hard to go back. There’s the human issue here. People like it when they’re making more money, but it’s hurting us.”

The downside to all of this is that high energy and wood prices could send both industries into such disarray that businesses and households would not want to participate anymore.

Already this year many companies and homeowners have notified heating oil vendors that they cannot afford to commit to their previous usage levels because of the record high per-gallon costs.

Mills that produce their own electricity and heat are coming up with combinations of biomass wood, coal and oil – primarily more wood than oil – to keep costs down. It all depends on which commodity is the least expensive on any given day.

On the residential level, numerous households are going to let their oil tanks run close to dry before buying 50 or 100 gallons instead of a full 275-gallon tank load.

That will force more heating-oil vendors’ trucks on the road, running on near-record high price-per-gallon gas and diesel. Loggers, too, are paying the high fuel costs, prices they say do not make them the villains in the sensitized wood market. Some firewood dealers are adding $15 fuel surcharges to each cord instead of raising the price of the wood.

“It’s a struggle because of the cost of diesel fuel and gasoline right now,” said Tom Gardner, owner of W.T. Gardner, a landowner and logging contractor in Lincoln. “Fortunately, the mills are helping. We don’t really have the luxury to do that.”

Industry pressures

Until earlier this fall, labor shortages and an increased demand for biomass wood were stressing the wood industry. Those pressures spilled into all wood species, from wood for paper mills and sawmills to firewood.

Biomass became a hot commodity for two reasons. The first was that more homeowners wanted to spread mulch in their yards. The second was a law passed in Massachusetts that required electricity sellers there to have a higher percentage of energy produced from renewable resources in their product mix.

Massachusetts power sellers turned to Maine independent energy producers for help. Nine statewide renewable energy producers use biomass to generate electricity and they sell it to the Massachusetts power companies. Most independent power generators that were once shut down now are back on line, making money from Massachusetts.

“It’s producing an incentive for biomass producers to run,” said Dave Wilby, executive director of Independent Energy Producers of Maine. “They’re making more money through it than they would without it. It will help the bottom line of many of these facilities.”

Added to the increased demand for biomass were logger shortages that were intensified last summer by a federal government limit on foreign workers coming into the United States. Any sector wanting wood – from paper mills and lumberyards to biomass generators – would compete for the loggers, causing prices to rise. Wood inventory levels at paper mills and woodlots became depleted, and any inventory cushions were gone.

This fall, conditions started to turn around. The limit on foreign workers, primarily Canadian loggers, was lifted, and they began arriving in the woods on Oct. 1. They’ll be here through mid-April.

Also, the weather cooperated. After a wet summer, near-perfect temperatures in September and October made log cutting an easier task in Maine’s woods.

“We’ve had an exceptional fall production season,” said Patrick Hackley, spokesman for the Forest Resources Association. “The weather has been pretty good. As long as the weather holds, we’re doing OK.”

Wood market corrections

With improvements in labor and weather conditions, mills are filling up with wood.

Yet the prices are staying higher than what wood industry participants think they should be.

John Williams, president of the Maine Pulp and Paper Association, said that in recent years, increased demand and limited supplies did drive up the price of wood. Better market conditions in the last few months should have brought them down, he said.

“I don’t know why it stayed up as high as it did,” Williams said.

At Lincoln Paper and Tissue Co., co-owner Keith Van Scotter said his current wood inventory levels are above normal. The prices, though, “are higher now than what they should be” when factoring the rate of return on the land with high gas and diesel prices and adding a comfortable profit.

He said he believes that the mills need to correct the superheated marketplace through one-on-one conversations with wood vendors and other actions he would not disclose.

“It’s not justifiable. If something doesn’t change, the whole landscape of the market will change,” Van Scotter said.

Domtar Industries Ltd. in Woodland is advertising in the newspaper that it wants to buy biomass wood for use in its pulp and paper products, and to burn as fuel.

The advertisements were not placed because of an inventory shortage, according to Domtar spokeswoman Gail Nicholson.

“If you could see our chip pile, you couldn’t say we were having trouble getting chips,” Nicholson said.

She would not disclose the prices that Domtar was paying for wood, only mentioning it was high.

Hardwood and softwood prices are up about 60 percent from two years ago. Firewood is selling for between $80 and $100 a cord for tree-length while 8-foot lengths are around $105 a cord. The wood is not cut or split and is green, not seasoned.

During the summer, seasoned cut and spilt firewood was selling for $125 to $160 a cord. Now it’s above that.

Cheryl Bentl, spokeswoman for Dale Henderson Logging Inc. in Brewer, said she’s surprised that market-driven prices are staying high.

“The prices are still up there,” she said. “We’ve been hearing rumors that the prices are coming down but we haven’t seen it yet. When the mill prices go back down, I’m sure firewood will too.”

Inventories improving

Besides wood, energy markets have been improving in recent weeks. This week, crude oil prices fell below $49 a barrel prices after record highs of $55 a barrel a few weeks ago.

But the only energy sector to reflect the drop in crude oil prices was gasoline, where on Monday the price fell about 7 cents per gallon. In the Bangor area, that brought gasoline to less than $2 a gallon at some stations.

Other prices remained high, according to the State Planning Office. On Nov. 1 the prices were:

. $2.30 a gallon for kerosene, up 4 cents from the week before and 79 cents higher than last October;

. $1.99 a gallon for propane, up 8 cents from the week before and 43 cents higher than last October;

. $2.01 a gallon on average for heating oil, up 2 cents from the week before and 72 cents higher than last Nov. 1.

Before this winter, the highest statewide average was $1.78 per gallon during the 1999-2000 winter, according to the State Planning Office. Last winter, the highest average price was $1.56 per gallon.

Prices should be coming down, according to market participants.

A federal government report issued Wednesday stated that available stocks of crude oil are 1 percent below year-ago levels. Current heating oil inventories nationwide are 12 percent below last year’s mark in what could be viewed as a marketplace trying to catch up with a summer of high demands for crude oil.

In New England, heating oil inventories are greater than in the rest of the country. Heating oil inventories are now 29 percent above the five-year average and 38 percent higher than last year, according to the State Planning Office.

“It’s a good thing inventories are adequate,” said Jamie Py, executive director of the Maine Oil Dealers Association. “Hopefully, the barrel prices will fall down at some point.”

Ed Silliere, vice president of risk management at Energy Merchant Corp., told The Associated Press that he believes market sentiment has shifted so strongly that oil prices will fall below $40 a barrel before the year is up. “I don’t think anything is going to stop the refiners” from producing enough heating oil, Silliere said.

Prices remain high

Fear of the unknown, though, could affect any of the improvements recently experienced in the wood and energy markets.

What concerns analysts are possible shortages “if things go wrong,” according to Michael Shea, president of Webber Energy Co., headquartered in Bangor. Those fears include militant attacks on oil installations in Iraq and a strike in Nigeria, Africa’s largest oil producer.

In Maine, the fear is an ice storm or brutally cold winter.

“We are not in any dire straits,” Shea said. “But it’s that anticipation of the future. It’s that fear that the cushion we normally have in the inventory has shrunk.”

But Nagusky of the Maine Office of Energy Independence and Security said Mainers shouldn’t overreact to what analysts are predicting based on “what could happen.” Her office, along with Gov. John Baldacci, will release tips next week on how to keep warm this winter. Also, Nagusky suggested that people visit the BundleMEUp Web page for suggestions on how to weatherize their homes. The site is accessible through www.maineenergyinfo.com.

“People need to remain calm,” she said. “We get through these and we are mobilizing to address the high-price situation, and what we see is a ‘could be’ hard winter for many Maine people.”