The Boston Globe
February 15, 2000
How to prevent the heating oil crisis from happening again
Joseph P. Kennedy II
The heating oil crisis should never have happened. The question is why it happened and what steps we should take to make sure it doesn’t occur again.
Citizens Energy Corp. has tried to do its part to make sure that no one is left out in the cold. But skyrocketing heating oil prices fueled so much demand for our discount oil that at the peak of the recent cold snap we were receiving as many calls in a week as we did over the entire heating season last year.
We have read accusations that it is the fault of OPEC, greedy oil companies, the lack of adequate planning by local wholesalers and retailers, the weather, and ocean conditions. Why not throw in the Curse of the Bambino while we’re at it?
In truth, what we see is the result of market forces without adequate government oversight. While all elements listed above have played some role in skyrocketing heating oil prices, the fundamental answer is the lack of sufficient heating oil supply to meet surging demand when the weather turns cold.
Among the many factors affecting the recent price spikes in home heating oil, perhaps the most significant is the disincentive of heating oil wholesalers to purchase more oil than they anticipate they can sell. They must determinate not just if a cold snap will hit but when it will hit in order to minimize the costs of keeping product on hand and the losses associated with unsold inventory.
Because last winter was unseasonably warm, wholesalers found themselves with unsold product at the end of the heating season. Consequently, many dealers “went short” on this winter’s supplies. While that might be a reasonable business decision the cost to consumers, especially to the working poor and senior citizens living on fixed income, is unconscionable. While heating oil has been selling in most markets at a small markup above the spot prices -- well less than $1 per gallon -- inventory shortages in the Northeast led to working families paying well over $2 per gallon at the peak of the run-up. That run-up was largely because New England’s heating oil inventories are currently just 4.5 million barrels -- a drop of 12 million barrels since this time last year.
To protect the households that heat with natural gas and electricity, the federal government requires those industries to maintain sufficient Reserves to put through the pipelines or onto the grid to meet consumer demand. Inventory control standards, however, are nonexistent for home heating oil, and our region, as we have seen in the last month, has suffered the consequences of federal inaction. The federal government does maintain a strategic reserve of crude petroleum to be tapped in case of national emergency, but stockpiles cannot be tapped fast enough to help New Englanders suffering heating oil sticker shock today.
A “swap” plan under consideration by the Department of Energy would allow oil companies to take oil out of the reserve, sell it at current prices, and later return a larger amount of crude to the reserve. While the swap deal could reduce crude oil prices, the arrangement does not address the heating oil inventory crisis, which, as we have seen recently, is linked more to the regional supply of home heating oil than the spot price of crude.
In the past, I have proposed a plan to allow oil companies to purchase SPR cured, sell it on the open market, use the proceeds to buy home heating oil, and once sold, use the funds to replace the SPR crude.
While more to the point than the swap plan, the crude-for-heating oil proposal lacks the simplicity of setting minimum home heating oil inventory levels. Creating supply standards does not tap into the SPR nor does it create a new bureaucracy to oversee complex oil transactions. It simply requires wholesalers to maintain adequate supplies. The marginal increases in storage costs to wholesalers would be passed on to home heating oil purchasers ,whose cost increases would pale in comparison to the estimated $150 million in heating oil costs paid by Bay State residents over the last month.
Creating minimum inventory levels should go a long way towards solving the price vice of high demand and low supply. Senator Edward Kennedy plans to file legislation proposing this solution in the Senate, while Representative Joe Moakley will file the bill on the House side. However, a number of other measures ought to be embraced.
To begin with, there should be an increase in federal fuel assistance to the poor. The Low Income Home Energy Assistance Program has become the incredible shrinking benefit, with fuel assistance getting cut in half over the last decade at the same time that demand for aid has risen. We ought to find more money to redeem LIHEAP’s promise to heat the homes of those in need.
Second, the $300 million in emergency heating funds controlled by the federal government ought to be released more quickly in response to national and regional energy crises.
Third, we need to alter pricing policies that encourage large industrial users of natural gas to switch to oil in times of high energy demand. Turning off gas spigots and firing up oil burners further bleeds down the supply of heating oil, putting additional pressure on prices.
Fourth, we need the bully pulpit of the White House to convince our oil-producing allies to raise production quotas and get more oil into the market.
Fifth, Massachusetts ought to do its part to help the poor and the elderly cope with the cold. No appropriations have been made to low-income energy assistance since the state budget crises of the early 1990s. With record revenues and surpluses, the $12 million recently approved by the state House of Representatives was a good start, but more is needed in the long run. Neither the work of a nonprofit like ours nor state government support of fuel assistance can substitute for rational federal policies to protect us from the cold next time.