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  Will You Be a Home-Heating Winner or Loser?
Reported by SmartMoney.com on Wednesday, 21 October 2009 (on October 21, 2009)
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In the next few weeks, homes in the coldest parts of the country will start receiving their heating bills for the 2009-10 season, and most will notice a treat: lower heating costs.
The drop comes in part because the temperatures from October through March are expected to be warmer than last year, which in turn will send down the price of natural gas, heating oil, propane and electricity. Households that primarily depend on propane for heating are likely to spend an average of 14% less, according to the Energy Information Administration (EIA), which tracks energy statistics from the government. Homes that depend on natural gas will see their bill drop by about 12%. Do you use heating oil and electricity? Your bill will drop, too, but only by about 2%.
Producers and suppliers are adapting different strategies to cope with shifts in supply and demand. Here’s what it means for your home-heating bill.
Winners
Natural gas suppliers: Natural gas supplies started rising at the end of 2008, when industrial consumption plummeted as factories and manufacturers lost business. Now those inventories are approaching a record high, with more than 3.8 trillion cubic feet projected to be on hand as of Oct. 31, according to the EIA. Those high storage levels are dampening prices. For the coming winter, the EIA projects that natural gas will cost on average $11.52 per one million cubic feet, down from $14.58 during the 2005-06 winter season.
What’s more, there’s speculation that natural gas could be discovered on vast shale formations in Texas and the Northeast and further cushion the country’s inventory. However, this discovery could be a double-edged sword, on the one hand increasing demand, but also prompting some consumers to switch to natural gas. That would prompt a price increase.
CONSUMERS' BOTTOM LINE: “The biggest short-term winners will be the households that have natural gas furnaces,” says James Owen, spokesman for the Edison Electric Institute, an association of U.S. shareholder-owned electric companies, which represents 70% of the electric power industry. But the drop won’t be proportional to the price decrease of wholesale natural gas because utility companies buy natural gas months in advance of winter and have long-term contracts, says Richard Goldberg, the president of Warm Thoughts Communications, a consulting company for heating oil, natural gas and propane providers.
In an attempt to get new customers, some utility companies are offering incentives. National Grid, a natural gas and electricity delivery company, is slashing up to 60% of the cost of a natural gas furnace for households in Massachusetts, New Hampshire and Rhode Island that convert to natural gas; the household pays for installation.
Heating oil suppliers: The dip in heating oil prices is a huge help for heating-oil retailers, which saw customers convert to natural gas furnaces during price spikes, says Goldberg.
Heating oil prices are projected to drop to $2.62 a gallon on average, from $3.32 a gallon in 2007-08. “The biggest drive that causes people to convert from oil is fear prices will get high,” he says. “Now, you’re seeing fewer people converting away from oil because prices have come down.”
When heating oil prices drop, suppliers are also more inclined to lower their markups, but the amount varies by company, says John Maniscalco, the CEO of the New York Oil Heating Association, which represents heating oil providers.
But should the National Oceanic and Atmospheric Administration’s warmer winter predictions come to fruition, heating oil retailers will end up selling fewer gallons than last winter, which could tighten their finances, says Brandon Wright, a spokesman for the Petroleum Marketers Association of America, whose 8,000 wholesale and retail members sell heating oil, propane and solar panels. To hedge that possibility, some heating oil providers are ordering less inventory for the winter, he says.
CONSUMERS' BOTTOM LINE: Households that depend on heating oil will see lower prices. They’ll also feel the market price swings, says Goldberg. To protect yourself from price volatility, consider locking in a fixed price of heating oil that your provider is offering; that way should prices rise, you’ll still pay the lower price. However, should prices drop, you’ll be stuck paying the higher locked-in price. (Read our story on fuel co-ops here.)
Losers
Integrated energy companies: Energy behemoths like Exxon Mobil (XOM) and Chevron (CVX) will feel the downward slide of heating oil prices, primarily the difference between the high price they pay to buy crude oil and the low price that heating oil sells at, says Allen Good, a Morningstar equity analyst who tracks these companies. As a result, their revenues will decrease.
These companies have been dealing with a weak refining margin all year, says Good. That means they’ve been paying a higher price to refine crude oil into heating oil than they’re getting to sell it. At this time last year, total refining across the U.S. was at about 90% capacity utilization, whereas now it’s running at 80% to 85%, he says.
Still, Exxon and Chevron will offset these losses thanks to their refining assets throughout the world, especially in Asia and Europe where demand is higher than in the U.S., Good says. Earlier this year, Exxon Mobil’s joint venture in Fujian Province, China, announced the launch of 160,000-barrels-per-day crude distillation units. Energy companies whose refining occurs primarily in the U.S., like ConocoPhillips (COP) will see their revenues hit even harder, says Good.
CONSUMERS' BOTTOM LINE: Lower heating oil prices will persist on the retail market during the 2009-10 winter.
Natural gas producers: Compared with this time last year, only half of the natural gas drilling rigs in the U.S. are operating. That’s in part due to record inventories and lower prices, says Chris McGill, the managing director of policy analysis at the American Gas Association.
Companies in the business of exploring, drilling and finding natural gas might be more exposed to price slides if they haven’t presold a lot of their gas, says Mike Beck, a vice president for Direct Energy, which produces electricity and natural gas and is a retail supplier. This business requires heavy investment and capital and when prices drop it’s harder to secure that, he says.
CONSUMERS' BOTTOM LINE: As long as natural gas inventory levels remain high, expect prices on the retail market to stay low.
Electricity suppliers: The price of electricity – which is set by several factors – is projected at one cent per kilowatt hour on average during the 2009-10 winter, down 2.1% from the previous winter. A variety of fuels help make electricity, including coal and natural gas, says Owen of the Edison Electric Institute. With coal and natural gas prices dropping, electricity also takes a dip. Coal consumption in the electric power sector fell by 11% in the first half of 2009 as compared with the first half of 2008, according to the EEI, due in part to lower electricity generation by the industrial sector.
Still, the long-term outlook for electricity suppliers looks quite optimistic. Thirty-five percent of U.S. households rely on electricity as their primary heating fuel, according to the EIA. And the number of those electricity-dependent households is growing faster than households using other major heating fuels.
CONSUMERS' BOTTOM LINE: Expect slightly lower prices than last winter and probably the smallest dip in price out of all the conventional heating fuels.
Propane suppliers: Propane prices depend primarily on natural gas and heating oil and both of their prices have dropped, says Goldberg. The EIA projects that the price per gallon of propane will drop to $2.05 during the 2009-10 winter, down from $2.37 last winter.
There is also an abundant supply of propane. Up until the housing bust, propane was increasingly the heating preference for new homes, especially in areas where natural gas isn’t the primary heating source, says Goldberg. When the home-building market slowed, demand for propane dropped and inventory piled up.
Should propane prices drop even further, they could fall below some propane companies’ cost structure, and they’ll have difficulty weathering that storm, says Sara Banaszak, a senior economist at American Petroleum Institute.
CONSUMERS' BOTTOM LINE: Households that depend on propane for heating should have started seeing price reductions last year and will continue to this winter, says Goldberg.
Solar panel suppliers: When conventional heating prices decrease, consumer demand for solar panels also drops. When gas and oil prices rise, solar panels become more popular because that’s when households look at energy-efficient substitutes, says Heather Honea, an associate professor at San Diego State University’s College of Business.
Also, during a downturn, most consumers can’t pay for such an investment. On average, purchasing and installing photovoltaic panels that convert sunlight into electricity costs $25,000 to $35,000, says Monique Hanis, a spokeswoman for the Solar Energy Industries Association, a trade group.
Yet fitting your home with solar panels is getting cheaper. That’s because companies that install them are looking for ways to increase business following flat demand for solar panels in the commercial sector between 2008 and 2009. What’s more, households that purchase and install a solar photovoltaic system by Dec. 31, 2016, can get a tax credit of up to 30% of the cost.
CONSUMERS' BOTTOM LINE: Consumers considering switching to solar heating should make the move within the next year as prices continue to drop and the federal tax credits are in effect simultaneously. This is the time when households should set up the infrastructure that will protect them from rising conventional heating prices, which at some point will return, says Honea.
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