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Good news for heating oil customers finally

October 20, 2013 So far every winter this decade, home heating oil prices have gone up while the price of natural gas has gone down until now.

People who heat their homes with oil are finally catching a break. This time, it's natural gas customers who are likely to pay more, according to forecasts by the U.S. Energy Information Administration.

Oil customers can expect to pay 2 percent less to heat their homes this winter than last winter, the EIA reported in its annual "Winter Fuels Outlook," published earlier this month. That may not amount to much of a savings, but it's a big improvement over previous forecasts in recent years, which have called for double-digit increases.

"It's good news," said Tony Malandra, president of Yeager's Fuel in Allentown. Yeager's, a full-service dealer, is selling oil for $3.49 a gallon 30 cents less than a year ago. "Naturally, cheaper prices for heating oil help our industry. It's a more affordable fuel for the customers."

Natural gas customers, meanwhile, can expect to pay 13 percent more this winter than last winter, and 25 percent more if the average temperature is 10 percent colder than normal.

Of course, everything is relative. Compared with oil, natural gas is still a very, very good deal.

The typical heating oil customer who lives in the Northeast is expected to spend $2,046 on fuel this winter, up 35 percent from the 2008-2009 winter, according to the EIA.

But at $1,045, the projected expense for the natural gas customer is $215 less than it was five years ago and about half that of an oil customer today.

The price differential between the two fuels is largely the result of new hydraulic fracturing technology that has led to increased domestic gas production, including along Pennsylvania's Marcellus Shale formation. Today, the United States produces nearly nine-tenths of the natural gas it consumes, compared with half of its oil.

Indeed, the surge in domestic gas had driven prices so low earlier this year that some producers decided to cap their wells. That, in turn, pushed prices up although nowhere near as high as in the recent pre-fracking past.

UGI Utilities, the natural gas provider in the Lehigh Valley, raised its rates 7.2 percent in June. That brought the bill for the average customer using 85 cubic feet of gas a month to $92.37.

"No one really anticipates [natural gas] prices climbing up to previous levels any time in the near future," UGI spokesman Joe Swope said.

Not surprisingly, natural gas has overtaken heating oil to become the region's most popular heat source. In Lehigh and Northampton counties, 78,536 homes relied on natural gas in 2010, according to U.S. Census estimates. Oil was a close second, heating 77,668 homes, and electric was third, in 74,405 homes.

A decade earlier, oil was the leading heat source and by a wide margin. In 2000, 84,351 homes in the Valley used oil, compared with 60,427 that used natural gas.

A total of 11,247 UGI customers converted their home heat source to natural gas in the fiscal year ending Sept. 30, nearly matching the record the utility set the year before, Swope said. Most of those converting previously had oil heat.

The decline in natural gas prices is also benefiting the third of Lehigh Valley homeowners who heat their homes with electricity.

That's because some power plants run on natural gas; and in a quirk of how electricity prices are determined in the Northeast, the cost of gas plays a greater role than the costs of the other fossil fuels, coal and oil.

PPL Electric Utilities' current "price to compare" is 8.5 cents a kilowatt-hour for the three-month period starting Sept. 1. This rate, which does not include a separate charge for delivery, applies to customers who have not chosen an alternative supplier and therefore receive default supply service from PPL Electric Utilities.

In January 2010, PPL's first month of deregulated rates, the price to compare was 10.45 cents a kilowatt-hour.

Working in everyone's favor is the weather. Based on long-term weather forecasts, the EIA expects this winter not to be significantly colder than last winter, when the average temperature was close to normal.

Even the Atlantic hurricane season is cooperating. So far, U.S. oil refineries have not been disrupted by a single major storm.

Of all the energy commodities, oil is the most sensitive to world events natural or otherwise. War in the Middle East, for example, is a constant threat to price stability even though the United States and Canada are producing more oil than ever before.

Should the civil war in Syria spread to neighboring oil-producing nations or major transportation routes, the price of oil could skyrocket, warned John Rampolla, chief financial officer at Lehigh Fuels, an oil dealer in Whitehall Township.

A big part of the problem, according to Rampolla and others in the oil distribution business, is that Wall Street exploits such events to make a quick buck. "A lot of financial investors own a lot of oil," he said. "Some of the biggest oil players are the investment houses."

Their profits come at the expense of home heating oil customers; but oil dealers such as Lehigh Fuels take a hit too, since they make their money on small surcharges and service fees, which they collect less of as their customers conserve more.

Malandra of Yeager's said home heating oil customers seem to have gotten used to paying a lot more to heat their homes than they used to. "It's just a way of life now," he said.

But he's still holding out hope that the recent decline in prices is the start of long-term trend. "These things are cyclical," he said. "They should balance out sooner or later."

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National Oilheat Research Alliance ECC is funded in part through the National Oilheat Research Alliance.