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WPCNR Quill & Eyeshade. By John F. Bailey. June 19, 2008 UPDATED WITH RETAIL CHART 12:15 P.M. EDT: White Plains residents who heat with oil should plan now to handle a startling 50% increase in the cost of local fuel oil.
White Plains residents who heat their homes with oil got “a bit of bad news” this week. About this time of year, homeowners who purchase home heating oil on a monthly budget plan get their new contract from their fuel oil dealer. They are in for a shock. Heating oil for next year will cost you more than a gallon of gas. The bill above provides No. 2 Fuel Oil for the “bargain” of $906 a month for 10 months, $9,060 a Year.
Feed Me, Seymour:
Homeowners will be burning 50% more money in their oil burners this year.
The cost of a gallon of heating oil has jumped 50% to $4.70 a gallon (more than the $4.40 for a gallon of regular gasoline) . The sharp increase is due to the runup in crude oil prices, and the export of oil distillate (from which heating oil and diesel fuel is made) from U.S. refineries to foreign markets, according to the U.S. Government Energy Information Agency..
The price of No. 2 Fuel Oil quadruples in 4 years.
Four years ago, a typical monthly contract for fuel oil was $210 a month in 2005-2006. It rose to $400 in 2006-2007; it rose 50% this year to $600 to this week’s shocker, $906 a month for 2008-2009.
There is no relief seen because the worldwide demand for oil continues to soar. Even, says one economist, U.S. conservation of oil will not make a difference because world demand for oil will suck up whatever the U.S. does not use. If the state and county and city authorities are not looking at this. They should consider its possible impacts on the homeowner and apartment dweller.
$1500 a Tank.
If you fill up a 340 gallon oil tank it will cost you about $1,600 today. If crude oil continues its upward track homeowners not on contract can face one-time fill ups of $1,600 and up.
On a typical budget plan you will pay $906 a month for heating oil over the next 10 months. Heaven help you if the price of heating oil hits $5 a gallon and up in the next 10 months (where diesel fuel is already). You will have to pay the difference (more) next June to settle up.
A typical median home in White Plains reports their fuel bill is up from $600 a month one year ago from their provider. If you’re running a mortgage of $2,400 a month, and just making ends meet, you have a big problem. You have to come up with an extra $300 a month (a total of $900 a month) to heat your home next winter, while paying the gasoline price to drive to work whatever the gas may reach.
Just a reminder: this latest horror from the oil world makes the estimate of White Plains School District utilities going up 3.82% look way low now.
Refineries Export 80% More Heating Oil, Diesel Than last Year.
The heating oil increase predominantly affects the Northeast region. Eight million U.S. .households use heating oil and 78% of them are in the Northeast. As of January, heating oil was priced at $4.30 a gallon, now it has reached $4.70 a gallon.
This runup is due in part to the increase in crude oil prices, but mostly because, according to This Week In Petroleum, (published by the Energy Information Administration), “world distillate markets have been tight, and U.S. distillate prices (distillate is the crude oil derivative from which heating oils and diesel fuel are refined), have been drawing distillate from the United States. First Quarter exports in 2008 averaged 365,000 barrels per day, the highest first quarter exports ever. Last year, first quarter exports of distillate from U.S. refineries were 203,000 barrels a day. (WPCNR notes this is an 80% increase in distillate export.)
TWIP reports refineries make more profit on diesel and heating oil (the distillate products) than they do on gasoline — 5 cents profit a gallon for gasoline between spot and wholesale compared to a juicy 70 cents a gallon between spot and wholesale on distillates. (Access the latest price information and the TWIP newsletter at http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp)
U.S. Refineries Go Where the Profit Is — Overseas
This has caused a shift in the second quarter of 2008 by U.S. refineries to double the production of distillates (heating oil and diesel) in this second quarter of 08 over the first quarter. TWIP reports “refiners appear to have reduced crude (oil) inputs and adjusted their product slate to favor distillate production relative to gasoline.”
TWIP writes “adding volumes (of distillates) could reduce the U.S. spread (between spot and wholesale prices) somewhat. Still, even with lower distillate (price) spreads, distillate prices (of diesel and home heating oil) would remain high, pushed up by crude oil price.”
Crude Oil Drives the Market.
Crude Oil, peaking at $140 a barrel (42 gallons), (percolating at $136 a barrel Thursday morning) last week has been described as the villain. WPCNR asked Dr. Lutz Kilian, Associate Professor of Economics at the University of Michigan about this relationship. Professor Kilian has published numerous studies on oil price fluctuations over the years, which may be located at www.econ.lsa.umich.edu/econ/detail/0,2,4849760%255Fpeople%255F88738703,00 .
WPCNR asked why India and China are reportedly contributing to the run-up in gasoline prices. Dr. Killian said, “Emerging economies such as India and China have contributed to high crude oil prices (and other industrial commodity prices) in recent years, as their economies grew at a record pace. Those high crude prices are one factor driving high gas prices in the U.S., although U.S. refinery shortages certainly have contributed as well.”
Asked if he felt the India-China demand was excessive compared to the U.S. market, he said, “I would not call that Asian demand excessive any more than I would call U.S. demand excessive.”
I asked him if price controls could be designed in such a way that they would work to the consumer advantage. Dr. Kilian demurred, saying, “You are mixing oil price controls and gas price controls. Oil price controls were put in place only for oil produced in the U.S. domestically. Gasoline price controls mainly created lines at U.S. gas stations.
“The problem with setting a price ceiling is that there is not enough gas for all customers interested in buying at that price. Hence, those who come late will have to wait in line. The same principle was responsible for the bread lines in the Soviet Union. Instead of being productive citizens, people spend a good chunk of their lives waiting in line. We know that this experiment failed miserably. Economists do not believe in the efficacy of price controls. I am no exception.”
The professor placed no faith in any artificial control of gas prices: “Historically, price controls have not worked. They always have had unintended consequences and they always have been costly. You are asking how to fix the unfixable.”
I asked if we had not regressed back to a situation approximating the Rockefeller Standard Oil Trust in the late nineteenth century when a centrally controlled string of oil companies and their suppliers manipulated rates to maintain prices artificially high.
Professor Kilian noted, “What’s the evidence of such manipulation of crude oil prices? Why would U.S. oil companies want to cooperate with foreign oil suppliers to raise crude oil prices? What’s in it for them?
“Oil is traded in spot markets. Nobody is fixing prices in these markets. What is the evidence that the price is artificially high? Why do you think this is not the right price to reflect the current scarcity of oil?
Nor is there evidence that quantities are being fixed. Has the supply of crude oil fallen? No. The only thing that has changed is that more customers want to buy oil.”
Crude’s Role in Driving $4.40 a Gallon Gas and $4.70 a Gallon Heating Oil.
In a gallon of regular gasoline in April, 2008, the price of crude oil made up 73% of it, Refining, 10%, Distribution & Marketing 6% and Taxes (State and Federal), 11%
Let’s apply it to the $4.36 per gallon cost WPNCR’s Mobile Unit paid for regular this week. The following figures are approximate:
$3.18 of the $4.36 was the cost for Crude Oil
48 cents for Taxes (State & Federal) New York State charges 41.4 cents excise tax per gallon.
44 cents for Refining
26 cents for Distribution & Marketing & Profits.
The profit per gallon out of that 26 cents is difficult to pin down.
A Barrel of Crude and where it goes
Oil companies extract 21.5 gallons of gasoline and 6.4 gallons of distillate from each 42 gallon barrel of crude oil, plus various other products. The list of products below and the percentage they make up of the 42 gallons is from the California Energy Commission. A total of 48.43 gallons of products are made from each 42 gallon barrel of crude oil.
Finished Motor Gasoline |
51.4% |
Distillate Fuel Oil |
15.3% |
Jet Fuel |
12.3% |
Still Gas |
5.4% |
Marketable Coke |
5.0% |
Residual Fuel Oil |
3.3% |
Liquefied Refinery Gas |
2.8% |
Asphalt and Road Oil |
1.7% |
Other Refined Products |
1.5% |
Lubricants |
0.9% |
So at the cost of $134 a barrel of crude oil bought by an oil company today the cost per gallon of gasoline and distillate is $2.77. ($134 divided by 48.43 gallons) Source: California Energy Commission
Crude Oil accounts for 60% of the price of heating oil, Refining, 16% and Marketing & Distribution & Profits, 24%.
Let’s again see how that breaks down on the $4.70 price per gallon paid by the typical median homeowner for heating oil this week.
Crude Oil — $2.82
Marketing & Distribution (Profits)– $1.12
Refining — 0.75
Total: $4.69
Statistics from Energy Information Administration.
Crude oil cost Drives Cost of Everything.
The price of crude drives the cost of all other goods. Consumers who heat in White Plains should think carefully about how to manage their heating this fall. If they are not on a budget plan, they should investigate its possibilities or look at one time payments of $1500 and up for each home fuel tank fill up. Rents on apartments may have to go up. Con Edison has the right to run up their cost per kilowatt hour based on the costs of energy.
The lower chart shows as the cost of crude oil went up the last two years, retail stocks went down. Top Chart shows as the price of crude oil rose (blue line) gas prices fluctuated up in the last quarter of 2007. Bottom chart shows that as crude oil rose (bottom dark line, retail stocks plunged. (Reuters)
More directly the cost of gasoline prices inversely affects retail sales. The higher gas goes, the more retail sales are affected.
