Oil Boom Likely to Lower Heating Bills in Coming Years, but Not Quite Yet

December 12, 2013
By
Northeast Oil deliverymen Brian Hartman and Joe Imbrescia are seeing prices remain rather high for heating oil this winter, even though predictions say prices in Greater Boston will slightly decrease. Natural gas is predicted to increase this year. However, in light of the recent oil boom, lower prices for both heating products in the next several years looks very realistic.

Northeast Oil deliverymen Brian Hartman and Joe Imbrescia are seeing prices remain rather high for heating oil this
winter, even though predictions say prices in Greater Boston will slightly decrease. Natural gas is predicted to increase this
year. However, in light of the recent oil boom, lower prices for both heating products in the next several years looks very
realistic.

Just five years ago, America seemed to be at a crisis point when it came to its energy needs, and nowhere was that more apparent around here than in home heating bills – whether for heating oil or natural gas.

In fact, during the presidential election of 2008, both candidates preached about the need to achieve energy independence – and just about anyone with a heating bill would have attested at the time that energy independence was a prime concern for most Americans.

Now, just a few years removed from that election, the United States has flipped the script and become the top producer of oil and natural gas in the world by using the new drilling techniques of hydraulic fracturing (known as “fracking”). Using that technique to tap into previously unattainable oil reserves in the Dakotas, Texas and Pennsylvania, American is seemingly on its way to energy independence almost overnight. Already, natural gas prices have gone down and American oil refineries report having a glut of crude oil at their doorsteps.

It is one of the most underreported stories in the nation, and it could end up saving residents thousands upon thousands of dollars in the coming years on their heating bills – but as for this year, don’t pop the cork on that champagne just yet.

Out of Left Field

Experts in both the natural gas and heating oil industries said the new situation was nearly unfathomable just a few years ago.

“This is really something new and dynamic for us on the gas side,” said Liz Arangio, director of gas supply planning for National Grid. “You know, I would have to say I didn’t expect it. Just five to seven years ago, the long view for the U.S. was to import LNG (liquid natural gas). There were probably in excess of 50 LNG projects (proposed) to import gas to the U.S. Just five to seven years later, no one is filing to import and developers are filing to export. It’s a fascinating time to be in the field. Everything is changing so fast and we think that is very good for our customers.”

Just this past October, the Wall Street Journal reported that the U.S. would overtake Russia in 2013 as the top producer of oil and natural gas products (combined). U.S. Energy Information Administration (EIA) figures showed that the U.S. is producing 22 million barrels of product every day, while Russia is estimated to produce about 21.8 million barrels per day.

Add to the fact that imports of crude oil and natural gas are down significantly in the last five years, and it equals something rather unbelievable.

In the Wall Street Journal article, EIA Director Adam Seiminski said, “This is a new era of thinking about market conditions, and opportunities created by these conditions, that you wouldn’t in a million years have dreamed about.”

Michael Ferrante (no relation to the School Committeeman), director of the Massachusetts Energy Marketers Association, said America’s energy output is so new that its effects are still unknown.

“What we’re seeing is the production of a lot more petroleum product in the U.S., which loosens the grip of foreign oil,” he said. “It really hasn’t shown it’s true value yet…It’s probably still years away from its full effect on prices.”

Fracking Is Controversial

While ‘fracking’ seems to have transformed the petroleum markets, and possibly reversed the decade-long trend of skyrocketing home heating bills, it hasn’t gotten rave reviews by everyone and some wonder if the negatives outweigh the positives.

The process accesses petroleum products embedded deep down in solid shale rock formations. Oil developers drill deep wells and then use large amounts of pressurized water to break the rock and release the oil and gas. It’s an expensive proposition, but one that has been paying off for companies so far.

“I don’t think this came out of left field,” said Ferrante. “New drilling techniques like ‘fracking’ – which have been known for many years – are just now coming to fruition in the shale areas. That isn’t surprising really. What is surprising is the vast amounts that could come here…The simple fact remains there is a large amount of petroleum being discovered and drilled for in states as close to us as Pennsylvania.”

Many nearby residents and environmentalists, however, have not taken so kindly to the transformations the oil boom has brought upon their sleepy rural towns. Colorado voters in a state ballot question recently banned ‘fracking’ from being conducted and public opinion polls of ‘fracking’ continue to show low approval ratings.

This Year’s Prediction Not As Good News

Though the future seems to be bright, the oil boom won’t be saving anyone from a pain in the wallet just yet.

The state Department of Energy Resources (DOER) is predicting a rise in heating costs this year, especially for natural gas customers. Heating oil customers – while still confronting high prices for that product – will see little to no increase over last year.

“Based on colder winter weather predictions and EIA price and consumption projections, DOER is projecting that all Massachusetts residential heating costs will rise this winter, with propane rising the most at about 8 percent and heating oil rising the least at less than 1 percent,” read the department’s annual statewide prediction.

National Grid predicted that the average Boston area gas customer will see at least a $5 increase per month starting in November. However, due to supply issues based on the Boston area being the final stop on the pipeline, natural gas could be prone to price spikes this winter if demand goes really high.

The federal EIA is predicting that natural gas customers in all of New England could see 13 percent higher prices over last year, and that heating oil customers could see prices about 2 percent lower.

Nonetheless, Ferrante said that doesn’t mean heating oil is by any means cheap – despite favorable predictions or oil booms.

“This industry is still under pressure despite the increase in supply and resources,” he said. “Right now, we’d certainly like to see lower prices. They’re still quite high and it’s still expensive to heat your home. That said, I am starting to be more optimistic about the price of crude oil.”

Prices for heating oil in this area are still in the range of $3.50 per gallon, and depending on the size of one’s home and the overall temperatures, residents who use oil can spend upwards of $3,000 on oil per winter.

Pipeline Problems

Part of the reason consumers in the Boston area are not seeing the fruits of the petroleum boom is due to pipeline issues.

Most of the area’s natural gas comes directly from the Marcellus Shale region in central Pennsylvania, which is now producing seven times as much gas as it was in 2010. Tapping into those lucrative reserves are what originally caused gas prices to begin to go down so much five years ago. Last year, the EIA announced that Marcellus Shale gas was directly responsible for making gas much more affordable and plentiful in New England – which has not traditionally been a natural gas market.

The larger supplies though, are now being threatened by problems with the pipeline.

One of the major problems is that Boston is at the so-called “end of the line.” Simply put, it means that all of the supply coming from the Marcellus area gets dropped off at numerous locations – including New York City – before it reaches Boston.

Another problem is that Massachusetts switched most of its electrical power plants over to natural gas years ago. That means that on the coldest days, there isn’t as much supply because a good deal of it is eaten up by electric power plants.

This causes price spikes in both natural gas and electricity prices (electricity is expected to increase this winter by $13 per month according to National Grid).

Unfortunately for Boston, New York and New Jersey are now beginning to reap benefits of cheaper gas as they have pipeline expansion projects that are going online this winter. Other pipeline projects will continue being constructed for that region through 2015.

It isn’t until 2016 that Massachusetts customers could see relief, according to the EIA.

“New England consumers, however, would not significantly benefit from currently planned pipeline expansions until 2016,” read an EIA report from last month. The Algonquin Gas Transmission (AGT) pipeline, which takes gas from Marcellus and other sources to consumers in New England, has traditionally operated at near-full capacity during periods of peak winter demand. The next planned expansion on AGT is the Algonquin Incremental Market (AIM) project…The target in-service date for the AIM Project is November 1, 2016. The difference in construction activity for New York and New England markets is reflected in market prices for natural gas.”

Another threat also looms nationwide for gas customers – that being the threat of large amounts of exports that reduce supply greatly and strip away any savings from the petroleum boom.

“Because of the success of the fracking process, there is a lot [of natural gas],” said Ferrante. “There’s a chance we could see it shipped overseas, which could lead to higher prices.”

Future Looks Slick

Despite some current setbacks – such as pipeline capacity issues and continued high prices for heating oil – experts seem to agree that there isn’t an end in sight to the glut of newfound American oil and natural gas. While many foreign experts believe it to be a short-term bubble, those close to the domestic industry routinely predict that the boom isn’t going to end in the foreseeable future.

Ferrante said it means there is good reason to be optimistic that high home heating prices could be a trend that burns off quickly.

“More product in America could mean lower prices for natural gas, diesel fuel or heating oil,” he said. “I would  absolutely say we’re optimistic about the future of supplies and how they will affect pricing.”

  • tom

    When constructing pipelines they should use the same rule of thumb as for churches – you don’t size it for the average Sunday, you size it for Xmas and Easter.

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