How to Combat Higher Oil Prices

Cost of Gasoline, Heating Oil To Rise as Crude Hits Record

Wall Street Journal
September 29, 2004
By Thaddeus Herrick

The Run-up in oil prices is leaving consumers with a stark choice: Become more energy efficient - or pay the price.

Oil hit $50 a barrel this week for the first time, meaning consumers will need to get used to shelling out more for gasoline and heating oil. Though gasoline prices at the pump right now still are actually lower than they were during the spring and early summer, when they traditionally spike - they are rising again quickly. Another impact: Airlines have slapped on more fees, partly in response to the higher cost of jet fuel.

The costs aren't likely to be fleeting. Industry executives and analysts say this year's jump in prices indicates a structural shift toward higher petroleum prices. For one thing, world demand for oil is soaring, particularly as China's appetite swells, but the oil producers that comprise the Organization of Petroleum Exporting Countries already are pumping oil out of the ground as fast as they can. Adding to supply woes is geopolitical uncertainty among major producers ranging from Iraq and Venezuela to Nigeria, where yesterday, rebels threatened to attack oil facilities. Compounding the trouble: The U.S. has a shortage of refining capacity. The number of U.S. refineries fell to 153 in 2002 from 319 in 1980.

The result is pinched inventories of both gasoline and fuel oil. "It's a whole new era," says William Greehey, chief executive of Valero Energy Corp., the nation's largest independent refiner.

To some Americans, the surge in oil prices may seem like a repeat of the 1970s, when higher energy costs forced Americans to put on heavy sweaters, turn their thermostats down and drive cramped, fuel-efficient cars. But, when today's oil prices are adjusted for inflation, they still are almost 40% lower than they were back then. In addition, the surge in oil prices - it was just $32.48 a barrel as recently as February - is too recent to have that sort of shocking effect on consumption and the economy.

So far, Americans are paying up. While sales of the biggest sport-utility vehicles (some of the biggest gas guzzlers) have softened, there is no sign Americans are making a wholesale move toward smaller, fuel-efficient vehicles as they did in the past. The price of a gallon of regular unleaded gasoline is $1.92, up five cents from last week and 33 cents from last year. But because vehicles are far more efficient than during the late 1970s, that still is "not a huge hit on anyone's income yet," says Doyle McManus, an analyst at J.D. Power & Associates.

Still, for consumers, there is a growing incentive to keep energy conservation in mind as they go about their lives. Here is what the new world of oil could mean, and some options for people who want to save money.

Heating Oil:

Despite soaring prices, oil remains less costly for home heating than either natural gas or electricity. With demand strong and supply tight, natural gas costs at least 15% more than heating oil. Using electricity for heat costs as much as 15% more than natural gas.

Refiners managed to build plentiful stocks of heating oil this summer, leaving the market well supplied for the eight million Americans, mainly in the Northeast, who use oil-fired furnaces. Still, inventories remain tight elsewhere in the world, pushing up fuel-oil prices nonetheless.

Analysts say prices could reach $2 a gallon this year, and higher if a particular cold winter boosts demand. The average consumer will pay as much as $1,800 for heating oil this year, an increase of several hundred dollars from last year, says David O'Connor, commissioner for energy resources for Massachusetts, which had an average price of $1.45 a gallon last year.

Fuel-oil users often protect themselves from price spikes by locking in a price before winter. But wary of this year's volatility, about 30% fewer fuel-oil dealers are offering this option.

Just as consumers haven't flocked toward more fuel-efficient cars, there is little evidence they are trying to cut their heating-oil bills. Mr. O'Connor says heating systems decline in efficiency because of carbon buildup if they aren't maintained. New systems are about 95% efficient.

Yearly maintenance is a good idea. Switching to a new furnace also can help. If you are burning 1,000 gallons of fuel oil a year, a typical amount for a home in the Northeast, switching to a 95%-efficiency furnace from a 75%-efficient furnace will save you several hundred dollars a winter. Expect to pay as much as $2,000 for a new system, so it will take a while to recoup the cost.

The Massachusetts Division of Energy Resources recommends cheaper ways to trim your bill: Pull your curtains at night and make sure nothing is blocking your radiator. Or spend as little as $30 on a programmable thermostat that lowers the temperature at night.

--Melanie Trottman and Joseph White contributed to this article.