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US residents expect huge heating bills this winter: what you need to know

One of the few reasons to rejoice in the Sept. 13 consumer inflation report was the decline in gasoline and oil prices, but it is probably too early to rejoice, because energy prices will rise, reports USAToday.

Photo: IStock

Many people, including Treasury Department chief Janet Yellen, are warning of possible price spikes that could give Americans a nasty chill this winter when they see their heating bills or fill up on gas.

“This winter, the European Union will basically stop buying Russian oil, and in addition, will prohibit the provision of services that allow Russia to transport oil by tankers,” Yellen said in a September 18 interview. “Perhaps this could cause a jump in oil prices.”

But there are other factors that can make this winter more expensive. President Joe Biden's release of 1 million barrels a day of oil from the nation's emergency reserves is set to end in October, Europe's energy crisis is expected to hit hardest during the cold winter months, and the country's biggest oil producers could cut output, other analysts have noted.

What fuel will be more expensive?

Analysts say oil and natural gas prices have room to rise, and that consumers will feel it at gas stations and at home.

Oil is about half the price of a gallon of gasoline, and diesel fuel for vehicles like trucks and heating oil for homes are distilled from oil. The majority of US residential and commercial fuel oil consumption is in New England and the mid-Atlantic regions.

About half of US homes use natural gas for space heating and hot water. Natural gas is also often used to generate electricity, which is why electricity prices rose 15,8% in the 12 months to August. As Europe struggles to fill its natural gas reserves before winter, natural gas prices have jumped to a 14-year high.

High natural gas prices have prompted some to switch to burning oil or coal to generate electricity.

How much more can Americans pay this winter?

The average cost of heating a home is expected to rise 17,2% from last winter to $1202, the second consecutive year of major price increases and the highest price in more than a decade, the National Association of Energy Aid Directors said ( NEADA).

More than 20 million families, or about 1 in 6 American families, are already behind on utility bills, she said.

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“Rising home energy costs this winter will put millions of low-income families at risk of not paying their energy bills and will have no choice but to make difficult decisions between paying food, medicine and rent,” said Mark Wolfe, executive director of NEADA.

In 2022, NEADA forecasts utility costs to rise to $3803, reflecting high prices for natural gas, heating oil and propane, as well as the impact of this summer's heat wave. High temperatures have pushed air conditioning costs up to about $600 from an average of $450 last summer.

Did the price of gasoline and oil fall?

Yes, oil and gasoline prices have plummeted due to declining demand.

The gasoline price index fell 10,6% in August from July, the Bureau of Labor Statistics said Sept. 13 in its CPI report. That reflected the steady decline this summer of the national average per gallon of regular unleaded gasoline to $3,71 this week, a level not seen since early March. Oil prices are down about a third from their June peaks, when gasoline rose to just over $5 a gallon.

But natural gas prices continued to rise as Russia cut supplies to Europe, creating frenzied global demand.

Why prices might rise now?

First, Biden's daily supplies from strategic oil reserves run out next month unless the administration extends them. In addition, inventories have fallen to their lowest level since October 1984, US Department of Energy data show, and these inventories will eventually have to be replenished by reducing future supplies.
More importantly, on December 5, the GXNUMX of industrialized countries, which includes Japan, the United States, Great Britain, Canada, Germany, France and Italy, plan to limit the price of Russian oil.

“If they do that, Russia is saying it is stopping everything — oil and natural gas exports,” said Joe Brusuelas, chief economist at RSM US LLP. If that happens, "Oil prices will re-trip the highs set in June and push the average price of regular gasoline back above the current $3,70 per gallon."

And natural gas prices are likely to rise again.

How does the price cap on Russian oil work?

By not buying Russian oil above a certain price, which is still to be determined, the G7 countries will limit Russia's oil revenues to finance its war in Ukraine.

Enforcement of the cap will depend largely on the denial of London-brokered shipping insurance, which covers about 95% of the world's tanker fleet, and financing cargo above the cap.

The restriction avoids an outright ban on Russian oil, which could cause world oil prices to rise, since Russia is the world's largest oil exporter to world markets and the second largest exporter of crude oil after Saudi Arabia. Price caps ensure that Russian oil can continue to flow, but it still drains the Russian treasury.

In response, Moscow warned that it would stop selling oil and natural gas to countries that set price caps on Russian energy exports. According to analysts, this will lead to a reduction in supplies and an increase in prices for both types of fuel.

Can't OPEC+ produce more oil?

The Organization of the Petroleum Exporting Countries (OPEC) and 10 other major non-OPEC oil exporting countries (collectively referred to as OPEC+) could agree to increase oil production, but are reluctant to do so.

After oil prices plummeted as the economy shut down to slow the spread of COVID-19 in March 2020, OPEC+ has been cautious about boosting production. Earlier this month, the group surprised markets by cutting production targets by about 100 bpd since October. It was seen as a symbolic move to communicate that the company is monitoring oil prices and will not hesitate to act if it feels that oil prices are falling too fast or too much.

Some are also wondering if OPEC+ will be able to produce much more oil. The Group regularly falls short of its production quota due to lack of capacity in some countries.

Who will hurt the most?

The Europeans will have the hardest time because they rely on Russian natural gas. Russia has already closed two major pipelines to Europe. This raised prices by 300% compared to last year and reached the highest level since 2008.

But Americans feel pain too. The US has sent a record volume of liquefied natural gas exports to Europe to help boost supplies before winter. But now that prices are rising, U.S. inventories are shrinking.

“We appreciate that the Biden administration is working with European allies to expand fuel exports to Europe,” six New England governors wrote in a July letter to energy chief Jennifer Granholm. "Similar efforts should be made for New England, the only region in the US that imports LNG because it doesn't have easy access to US supplies."

Why can't America just stock up on fuel?

Granholm has asked major producers to export less fuel to Europe and other countries, but that is unlikely to help as energy markets are global, analysts say. A slowdown in exports to regions that need oil or gas will drive up prices there and everywhere, analysts say.

Instead, analysts say the administration needs to look into supplies.

"If we had a Marcellus pipeline to Pennsylvania, that wouldn't be a problem," said David Ruecastle, an analyst and professor of economics at the University of New Haven. The pipeline between the natural gas rich Marcellus and New England was blocked by former New York Governor Andrew Cuomo.

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Chevron chief executive Mike Wirth also criticized the government for stifling incentives for companies to produce more oil, calling for a phase-out of fossil fuels in the coming years and imposing windfall taxes.

“We will pay the price for this,” Rewcastle said, noting that there is no short-term solution. “Perhaps this will be an instructive moment.”

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