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Higher Heating Costs

October 13, 2005 at 12:00 AM EDT
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MARGARET WARNER: With winter fast approaching, many Americans are facing the prospect of dramatically higher heating bills. That was the bad news reported yesterday by the Energy Department’s Energy Information Administration.

GUY CARUSO: We’re expecting about a one-third increase in heating fuel expenditures in this country this winter compared with last winter.

MARGARET WARNER: The burden will fall unevenly, depending on what kind of heating fuel a household uses. The number one source of heating fuel in this country is natural gas. And the 55 percent of U.S. households using it will be hit the hardest. The price of natural gas is expected to jump 48 percent. That means another $350 to the winter heating bill for the average household.

Electric heat is the second most popular, and the 29 percent of American households that use it will get off the lightest. Electricity prices are expected to rise just 5 percent for an average of $38 over last winter’s bills.

The much smaller group of homeowners who use heating oil — just 7 percent of Americans — face a sharp 32 percent increase, or an average of $378 more.

And bills for the 4 percent of homes that use propane will spike 30 percent, or roughly $325.

The higher prices were blamed on tight supplies, badly exacerbated by the damage to oil rigs and refineries caused by Hurricanes Katrina and Rita. The poor and elderly people on fixed incomes, like 83-year-old Chicago resident Lillian Drummond, are likely to suffer most.

LILLIAN DRUMMOND: I can hardly pay for the gas bill now, including electricity, too. They’ve gone up so high, and if they go up anymore, I don’t know what we’ll do

MARGARET WARNER: The federal government and many states do provide some heating assistance for low-income households.

And for more on the expected impact of these higher heating costs, we’re joined by Tom Wallin, president of Energy Intelligence, an information services company that produces data, news, and analysis about global energy issues — it also publishes leading industry journals like Oil Daily; and Kara Saul Rinaldi, an economist and policy director at the Alliance to Save Energy, a bipartisan group that promotes energy efficiency. Welcome to you both.

Tom Wallin, why in a nutshell are we going to see this abrupt increase in prices? How much of this is the hurricanes?

TOM WALLIN: Well, it is primarily the hurricanes. I mean, what’s happened here is we’ve lost a big chunk of our supply of oil and gas and refined products, and that means we’re not building up the kind of inventories for the winter that we normally would.

And in addition, these storms are having a lasting impact on supply, and we’re not going to have the kind of supplies this winter, our domestic production is going to be lower, so we’re going to have to draw harder on these inventories. That’s the immediate reason.

But there is a bigger cause here that lies behind all of this, and this is the fact that our global petroleum supply system has really been stretched to its limits for some time now. And so when you have a crisis like these storms, you have some kind of a disruption, it has a big impact on prices. There’s still that vulnerability remaining. And so if there is some other crisis or problem in the world petroleum market this winter, the prices will go higher than the Energy Department is even saying.

MARGARET WARNER: And briefly because I want to get to Ms. Rinaldi, but why are we seeing a difference in different kinds of fuel? For instance, why is natural gas, which more than half of all Americans use, significantly higher than say home heating oil?

TOM WALLIN: Well, I think a big reason for that is that there are just fewer import sources we can draw on, and unlike petroleum, where we have a strategic reserve, we have no strategic reserve for natural gas. There’s increased exposure there and less to fall back on.

MARGARET WARNER: Kara Rinaldi, one other explanation. Why on the other end will electricity not go up more than 5 percent? Don’t these electricities use other fuels to generate electricity?

KARA SAUL RINALDI: Well, that’s just it. They have coal and nuclear and power, and those aren’t spiking the way natural gas and oil are, so that’s why we are seeing those spikes. These are imported sources.

MARGARET WARNER: So which parts of the country — consumers in which parts of the country can expect to see the biggest hit, feel the biggest hit?

KARA SAUL RINALDI: Well, for natural gas it will be a large hit in the Midwest, and for home heating oil, that’s primarily used in the Northeast.

MARGARET WARNER: What would you add to that, Mr. Wallin, in terms of the regional impact and how different it will be?

TOM WALLIN: Well, yeah. I think that’s true. Natural gas really is used across the country. It’s in the West, it’s in the mid-Atlantic states, too. The East — the Northeast can draw on imports, of course, so that is a factor that alleviates the situation.

MARGARET WARNER: And propane, is that mostly rural?

TOM WALLIN: That’s mostly rural, also in the Southeast.

MARGARET WARNER: You mean non-rural, but just in the southeast?

TOM WALLIN: Yeah, well, in the Southeast, in Florida, for example.

MARGARET WARNER: Ms. Rinaldi, it seems obvious that the people on low incomes are going to feel the impact the most, but explain more why that is. I mean is it just that they don’t have a financial cushion, or are there other factors?

KARA SAUL RINALDI: Well, unfortunately, the low-income families usually are the hardest-hit by price spikes such as these primarily because they don’t have a disposable income that they’re not choosing between whether or not to go out the dinner or to buy an additional movie. They’re choosing between what their necessities are, and, therefore, they just basically don’t have the money there to be able to reach into and to dip into to meet the higher energy bills.

But another point is that they simply don’t have the ability to change out their furnaces or to upgrade their windows and to install new appliances and new systems that will help not only this winter but in winters to come. They are stuck in a home which is owned by someone else or, whether it’s a subsidized housing or whether they’re renting from a landlord.

So that’s why we need building codes and standards to be put into place that will ensure that the next time the home is built, the next time they need to change out a furnace, it’s built to a higher energy efficiency code.

MARGARET WARNER: Now, there are, as we mentioned in the setup piece, federal and state heating assistance programs. Are they automatically pegged to a rise — an increase in the price of fuel, so that they’ll still be covered, or is something else going to have to be done?

KARA SAUL RINALDI: Well, we’re definitely going to need for the president and for Congress to put more money into the LIHEAP and Weatherization budgets to help offset these price increases.

MARGARET WARNER: And another question for you on impact: What about middle- income people who have recently bought, you know, one of these new kind of super-sized house, now are they also in for a rude shock, or are these new homes, more upscale homes built much more efficiently?

KARA SAUL RINALDI: Well, it really depends on what state as to what code they’re built to, whether they’re built to a high code which ensures there is enough insulation, that their windows were double-paned and energy star, that they had a high-efficiency furnace. If that’s the case, then they’re in pretty good shape.

Of course, the bigger the home, the more space to heat. But if it’s a tight home and it’s well-sealed, well-insulated, then they’re in better shape to combat a really cold winter.

Of course, some people building similar homes that look the same but don’t have all of that energy efficiency, and they’re going to need to look into upgrading and getting the payback on their utility bills.

MARGARET WARNER: Tom Wallin, talk to us now about the impact on business. How widely will the impact be felt on businesses, and which businesses, in particular?

TOM WALLIN: Well, I think that the heating costs are going to be felt by all businesses, but the impact across different industries is not homogeneous at all.

You certainly have certain sectors that rely particularly on natural gas, for example, petrochemicals or fertilizer manufactures or just automobile manufacturing — those kinds of sectors are going to be hit harder. And other sectors, like the oil industry obviously, is going to see much higher profits.

MARGARET WARNER: And will the increases — let’s just take an average business, let’s say Wal-Mart, which has huge warehouses to heat or Amazon or people with just huge spaces to heat, are the heating costs enough of their business that it’s going to have a ripple effect, and that ultimately consumers will feel it in higher price for goods and services?

TOM WALLIN: I think it’s less of a factor for those retailers than, say, the higher transportation costs that they’re already facing in terms of gasoline and diesel. And to the extent that those higher transportation costs persist, those are the costs that are more likely to be pushed through, but even those costs are harder to push through in terms of higher prices, I think.

MARGARET WARNER: And what about building costs?

TOM WALLIN: Yeah, I mean, materials for manufacturing, lumber, that sort of thing, those are heavily dependent on transportation fuels, again.

MARGARET WARNER: So Kara Rinaldi, when will people really feel this? When are they going to open a bill and really get their first jolt?

KARA SAUL RINALDI: Well, it’s going to depend a lot on our weather. As soon as it gets very cold and people start turning on those heaters, that’s — the following month when they get their bill, that’s when they’re going to be feeling it.

So it’s time for consumers to start looking right now at ways of increasing their energy efficiency and that’s what we need to see them do.

MARGARET WARNER: All right. So on the assumption that perhaps they can’t even go out and buy new windows now and they probably aren’t going to go buy a new house, what can consumers, what can homeowners do to cushion the blow?

KARA SAUL RINALDI: Well, in the short term, there are some easy things that a consumer can do. They can install a programmable thermostat, which is a marginal cost. But in that way they can make sure when they leave the house their thermostat drops a little bit. So they’re not keeping it warm and toasty the entire day. And then it’s all ready for them when they come back. So they’re reducing their energy use while they’re outside the home. They can insulate their water heaters. They can install new insulation. Insulation is one of the quickest and easiest ways, by just rolling that out in the attic, making sure their ducts are also well-sealed, their crawl spaces are filled with insulation and just checking to plug all the leaks in your home.

If you look at all the different… if you add up all the leaks in your home, it can be like having a three-foot-by- three-foot hole in your wall. So you need to just make sure you plug all of those infiltrations.

MARGARET WARNER: All right, Kara Rinaldi, Tom Wallin, thank you both.

TOM WALLIN: You’re welcome.

KARA SAUL RINALDI: Thank you.