(Bloomberg) – In the most densely populated corner of the United States, temperatures are about to drop after a period of unusually warm weather. And the signs of a winter crisis are already multiplying.
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Fuel oil delivered to New York is the most expensive ever. Connecticut retailers are rationing it to prevent panic buying. New England diesel and heating oil stocks – the same product, taxed differently – are at a third of normal levels. Natural gas inventories are also below average. A Massachusetts-based utility is imploring President Joe Biden to prepare emergency measures to avert a gas shortage.
Add a little cold to the mix and, in the best-case scenario, Northeast consumers will face the highest energy bills in decades this winter. The Biden administration, under pressure to rein in prices ahead of the midterm elections, is considering ways to stockpile more diesel and gasoline in New England. In the worst case, a group of states with a combined economy larger than Japan’s will run out of fuel to keep the lights on and heat homes and businesses.
“It’s going to be pretty bad,” said Marcus McGregor, commodity research manager at Conning Inc. “Diesel, fuel oil and natural gas prices have skyrocketed. When you’re on a fixed salary, impact does this have on your overall budget?
The Northeast is no stranger to fuel constraints. Its shortage of pipelines and refineries means that shale fields in Texas and Pennsylvania might as well be on the other side of the world. But now a global supply shortage intensified by the war in Ukraine puts the region at risk of an energy catastrophe to rival that which threatens Europe. The North East will compete with countries across the Atlantic and around the world for the fuel needed to generate electricity, fill trucks and fight the cold.
Rocky MacDonald, a father of three and real estate agent in Stoneham, Massachusetts, expects to pay more than $500 for heating oil to keep his three-bedroom ranch home warm this winter. This is about 20% more than last year. To save money, MacDonald and his wife cook dinner at home more often. When they go out, they skip the bottle of wine.
” I can not believe it. The monthly expenses are crazy amounts,” MacDonald said. “I try to hoard every penny.” His family’s total expenses have soared to $10,000 a month from $8,000 a year ago, and he fears rising interest rates will trigger a housing market crash, eating away at his income.
For Rocky and other consumers struggling with historic inflation, the outlook is increasingly bleak. Americans are poised to spend the most on heating in at least 25 years this winter, according to government estimates.
In the Northeast, a typical family is expected to pay $1,094 for natural gas heating this winter, up 23% from last year, the Energy Information Administration said. Homes that rely on fuel oil for heating — primarily in New England and the Mid-Atlantic — will be hit even harder, with an average bill of $2,354. Northeast households using propane will spend approximately $1,970. Low-income consumers will suffer the most.
“Some of the people most at risk of suffering when heating oil runs out are immigrants and refugees,” said Jeffrey Thielman, president of the nonprofit International Institute of New England. “We are very worried about the coming winter.”
This creates a tricky political calculation for the Biden administration. U.S. energy exports have surged under pressure to help European allies replace sanctions-hit Russian supplies. But Biden also faces calls to limit those shipments to help consumers at home. For Republicans, inflation has proven to be a potent political weapon: A press release announcing a Donald Trump rally in Pennsylvania this month noted soaring heating oil prices in the state.
So far, the Biden administration is using one of the few tools it has to combat high prices at the pump: It is releasing unprecedented amounts of crude oil from the country’s emergency reserves. But it can only go so far. U.S. refineries are already running at full capacity, and without excess capacity to turn crude into usable fuel, the additional oil releases don’t do much.
Of course, a lot depends on Mother Nature. Meteorologists are predicting relatively mild temperatures for Europe and the North East this winter thanks to the weather pattern known as La Nina. Gas prices for next month delivery have fallen on both sides of the Atlantic as a warm autumn reduces demand. But in late October, the UK’s National Weather Service said the chances of a colder than normal winter were growing.
At the heart of the Northeast’s energy pressure is natural gas. Even after Pennsylvania’s shale boom brought plentiful supplies to the doorstep of the region, the constraints persisted.
That’s because New England and the Mid-Atlantic are more dependent on gas than ever. Coal-fired power stations have shut down en masse, victims of environmental opposition and competition from cheap gas. Wind turbines and solar parks have not grown fast enough to replace them. And this abundance of shale gas in Pennsylvania? Concerns about climate change have derailed pipeline projects to bring it east. The Northeast Dilemma reveals how the energy transition, at least in the short term, is making consumers worse for pain.
Nearly half of the electricity produced in New England and New York comes from gas. In very cold weather, the heating can take precedence over the running power stations, which keep the lights on.
“The New England region has been on a lousy carousel for about a decade now, trying to cope with the risk that comes each winter due to its overreliance on a single fuel source,” Federal Commissioner Allison Clements Energy Regulatory Commission, said in an interview.
Fuel oil and diesel are also part of the equation. The number of households in the North East using oil has declined as more and more switch to gas, but that’s cold comfort for the nearly 20% of homes that still rely on it. The East Coast, the only American region dependent on foreign imports, must compete with countries struggling to replace Russian supplies. Refineries from Virginia to New Jersey have closed after failing to compete with larger Gulf Coast rivals.
A shortage of diesel, meanwhile, can have devastating economic consequences. The bulk of consumer goods travels on trucks and trains powered by fuel, which is also used in manufacturing and food production.
The Northeast is not entirely isolated from oil and gas pumped from other parts of the United States. It can get its supplies from pipelines that meander from the Gulf Coast and other points to the west. Fuel oil and diesel are also delivered by truck and rail. In rare cases, they arrive by sea, although the law requires that only US-built ships deliver fuel into the country – and there aren’t many.
But in a deep freeze, the Northeast will need more supply from overseas. Most of it will come from Canada, and some will come from Europe, a region that will struggle to export fuel with its own energy security at stake as the continent moves away from Russia.
Other supplies will arrive from abroad. Shipments of liquefied natural gas leave Trinidad each winter under a long-term contract and arrive at a terminal outside Boston. Shipments to the East Coast also came from Nigeria and a handful of other countries.
On peak winter days, up to 35% of New England’s natural gas supply comes from LNG shipments, according to New Hampshire utility Unitil Corp. And the US will find itself competing with UK buyers in Japan.
This is also true for so-called distillates like heating oil and diesel. Last year, more than a fifth of the East Coast’s supply came from overseas.
Eventually, the Northeast may be able to wean itself off foreign fuel by developing renewable energy. But in the short term, there is little relief in sight.
“It won’t be pretty for the consumer,” said Robert Yawger, director of the futures division at Mizuho Securities USA.
–With help from Josh Saul.
(Add propane costs to ninth paragraph)
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