Published on Wednesday, February 9, 2000 in the Boston Globe
Northeast Oil Gouging:
'A Classic Case Of Market Failure'
by Scott Allen
As a search for villains intensifies in New England's worst heating oil crisis since the 1980s, energy analysts say the real culprit may be ''a classic case of market failure'' in which just about everything that could go wrong did go wrong in the region's shaky oil distribution system.
From the OPEC ministers who slashed the world oil supply to refiners who cut back on heating oil reserves just as winter approached, the Northeast simply wasn't prepared for a sudden cold spell, according to federal assessments. When the mercury plummeted in January, there wasn't enough heating oil to go around, nearly doubling the price in less than a month.
Today, thousands of vulnerable people are struggling to stay warm, especially in Boston, where Citizens Energy Corp. was forced to stop accepting new applications for fuel aid to the poor and elderly last week. One New Hampshire oil company left its customers out in the cold altogether, stopping all deliveries because it couldn't afford the escalating wholesale prices.
Now, attorneys general across the region are looking for evidence that oil dealers may have gouged their customers, and US Energy Secretary William Richardson is scheduled to come to Boston next week for a strategy session on how to deal with the home heating oil crisis.
Consumer advocates, meanwhile, called on state and federal officials yesterday to put major oil companies on the hot seat, charging that their lack of foresight hurt thousands.
''American oil refiners have a lot of questions to answer,'' said Larry Chretien, executive director of the Boston Oil Consumers Alliance, which provides discount oil to about 6,000 members. ''They were making a whole bunch of gasoline for sport utility vehicles, but they weren't making any [heating] oil.''
But it may already be too late to change the course of the current price panic, which appeared to ease yesterday as the price of newly delivered oil in New York Harbor fell sharply. Even if Richardson releases federally owned oil to be processed into heating oil, it wouldn't be available for up to a month.
Instead, federal and state investigators may have to concentrate on figuring out how to avoid the next crisis, something that may be hard to do as long as New England relies on such an unstable commodity as heating oil to warm homes.
So far, Vermont Representative Bernard Sanders has filed a bill in Congress that would set up a reserve supply in New York Harbor to avoid future shortages. Others have suggested that wholesale oil companies be required to keep a larger reserve.
However, the idea of a fuel reserve has run into opposition in the past because of the cost to maintain it, which Sanders estimated at $225 million over the next 20 years. Some critics say the reserve system would drive up oil prices all the time, rather than only during periodic shortages.
''As bad as this has been, I'm not sure it's worse than under some of the alternatives,'' said Massachusetts Energy Resources Commissioner David O'Connor, noting that this is the first sudden price increase since 1990.
The roots of the current crisis go back to last year when, faced with the lowest inflation-adjusted crude oil prices since the Depression, the Oil Producing and Exporting Countries finally persuaded members to reduce worldwide production. The supply cut, coupled with rising energy demand in Asia, caused an increase in the price for all petroleum products from propane to gasoline.
Up until that time, New England had been blessed with remarkably low and stable heating oil prices. Last year, for example, the price of a gallon of heating oil never topped 80 cents, compared to the $2 a gallon that some customers were paying earlier this week.
But the rising world oil prices had a particular effect on home heating oil, unusual among petroleum products in that it is used only in cold weather months and mainly in the Northeast, from Maryland north. Most of the rest of the country relies on natural gas for heat.
Because of the limited market for home heating oil, refiners are loath to produce too much for fear of winding up with unused product in the spring. With crude oil prices running high, refiners cut back on their heating oil stocks, causing US reserves to drop by more than 10 percent in November, when supplies normally rise.
''Far and away the most important decision was made last fall by refiners to limit the amount of home heating oil that they would refine,'' said O'Connor.
Oil industry officials dispute that they cut back on home heating oil production, noting that overall production for this winter is slightly above last year. While reserves did drop, John Felmy of the American Petroleum Institute argues that the drop reflected the industry's concern about having too much oil in storage on New Year's Eve, when Y2K problems had been feared.
But Alice Lippert, a home heating oil analyst at the US Energy Information Administration, said the refiners' low reserves suggest they were expecting a mild winter, an expectation reinforced by the warm temperatures of the last two winters.
At the agency's annual home heating oil conference in October, said Lippert, ''We couldn't get anybody to predict that it was going to be a normal or a colder than normal winter.''
Of course, if refiners were unprepared for a cold winter, so were New Englanders. After several years of relatively low heating oil prices, few were willing to pay a few dollars extra in exchange for a guarantee from their oil delivery company to keep prices stable throughout the year.
As a result, when the temperature began to drop right after Christmas, the entire Northeast was vulnerable to a sudden shortage that invites spiralling prices. In early January, the price of oil delivered to New York Harbor began to soar, sending a chain reaction through wholesalers and retail distributors and finally to customers. From Jan. 17 to Jan. 24 alone, retail heating oil prices in Massachusetts jumped from $1.17 a gallon to $1.74.
The price jump immediately clobbered customers of J.L. Oliver in Berlin, N.H., which had promised to deliver oil for as little as 55 cents a gallon even if the wholesale price jumped. The company stopped making deliveries altogether, forcing the state Office of Energy and Community Services to find new oil suppliers for about 2,500 households.
In addition, Citizens Energy, a nonprofit organization run by former US Representative Joseph P. Kennedy II, suspended applications for an emergency fuel aid program for the poor and elderly, largely because Citizens was paying almost $2 a gallon for oil that it turned around and offered at 40 cents for people in the program.
Even as the heating oil crisis swept the region, at least two other factors made the problem even worse.
First, natural gas companies up and down the Eastern Seaboard, also facing demand increases, began switching certain major customers from gas to oil service. These customers, who received a discount on their gas bills in exchange for agreeing to switch to oil occasionally, increased demand for heating oil just as prices were rising.
In New England, these factories and power plants switching to oil boosted oil demand by only about 2 percent, but oil industry officials said the increase was much greater in New York, New Jersey, and Pennsylvania.
Second, the cold weather also brought ice and rough weather to ports throughout the region, making deliveries of oil that could ease the crisis more difficult, according to Lippert of the Energy Information Agency.
In addition, the attorneys general of Massachusetts and Rhode Island have launched investigations into whether oil wholesalers or even individual home delivery companies may have illegally jacked up prices to take advantage of the crisis.
Initial reviews of price increases in Massachusetts show that home delivery companies may have actually lost money, as wholesale prices jumped 58 percent while their prices to consumers went up only 55 percent.
However, Rhode Island Attorney General Sheldon Whitehouse is zeroing in on the nine biggest wholesale companies that provide the oil to the home delivery companies. Yesterday was the deadline for these companies - including Mobil Oil, Sprague Energy, and others - to provide financial information that could show whether they profiteered or not.
''I want to determine whether legitimate market forces are driving this increase, what they are, whether anyone is taking unfair or deceptive advantage, and what we can do to prevent such steep price hikes in the future,'' said Whitehouse.
Even if no gougers are caught, however, O'Connor, the Massachusetts energy commissioner, said the current crisis is a wakeup call for the oil industry to plan better for winter heating season. Already, momentum is building for some sort of government-mandated oil reserve, and pressure is likely to build when Energy Secretary Richardson visits Boston next week.
Moreover, the oil industry may pay in another way: natural gas suppliers are expecting a rush of home heating oil customers to switch to them once the ground is thawed enough to bury new gas lines.
Ultimately, Chretien, director of the Boston Oil Consumers Alliance, agrees that there is plenty of blame to go around for the oil price fiasco, from OPEC to consumers who had grown to expect low oil prices indefinitely.
Though Chretien wants more accountability for the major businesses in the oil supply chain, he concludes, ''We have met the enemy and he is us.''
### © Copyright 1999 Globe Newspaper Company
© Copyright 1999 Globe Newspaper Company