Why are Prices Rising in a Warm Winter?

Let’s keep this short:  One of the warmest New England winters ever recorded means that demand should be low.  Low demand should mean high supply, which in turn should mean low prices (remember that Supply and Demand graph you had to stare at for an entire semester of Economics 101?).  So why are prices high… higher than we’ve seen in four years?

There are four answers.  First, a warm New England winter does not mean a warm global winter, so we have to look at the demand for heating oil around the planet, not just here.  But isn’t the entire planet warming up?  Um… no.  Even the “warmists” have changed their alarm to “Climate Change” because they can’t prove that the planet is warming.

This winter is a case in point.  New England is experiencing a really warm winter, while Europe is experience record cold.  You know those romantic gondolas on the canals in Venice?  Here’s what the canals look like this winter:

Where are the handsome young Gondoliers in their horizontal striped shirts with their bare arms?  We use less oil in New England, but they use more oil in Europe, and the average demand is about the same.

The second reason is that heating oil and diesel fuel are essentially the same product.  So when demand for diesel is high, the price for heating oil goes up.  Is the demand for diesel high right now?  Not in the US, which is in the fourth year of recession, but it is booming in Asia, which is the largest diesel consuming region in the world.  So again, even though US demand is low, global demand is up.

The third reason is that local supply is weak.  Two major refineries in the Philadelphia area are shut down, and a third is shutting down in a matter of months.  This represents almost half the refining capacity on the East Coast.  Sunoco and Conoco Phillips, who own the refineries, wanted to expand them to make them more competitive, but restrictive regulations made it impossible.  All three are now for sale.  (Let’s hear it for the success of all those “pro-business” government policies…)

Finally, the Iranian threat has driven Europeans and Asians to buy oil and store it, driving up the price on fears that it will prove to be even more expensive if Iran attacks its neighbors, or if Israel attacks Iran.  But isn’t it highly unlikely that those two will engage in battle?  Remember SCUD missiles?

OK, those are the four reasons why the price of oil is up.  So what’s the good news?

Three bits of good news.  First, the technical analysts – the guys who study the up and down market patterns irrespective of the underlying supply and demand – think the oil market is headed for a tumble very soon.  It could easily drop 30 cents a gallon without surprising anyone, and perhaps further.  Unfortunately, those guys are wrong 50% of the time, so I wouldn’t hold my breath.

Second, our local winter is so warm that people are using an average of 20% less fuel than last year… that’s good news by any measure.

And third, our most attractive alternative heating fuel in Northwest Connecticut, Propane, has not risen in price at all.  In fact, the price for Propane has fallen slightly over the last two months.  We continue to convert homes from Oil to Propane when it makes sense to do so (old heating system dies, the family also uses a gas stove, dryer, generator, etc.).

In summary, the price is high because of global demand, restrictive US policies, and the Iran threat.  I predict two out of three of those problems will go away in short order, bringing prices back into line.  In the mean time, the best question remains “How can I use less fuel?”  And that’s something we are really good at helping people achieve. 🙂