Will your heating bill top $1,000 a month?

Will your heating bill top $1,000 a month?

Will your heating bill top $1,000 a month?

Moneybox
Commentary about business and finance.
Oct. 3 2005 4:58 PM

The October Surprise

It's your home heating bill, 70 percent higher than last year's.

So far, rising gasoline prices have caused only marginal damage to the vast U.S. economy. Lower-end retailers, like Wal-Mart and Family Dollar, complain that high gas prices are cutting into their sales. American Airlines has canceled several flights, and the White House has issued a halfhearted plea for conservation. But while drivers may groan about the high price of gas, they haven't changed their consuming habits drastically—and if my Slate colleague Austan Goolsbee is right, they won't unless the high prices persist for five years.

But high prices for another form of energy are about to brutalize Americans. October signals the beginning of the winter heating season. The high price of heating fuel—a problem that has been hibernating in the spring and summer—is about to become an enormous issue in the northern half of the country.

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The price of natural gas, the most popular fuel for heating homes, is rocketing upward, driven by rising demand, relatively stagnant North American supplies, and the disruptions imposed by the recent hurricanes. According to the Energy Information Administration's most recent daily production update, up to 76 percent of the Gulf of Mexico's natural gas production remains off-line. As this chart shows, the price of a contract for November delivery of natural gas has risen 50 percent in the last six weeks, from about $9 per million British thermal units in mid-August to $14 today. Natural gas is vulnerable to such spikes. Because crude oil can be moved around the globe with relative ease, the hurricanes didn't massively disrupt the market for oil. That's not the case with natural gas. Natural gas from the Middle East would have to be cooled to -256 Fahrenheit, liquefied, transported in special ships, and then re-gasified in the United States. The necessary infrastructure is lacking. And there is no strategic natural-gas reserve the government can draw down in times of need.

The cost of heating oil, the price of which is largely a function of the price of crude oil, has been rising as well, up about 10 percent in the past month, according to EIA's weekly report. EIA projects significant further price hikes for both heating oil and natural gas next year, too. The government does have a Northeastern heating-oil reserve that President Bush is thinking about tapping.

As a result, assuming a typical winter and a "Medium Recovery case," EIA estimates that heating costs are going to explode.  For the 2005-06 heating season, "residential per-household expenditures" will rise by 71 percent for natural gas in the Midwest, 31 percent for heating oil in the Northeast, and 40 percent for propane in the Midwest. For all of 2005, EIA projects Americans will spend $1.08 trillion on energy, up 24 percent from 2004. That amounts to 8.7 percent of gross domestic product, the largest percentage since 1985.

Heating-fuel prices hikes will have a different psychological and economic impact than rising gasoline prices. For most consumers, rising gas prices are manageable, since people tend to buy gas in $40 or $50 portions. And the price increase has generally been orderly and steady, which gives people time to adjust.

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Not so for heating-related fuels. Many people haven't paid heating bills since last winter, and level-paying arrangements (which spread payments out over several months) frequently take a hiatus in the summer. Consumers also purchase heating fuel in larger quantities than they do gasoline. They take delivery of several hundred gallons of heating oil at a time, not 20. Monthly bills run well into triple digits.

For many who live in cold-weather climes, the bite will be more painful than rising gas prices. Many consumers (Moneybox included) already spend more on heating fuels than they do on gas. For urban dwellers, for the carless, and for suburbanites who commute primarily by train, higher gasoline prices haven't been a big deal. But because everybody needs to heat their home in winter, the tax imposed by higher heating-fuel prices will be more far-reaching. Poor people in the Bronx who don't drive will find themselves spending much more on energy than they did last year.

Heating bills are, at least, somewhat progressive. The bigger your house, the bigger your heating bill. This winter, all those people living in 6,000-square-foot McMansions with double-height entryways and steam showers will be shelling out several thousand dollars extra in heating costs. The yuppies and the executive class will get squeezed along with the poor and rural dwellers.

One economic downside of the heating-fuel spike is that it will afflict many of the highest-earning parts of the country, which account for a disproportionate share of consumer spending. This winter, many northerners who shop at Costco and Saks will find that thousands of dollars that would ordinarily be spent on clothes, food, and electronics will instead go to the utility or to the gas company. And the first big bills will be arriving in mailboxes across the Northeast just when retailers are preparing the circulars for Christmas sales. In mid-September, the National Retail Federation issued its first Christmas shopping season forecast, which was somewhat pessimistic. If energy prices remain high, this is the year the Christmas shopping grinches could finally be right.