Energy Efficiency Center - FIA

Frequently Asked Questions

Natural Gas FAQ's

Q. Why Has the Demand for Natural Gas Increased?

Answer: Natural gas is America's most popular home-heating fuel because it is efficient, clean and reliable. In the United States, 52% of all heated homes have natural gas heat. And natural gas is increasingly popular for use in new home construction, businesses and electric generating facilities.

Demand for natural gas has increased even during the summer months because that is when the use of electricity increases and many power plants use natural gas to produce electricity. In fact, most new power plants are fueled by natural gas.

This increased demand has been "competing" with the gas drillers' ability to replenish the supply. So even though natural gas production has increased over the last few years, it has struggled to keep up with the demand for natural gas.

Q. What Can Be Done to Lower Prices?

Answer: With demand continuing to rise, gas companies are working to increase the natural gas supply available to our region by seeking new sources, developing new ways to get gas supply here, and supporting new energy efficient technologies. The federal energy bill signed into law in August will help in bringing new sources to our region and promoting energy efficiency. It is not expected that this will have an immediate impact on supply prices.

Efforts underway include developing new natural gas pipelines and expanding the use of Liquefied Natural Gas (LNG). New pipelines will bring natural gas to New England from places such as the Rocky Mountains and eastern Canada - lessening the dependence on the Gulf region and helping to reduce the impact of storms like Hurricane Katrina. LNG enhances our storage capabilities, helping to ensure that we have gas supply available whenever it's needed. While this effort does not directly control natural gas prices, it is believed that improvements in supply will help to restrain the prices gas customers pay.

Q. Is Natural Gas Still The Best Value?

Answer: Besides being one of the cleanest burning fuels, natural gas remains your best overall value, especially in comparison to alternative energy choices. Energy prices have risen for all fuel sources, yet clean, dependable, reliable gas heat offers many advantages over other energy sources. Natural gas burns much cleaner than heating oil, which means lower maintenance costs and fewer repairs on your heating equipment. Current market conditions have increased the price of natural gas, heating oil, electricity, and propane. However, the prices of all fuels rise and fall over time and with its many obvious advantages, natural gas has proven to be the preferred energy choice by more than 65 million customers across the nation.

Residential Heating Oil FAQ's

Heating oil is a petroleum product used by many Americans to heat their homes. Historically,heating oil prices have fluctuated from year to year and month to month, generally being higher during the winter months when demand is higher. This winter, distillate fuel inventories are low and customers will be concerned about the potential for higher prices. To understand the reasons for these price variations, consumers need to understand how heating oil is used and how and where it is produced.

Q. Who uses heating oil?

Answer: Of the 107 million households in the United States, approximately 8.1 million use heating oil as their main heating fuel. Residential space heating is the primary use for heating oil, making the demand highly seasonal. Most of the heating oil use occurs during October through March. The area of the country most reliant on heating oil is the Northeast

Some customers try to beat rising winter prices by filling their storage tanks in the summer or early fall when the prices are likely to be lower. However, most homeowners do not have large enough storage tanks to store the full amount needed to meet winter demands. Because homeowners may have to refill their tanks as often as 4 or 5 times during the heating season, possible rising or spiking prices are a concern.

Q.Where does heating oil come from?

Answer: The United States has two sources of heating oil: domestic refineries and imports from foreign countries. Refineries produce heating oil as a part of the "distillate fuel oil" product family, which includes heating oils and diesel fuel. Distillate products are shipped throughout the United States by pipelines, barges, tankers, trucks and rail cars. Most imports of distillate come from Canada, the Virgin Islands, and Venezuela. Refiners are limited in the amount of heating oil they can make to meet the demands of the winter heating season. Some winter heating oil is produced by refineries in the summer and fall months and stored for winter use. During the coldest winter months, the inventories that are built in summer and fall are used to help meet the high demand. Refiners can increase heating oil production in the winter to a modest degree, but they quickly reach a point where, to produce more heating oil, they would also have to produce more of other petroleum products which could not be sold in sufficient quantities during the winter months. On the other hand, if consumer demand is high for a seasonal product, such as gasoline, refiners may delay producing heating oil for the winter, which may lower inventories at the start of the heating season. Such was the case in the summer of 2002, when re- finers produced more gasoline to supply high gasoline demand. As a result, the 2002-2003 heating oil season started with low inventories.

Heating oil is brought into oil storage terminals in an area by refiners and other suppliers. For example, heating oil may be delivered to a central distribution area, such as New York Harbor, where it is then redistributed by barge to other consuming areas, such as New England. Once heating oil is in the consuming area, it is redistributed by truck to smaller storage tanks closer to a retail dealer's customers, or directly to residential customers.

Q. How much does a gallon of heating oil cost?

Answer: Heating oil prices paid by consumers are determined by the cost of crude oil, the cost to produce the product, the cost to market and distribute the product, as well as the profits (sometimes losses) of refiners, wholesalers and dealers. In 2001, distribution and marketing costs accounted for 46 percent of the cost of a gallon of heating oil. The next largest component, crude oil, accounted for approximately 42 percent of the cost of a gallon of heating oil. Lastly, refinery processing costs account for another 12 percent.

Q. Why do heating oil prices fluctuate?

Answer: Heating oil prices paid by consumers can vary over time and by where a consumer lives. Prices can change for a variety of reasons. These include:

Seasonality in the demand for heating oil - When crude oil prices are stable, home heating oil prices tend to gradually rise in the winter months when demand is highest. However, at times, prices can surge quickly to very high levels, as occurred in January/February 2000 (see box on "What Causes a Surge in Heating Oil Prices"). A homeowner in the Northeast might use 650-1000 gallons of heating oil during a typical winter, while consuming very little during the rest of the year.

Changes in the cost of crude oil - Since crude oil is a major price component of heating oil, changes in the price of crude oil will generally affect the price of heating oil. (See Figure 2.) Crude oil prices are determined by worldwide supply and demand. Demand can vary worldwide with the economy and with weather. Supply can be influenced by the Organization of Petroleum Exporting Countries (OPEC) and other factors.

Competition in local markets - Competitive differences can be substantial between a locality with only one or a few suppliers or dealers versus an area with a large number of competitors. Consumers in remote or rural locations may face higher prices because there are fewer competitors.

Regional operating costs - Prices also are impacted by higher costs of transporting the product to remote locations. In addition, the cost of doing business by dealers can vary substantially depending on the area of the country in which the dealer is located. Costs of doing business include wages and salaries, benefits, equipment, lease/rent, insurance, overhead, and state and local fees.

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