D. Dowd Muska


Who Killed the Oil-Heated House?

December 26, 2013

Americans are “addicted to oil”?

Evidently, no one’s told homeowners.

In 1973, the year of peak consumption, U.S. residences burned 942,254 barrels per day (bpd) of heating oil. Conservation, recessions, and fuel-switching, spurred by two energy “crises,” plunged the figure to 617,330 bpd -- a 34 percent decline -- in 1980. And the downward trend continued:

1985 513,789 bpd

1990 460,052 bpd

1995 425,542 bpd

2000 424,400 bpd

Cheap crude production abroad and the end of domestic price controls dropped the inflation-adjusted January price per gallon, between 1980 and 1999, from $2.64 to $1.16. That kept some customers loyal. But competition from electricity, conventionally produced natural gas, and the occasional wood stove remained fierce. The demand slide couldn’t be reversed.

A decade ago, heating oil again became the victim of hideously expensive petroleum, rising, in real terms, from $1.45 per gallon in 2002 to $2.67 in 2007 to $3.78 in 2012. (It’s currently a bit under $4.00.) Consumption cratered -- from 401,756 bpd in 2005 to 237,616 bpd in 2012.

It’s the choice of a quarter of homes in the Northeast, but heating oil is nearly unused in the West, Midwest, and South, and thus it warms just 6.1 percent of the nation’s residences. And now it faces a foe that will likely prove unbeatable: fracking.

New York, Massachusetts, Pennsylvania, Connecticut, and New Jersey consume the most heating oil. All five states either contain or abut the Marcellus Formation, a section of rock in the Appalachian Basin that is suffused with natural gas accessible by horizontal drilling and hydraulic fracturing.

Pennsylvania’s natural-gas production grew by more than a factor of 12 between 2007 and 2012. In West Virginia, production doubled between 2010 and 2012. The bounty is so lush, federal number-crunchers wrote, it has “driven the forward price of natural gas at the Columbia Gas Transmission Appalachia hub below Louisiana’s Henry Hub price, the benchmark for natural gas throughout North America.”

Natural gas isn’t worth anything if it can’t get to customers. So in the Age of Fracking, a plethora of pipeline projects are completed, underway, or in the planning stages. Between 2013 and 2015, the Energy Information Administration (EIA) estimates a capacity expansion of “at least 3.5 billion cubic feet per day” to the “New York/New Jersey and Mid-Atlantic markets.” (On Halloween, Bloomberg Businessweek reported, “natural gas prices in Manhattan were nearly 40¢ cheaper than in Louisiana. That hasn’t happened in eight years.”) Even New England’s notorious NIMBYs are waking up to natural gas’s potential to cut power-plant emissions and provide affordable warmth. Progress on the region’s pipeline bottlenecks appears likely.

As natural gas stays cheap and becomes more available, conversions are proliferating. Abandoning oil is an individual decision, of course -- the math don’t make sense for everyone, and bureaucrats and politicians shouldn’t “incentivize” or mandate switching. But for millions of homeowners who are not planning to move anytime soon, the economic case for changing over is strong. In October, the EIA predicted that heating with natural gas this winter will cost the average domicile $679. Stick with oil, and the bill will be $2,046. If maintained for ten years, that’s a savings of $13,760, a figure significantly higher than the cost for most conversions.

Last winter, The Boston Globe reported that “membership at the Massachusetts Oilheat Council … has declined by nearly half over the last two decades.” Dealers, understandably desperate to stay in business, assert that historically, oil’s been a better pick than natural gas. They hawk state-of-the-art furnaces and technologies that boost efficiency. They rail against “speculators” greedily driving up the cost of their product. And several have embraced “green” silliness, selling conventional oil blended with a portion of “biofuel.”

Provided they’re not hijacking the coercive power of governments to impose rent-seeking schemes, best of luck to the oilmen who are trying to maintain their livelihoods. But history isn’t encouraging. Energy transitions take time, but once they occur, they’re usually permanent. Coal isn’t returning to homes, and it’s disappearing as a fuel for power plants. It’s looking more and more like natural gas cannot be stopped. It heats the majority of residences, will soon generate the plurality of electricity, and might one day capture a significant share of the transportation market.

That’s capitalism. Disruptive, unpredictable, and shaped by consumers’ -- not central planners’ -- desires. It defies “futurists,” exposes the cluelessness of resource ignoramuses, and puts the careers of “public servants” at risk. And it debunks “addictions,” diagnosed by the right or left, that never existed.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

# # # # #