Are U.S. Heating Fuels Becoming Unaffordable?
Despite recent hyperbole, U.S. heating fuel prices are not high by historical standards.
I wasn’t reading a lot of energy news during the 1973-74 oil crisis, but I can’t remember U.S. heating fuel prices ever receiving this much attention. An ominous Wall Street Journal headline reads, “A Winter of Giant Gas Bills is Coming. Are you Ready?”. Bloomberg warns us about an impending “Propane Market Armageddon”.
But are these prices actually high? Severin’s recent blog post on gasoline points out the importance of adjusting for inflation when making historical comparisons.
Today’s blog post looks instead at U.S. heating oil, propane, and natural gas prices. It turns out that, yes, 2021 prices are higher than 2020 prices. However, current prices are actually *below* the average real price over the period 2000-2020.
I’m not trying to minimize the suffering that millions of U.S. households will experience this winter. As always, we should think hard about how energy prices impact the most vulnerable households. But current prices are well within the historical range, and more “average” than “armageddon”.
The figure below plots average residential heating oil prices. These prices have been adjusted to reflect 2021 dollars. Since 2000 the general level of prices has increased 65% so adjusting for inflation matters.
The Associated Press is correct when they say that heating oil prices are “sharply higher” for 2021. But this is a statement about the year-to-year change and reflects, more than anything, that prices during 2020 were lower than at any time since 2005, as a result of reduced global demand and lower prices for crude oil.
Overall, heating oil prices in 2021 are below the average price for the period 2000-2020.
But What About Propane?
The story is similar for propane. Much has been written about surging demand for propane in part driven by outdoor dining and the similar applications. EIA is correct when they report that propane prices are up 54% compared to last year.
But again, it is helpful to view that year-to-year change with historical perspective. I’m sure there have been isolated cases of extreme propane prices in some places and some weeks but, on average, U.S. residential propane prices for 2021 are right in line with the historical range.
Dash for Gas
Ok fine. But heating oil and propane are both derived from crude oil. What about natural gas?
Residential natural gas prices are up compared to last year. But as with the other heating fuels, prices for 2021 are actually lower than the historical average 2000-2020. Worth noting also that U.S. natural gas prices are dramatically lower than the truly extreme natural gas prices being experienced in Europe.
Probably the more salient feature of the figure above is the pronounced seasonal pattern. Most natural gas utilities collect fixed monthly fees, so the average price (calculated as total revenue divided by total consumption) is higher during the summer when households consume little natural gas.
Bottom line: U.S. natural gas prices are not nearly as high as you might have been led to believe. Moreover, just in the last few days, wholesale natural gas prices have sunk even lower, driven by warmer than average weather, which should continue to moderate residential prices.
I want to emphasize again, though, that I’m not trying to minimize the challenges that millions of U.S. households will face this winter. Even in normal times, energy bills are a big problem for households with limited resources.
Also, with winter energy prices there is always the concern about bill spikes. At this point, this winter is looking unseasonably warm, but weather patterns can change and unseasonably cold weather can significantly push up both prices and fuel consumption.
But, overall, current U.S. heating fuel prices are more “common” than “catastrophic”. From heating oil to propane to natural gas, prices are well within the historical range and not nearly as extreme as they are being portrayed in many media sources.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Davis, Lucas. “Are U.S. Heating Fuels Becoming Unaffordable?” Energy Institute Blog, UC Berkeley, December 13, 2021, https://energyathaas.wordpress.com/2021/12/13/are-u-s-heating-fuels-becoming-unaffordable/
Data Construction Notes:
Monthly U.S. residential heating oil and propane prices are from EIA (here). These prices include delivery costs and are only reported for winter months October through March.
Monthly U.S. residential natural gas prices are from EIA (here). Data are currently available only through September 2021. U.S. wholesale natural gas prices are down considerably since September 2021.
Prices were adjusted for inflation using the Consumer Price Index.
Lucas Davis View All
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.
There is a big regional difference in propane costs. We live in a rural a rural area less than 20 miles from Berkeley and have no natural gas supply. We can only dream of propane costing under the $3 that you show on the graph above. We just paid $4.50 per gallon for about 170 gallons of propane to fill our home propane tank. At 27 kwh of power in a US gallon (3.79 liters) and a furnace efficiency of 80% this is a cost of about US$0.21 per kwh of delivered heat. Theoretically, an air sourced heat pump should provide about 3 times the heat of input electricity in our mild climate. At US$0.17 per kwh (12M to 15:00) a heat pump should cost less than US$0.06 per kwh of heat. Even at the US$0.30 per kwh price of electricity at peak from 15:00 to 24:00, this would still only be about US$0.10 per kwh delivered heat. We are experimenting with a portable heat pump, but so far I have not been able to conduct some tests to determine if this heat pump really delivers 3 times the heat of direct electric heat. Even an electric heater at 100% efficient is going to be cheaper to heat with than propane at US$0.17 per kwh. It would be interesting to evaluate heating costs on a regional basis and see at what point switching from propane or heating oil to air heat pumps would make economic sense. This would particularly true if the house needs AC for cooling, as then the cost capital cost of a combined AC/heat pump might cost less than separate AC and heating systems.
“Redundancy for electricity can be provided through distributed energy resources.” I have not seen any data that bears this statement to be valid. I have seen work done by the staff of the California Energy Commission that identifies only about half of the needed electricity production, to meet the demand, by 2045 ( I have documented this observation in testimony filed with the CEC)..
I suggest engaging at the CPUC’s IRP proceeding where the real action is happening on long term planning. We also do not and should not have 100% of the resource identified for 25 years from now. That kind of outlandish planning is the core reason why our electricity rates are so high.
Read your 11/30 blog. Oh my, you took a shot at the PCIA methodology and even want cover for long term contracts now that CCAs are market participants, too. Emerson will never scold you. I will not engage any further on this string, its just not fair.
I want a level playing field. The IOUs are playing with a stacked deck and stealing value from customers. If IOUs get cover for their contracts, then CCAs deserve it too. If you don’t want CCAs to get cover, then take it away from the IOUs. Industrial DA customers shouldn’t be able play by their own special rules.
Already did. It’s called the VAMO, my advocacy 5 years ago. For all electric customers, not just opt-out CCA or legacy industrials, or new commercial DA. A shame the CCAs couldn’t agree with me.
Being in the room when you made the proposal, it was unworkable. The biggest problem was that the IOUs refused to let go of their generation assets so they could be distributed to the CCAs and perhaps the ESPs or DA customers (the latter lack of direct accountability was an added legal problem as it is DA customers, not ESPs, who are responsible for the PCIA). It was the IOUs and TURN who rejected the deal, not the CCAs who have tried to propose similar ideas without success. You proposed to implement a natural gas solution in a very different electricity institutional structure.
For those interested in a summary of the VAMO proposal:
You were not in the room for the past 5 years.
Huh? I testified on behalf of CalCCA in the 2018 PCIA OIR. I’ve testified on behalf of the Joint CCAs in PG&E’s ERRA and continue to consult to them on these issues. I most certainly saw your presentation. I was part of the City of Davis commission that led to the formation of VCEA. I’m not sure what part of the discussion I’m supposed to have missed.
This historical analysis is very helpful. But what is happening here is a significant increase from recent past years in New England with much higher natural gas prices that influence the price of electricity. And it is the sudden jump in those prices that households cannot easily accommodate or plan for. Low and middle income customers pay for essential utility services each month and telling them that they paid higher prices adjusted for inflation is not something either policymakers or politicians can use as an excuse.
First off, I must be old:
“but I can’t remember U.S. heating fuel prices ever receiving this much attention.”
For much of the U.S. that was as much of a crisis as gas pump lines. We had an oil furnace in Seattle and the thermostat went down a lot. It drove a large extension of gas pipelines into Eastern states that had little gas infrastructure and was the force behind the 1978 NGPA. That heating oil is largely concentrated in the Northeast is a legacy of that crisis. (Almost no one uses heating oil in Seattle anymore.)
Second, looking at the gas prices, it looks like there’s an increasing spread between summer and winter prices since 2008. What’s behind that?
To understand how “costly” fuels are, wouldn’t it be better to use some measure of affordability, rather than just looking at inflation adjusted levels? For example, the portion of the household income spent on fuels, by income quartile would be more revealing. Since the minimum wage has not kept up with inflation, even historically average prices will hurt lower income households.
Good analysis. Now separate the commodity cost from the delivery cost on a per mmbtu basis, using the same real dollars. May have to do by state, but you will find an upward trending line for delivery and a downward one for the commodity. Imagine how that spread gets accelerated if states electrify “everything” and don’t push those legacy costs to the electricity bill.
Is rising delivery costs a problem if we’re trying to electrify everything? That just enhances the price signal that we’re trying to send.
First, rising delivery costs highlights the lower finding costs of natural gas as a fuel, not unlike the lower costs of solar. The political spin on higher energy prices is really an indictment of higher utility charges, but the politicians can’t blame the utilities.
Second, enhancing the price signal “we want to send” begs your conclusion of electrify everything. Natgas is not 100% replaceable, nor should it be. Today SDGE has a major power outage all morning (and its not a tough day) but natgas keeps homes and businesses heated and cogens are still running. Redundancy is a societal good. My question is what happens when you choose to hide “electrify everything” costs in pursuit of your agenda? That is not good economic policy, to say nothing of the effect on the poor.
Redundancy for electricity can be provided through distributed energy resources. We cannot afford the methane emissions from the pipeline system nor the GHG emissions. We also can’t afford the gas distribution system if it has an extremely low usage level due to widespread residential electrification.
“Hiding” electrification costs would involve full compensation of gas utility and supplier shareholders. There should be no such assurances (especially if one believes in the importance of market forces in a capitalist economy.) Investors lose money all of the time–it’s why they have been paid a market risk premium on their rates of return. But that said, the transition will be slow enough that we will be able to avoid large stranded costs by stopping investment now and decommissioning residential and commercial lines by 2040.
A true believer, good for you. GHG is real, but you must be assuming that no new tech exists or will be created that can extract the energy out of hydorcarbon molecules without creating CO2, much less fugitive carbon that cannot be sequestered (remember all those abandoned/idled gas fields you are creating). Of course the alternative is that industries that need natgas or that find it cost effective will simply move to countries without our judgment and regulatory regimes and produce products and jobs there. And pipeline emissions are so far down the trivial ladder that you should know better.
I do note your avoidance of the social costs of retrofitting low income housing, because someone does have to pay for that by your 2040 deadline. If you want a free market, just price the carbon for ALL participants, including homes, and let the market solve the problem. Then any social engineering will at least be out in the open. Which it never was when we built 1 million solar roofs and gave away a legacy feed-in tariff.
None of those technologies are feasible yet on a large scale, much less financially viable. We can fly to the moon, but we don’t yet have regularly scheduled service. Carbon capture projects continue to fail for a variety of reasons, and “green” hydrogen won’t be cost effective for a couple of decades, and perhaps not all for residential use (especially compared to electricity from DERs.)
You’re also conflating residential and industrial gas use. We will likely have industrial gas use well past 2040, but almost all of those facilities are hooked up to the high pressure transmission system (which you in particular are aware of.) In addition, there probably will be sufficient renewable gas to meet that demand, but not enough for residential and small commercial use. The demise of the gas distribution system will have no effect on industrial customers.
Spoken like true believer, that somehow markets alone will solve the problem. As an economist, I can go through the market failures that will impeded that transition. Of course we will need to find funding for low income households, but almost all of them are rentals that are profit making enterprises for their owners. Land values will go down to absorb these costs. (Land is priced residually to the economic activity associated with that land.) But I have to ask a more pertinent question–what’s the problem with helping low income households make that transition?
As for solar rooftops, I write about that here: https://mcubedecon.com/2021/11/30/why-are-we-punishing-customers-for-doing-the-right-thing/ Remember why solar panels looks so lucrative right now (they weren’t so much as little as 6 years ago)–the mismanagement of the IOUs’ generation portfolios and excessive unneeded distribution investment (both of which I have documented in testimony filed over the last decade at the CPUC.)