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 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.