Oct. 31, 2022

Staying Warm This Winter

Today many Americans are facing an issue their parents and grandparents never dreamed of: how to heat their homes this Winter. Although Winter is seven weeks away, anxiety among those in the northern parts of the country is at an all-time high. And rightfully so, the price and supply of most conventional heating fuels show that keeping your house warm this Winter will be expensive. And for some, it may not be possible at all.

Here where I live in Pennsylvania, we're facing this Winter with less than half the standard supply of heating oil. For those in other parts of the country, you may not be familiar with heating oil, but especially in the rural parts of the North East, heating oil is the primary heat source in the Winter. That typical diesel-like odor is wafting from many of the basements around here. Where I live, most of my neighbors use heating oil.

In New England, more than a quarter of all their homes use heating oil.

For those of us living in the country, there is simply no practical alternative. Heating oil and propane are the two most valuable ways to heat your home. There are no natural gas pipelines, electricity is prohibitively expensive in these cold climates, and geothermal is an alternative for some, but with a very high installation cost.

The Energy Information Agency provides updated information on the country's energy markets, and I will rely on them for my data. So, for the average homeowner, it's heating oil or propane. And what's occurring in the propane market this year is stunning.

We are running out of heating oil, and there isn't enough. That's the inescapable conclusion you come to after reviewing the current data. Here in the Mid-Atlantic, we're going into this Winter with half the average amount of hearing oil on hand. But in New England, heating oil stocks are at just 40% of normal. How will the oil companies supply all their customers this year? No one knows. It's a reality that hasn't happened in anyone's memory.

Let that sink in for a moment. What we do know is that the price of hearing oil is skyrocketing. So far, in the first three weeks of October (the latest EIA Data is from October 24), the cost of Heating Oil is up 24%. Heating oil began the month at $4.57/gallon and is at $5.69/gallon on October 24.

That means if you have a standard-sized oil tank, it now costs well over $1,500 to fill it. What's worse, some of the larger homes around here may need two or three deliveries throughout the Winter. My neighbor usually takes three tanks of oil in wintertime. At these prices, his tab this year will be $4,500.

And that's even though he supplements his heating need by burning wood—a popular alternative to conventional energy.

What's most concerning is that this trend in heating oil prices is coming to all of us. I remember being appalled at the high heating cost my friends in Boston had when I lived in Southern California. I could not believe they had to pay thousands of dollars to heat their home.

And then I went to the gas station. And suddenly understood that high energy costs are an epidemic throughout this country. For New England, it is the high heating cost in Autumn and Winter. For the South and Southwest, summer cooling costs are high. For California, it's the high cost of transportation.

We are a country that uses energy to make life bearable, to protect us from the humidity and heat of summer, and the frigid cold in Winter. And it's not just luxury that we're seeking. For some, maintaining a liveable home temperature is critical. It makes our homes habitable. Not to be morbid, but I expect many people will perish this Winter just for lack of heat in their homes.

It is a shortage in our land of plenty. The United States has been blessed with a bountiful supply of oil, ranking in the top 10 in proven oil reserves. We have also been the number one oil-producing country for the last couple of years. We have one-third the population of China, yet twice the oil.

Yet, this Winter, we are facing shortages in all our energy sources. With the very real specter of people dying for lack of heat.

And “shortage” is not a term that people in finance use loosely. It's a particular circumstance with real-world ramifications. And the best place to see these shortages is in the markets.

Suddenly escalating prices in heating oil, propane, and gasoline indicate that we have shortages in those markets. Price rises as supply shrinks.

Curiously, this energy shortage began 21 months ago when a new President was sworn in, with the pledge that he would "transition" the nation away from fossil fuels.

You know, those energy sources like heating oil, propane, and gasoline that are in such short supply now.


Econ Briefs

The headline news this morning is the record-shattering inflation rate in Europe. Inflation is caused directly by the increase in 25% gas and electric prices. The EU saw inflation higher than 10% in the latest quarter.

Eurostat, the organization that compiles all of the EU's economic data, is out with an interesting article this morning that shows the wide range of energy costs. But 10% is the inflation for all of Europe and does not reflect the incredible differences between the member nations. There are a group of countries where energy costs are rising at unprecedented rates. Energy costs in these countries, gas, and electricity are up more than 50% this year. These countries include Latvia, Estonia, Romania, The Czech Republic, and Denmark.

Other countries are seeing a relatively mild increase in energy costs for their citizens. Countries seeing less than 10% energy cost increases include Bulgaria, Slovenia, Germany, France, and Ireland. France, of course, has the continent's most extensive nuclear power stations. This power source, of course, is not impacted by the Russian gas boycott. At the same time, Germany appears to be subsidizing its citizen's gas and electric bills.

Inflation in Europe is the enduring cost of their Russian oil and gas sanctions, as well as the destruction of the Nordstream Pipelines. Europe is now paying premium prices for energy they must directly source worldwide.

Let's move around the world to China. Those Chinese Purchasing managers are indicating that the Chinese economy is slowing. Both manufacturing and non-manufacturing Purchasing Managers slipped into negative territory. For the non-manufacturers, it's the first time in 5 months that they've hit the brakes. The Purchasing Managers are the first step in the production cycle and are considered an excellent leading indicator.

Here in the US, the big news will come on Wednesday, when the Federal Reservewill issue its latest decision on interest rates. Everyone on Wall Street believes the Fed will raise rates by 75 basis points this time. It's a compromise position, with some earlier Fed statements indicating that they would have liked to raise rates by 100 bps. Still, recent economic data suggests that would be too much for this steadily weakening economy.