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Thursday, October 3, 2013

The Northeast Home Heating Oil Reserve and the National Oilheat Research Alliance

Anthony Andrews
Specialist in Energy Policy

During the winter of 1999-2000, the price of home heating oil virtually doubled in some Northeastern states while storage levels of middle distillate stocks—the range of home heating oil and diesel fuels—sharply declined. The situation attracted lawmakers’ attention and concern. Of the U.S. households that use heating oil to heat their homes, 69% reside in the Northeast. The Northeastern states continue to rely on heating oil as a source of home heating, but at a reduced level of dependency compared to 2000. The Northeast demand for home heating oil has declined by 47% since 2000, from nearly 7 billion gallons to 3.6 billion gallons in 2011. However, the price of heating oil has increased more than 2½ times from roughly $1.50 per gallon beginning in 2000 to just over $4.00 gallon in early 2013. The price increase reflects the trend in the price of crude oil.

Both population and housing occupancy rates ostensibly drive heating oil demand. Both increased in the Northeast over the past decade. At the same time, improved insulation and more energyefficient heating systems in newly constructed homes may have offset demand. As a percent of overall domestic demand for natural gas, the Northeast region has remained nearly steady, varying between 20% and 22%, and recently returned to a level barely above 2001-2002 demand. Natural gas, electricity, bottled propane, and wood can substitute for heating oil. Natural gas demand in 2011 barely exceeded the 2000 demand. While natural gas production in the Northeast has increased because of unconventional gas shale development, the existing pipeline distribution system has not expanded in the New England States. Retail electricity sales have increased in New York and Pennsylvania, the two most populous states in the Northeast, while sales in the New England states remained nearly level. While the Energy Information Administration (EIA) does obtain volume data on residential propane sales, it does not publish this data. However, U.S. propane residential prices did rise from $1 per gallon in 2000 to over $2.80 per gallon in 2012. Residential use of kerosene has also declined.

In response to the 1999-2000 heating oil price spike and supply shortage, the United States Congress authorized the Northeast Home Heating Oil Reserve (NHHOR) in the Energy Policy Act of 2000 (P.L. 106-469). As a two million barrel emergency stockpile of government-owned heating oil, NHHOR was intended to meet roughly 10 days of demand by the Northeastern states at the time it was created. Congress also authorized the National Oilheat Research Alliance (NORA) to develop projects for the research, development, and demonstration of clean and efficient oilheat utilization equipment; and to operate programs that enhanced consumer and employee training.

Middle-distillate range petroleum products can serve as a heating and transportation needs. In its 13-year history, NNHOR has only released fuel for use by federal, state, and local emergency responders during natural disasters and not for retail sales during market dislocations. While the release demonstrated the utility of maintaining a distillate stockpile, the authorizing legislation had only anticipated a heating oil supply shortage during market dislocation. The recent change out of NHHOR stocks with ultra-low sulfur distillate increased its utility as a transportation fuel. In the absence of NHHOR, residential consumers have the recourse of substituting ultra-low sulfur diesel fuel for their heating needs.

Date of Report: September 19, 2013
Number of Pages: 24
Order Number: R43235
Price: $29.95

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