Crude Oil Blues* - Home Heating Oil in New Hampshire – Part 1

Home heating oil has been in the news a great deal the past few weeks in New Hampshire as oil deliveries from one of NH’s largest oil delivery companies, Fuller Oil, have been compromised. Many customers became concerned about late and partial deliveries and had difficulty contacting the company by phone. The NH Attorney General became involved and there has been a lot of discussion in the press and legislature about getting oil to customers and how to protect customers who prepaid for oil delivery contracts.

Oil delivery problems were not unique to NH. Just last week, there were radio reports of home heating crises in other states and where Department of Transportation regulations, which limit the hours that propane and oil delivery drivers can spend on the road, were suspended to enable oil and propane delivery companies to  get oil to their customers. With all this recent attention on home heating oil, I thought it would be timely to take a closer look at this topic to see what we could learn. 

Like many other folks in Northeast, I use oil to heat my home. In fact, as I noted in an earlier blog, home heating oil is the predominant home heating fuel used in most of New England. The green highlights in the map below clearly show our dependence on oil. In fact, the Northeast, which includes New England plus the mid-Atlantic states down to Virginia, is the largest home heating oil market in the world. As seen in the pie chart below the Northeast is responsible for 85% of home heating oil used in the US.

Let’s start with the basics. Home heating oil is a hydrocarbon fuel which is produced from the refining of crude oil. Crude oil itself is a mixture of different hydrocarbon compounds and, in the refining process, the crude oil is heated and various ranges of hydrocarbon molecules are separated from one another by the process of distillation.  There are different grades of fuel oil produced during the distillation process which are termed distillates. These distillates include jet fuel oil, gasoline, diesel, and fuel oils of different grades running from Number 1 to Number 6 fuel oil.

As the fuel oil number increases from 1 to 6, so does the viscosity of the oil and the average size of the hydrocarbon molecule in the fuel. Fuel oils in the Numbers 4 to 6 range are commonly used to fire the boilers on ships and are often referred to as bunker fuels. These bunker fuels are thick, goopy mixtures which normally need to be preheated before use. Depending on the grade of crude oil used as a feed material in the refineries, these bunker fuels can contain a lot of contaminants, such as sulfur, which make them highly polluting.

The home heating fuel that most of us use is known as Number 2 Heating Oil. Number 2 heating oil is similar in composition to kerosene and the automotive diesel you can purchase at the gas station. During the recent home heating oil shortage, many folks supplemented their home heating oil with diesel and kerosene but I recommend that you check with your oil company about the interchangeability of these fuels. The biggest difference between #2 heating oil and the diesel fuel used for transportation is the sulfur content. Home heating oil typically contains a lot of sulfur, which can range from 500 to 2000 parts per million (ppm), whereas transportation diesel has a sulfur content below 15 ppm.

Due to federal regulations regulating tail pipe emissions from diesel engines, the sulfur content of diesel fuels sold at gas stations is now very low in order to limit the amount of sulfur dioxide that is produced as a pollutant from the combustion of these fuels. Sulfur dioxide is a nasty combustion product and contributes, along with the burning of coal, to the acid rain and regional haze problem.

Even though low sulfur diesel for transportation use has been in place across the US for a while now, this is not the case with home heating oil. Here regulation is very much on a state-by-state basis. With the encouragement of the federal authorities, many New England states have been pushing to reduce the sulfur content of home heating fuels. In 2005 there was a proposal by some of the Northeast states to reduce the sulfur levels in home heating oil to reduce regional haze problems. It was recognized that home heating oil was the second largest contributor to sulfur dioxide emissions in the Northeast (after coal-fired power plants). Action on this proposal has, however, been rather patchwork in nature. Some states, such as New York, immediately moved to very low sulfur home heating oil but other Northeast states have adopted a phased approach, moving incrementally to heating oils with less than 500 ppm sulfur and then to heating oils with less than 15 ppm sulfur. These very low sulfur fuels are known as ultra low sulfur distillates or ULSD and are almost identical to transportation diesel fuel. 

The graphic below shows the time line for home heating oil changes in the Northeast states. New York already requires the use of ULSD and this year Vermont, Massachusetts and New Jersey are dropping their maximum sulfur levels to 500 ppm in the first step and will require ULSD later on in the decade. Although Connecticut is not shown on the graphic below, they have a law in place mandating ULSD for home heating oil if surrounding states pass similar legislation. I find it interesting that NH is conspicuously absent from this initiative but it is my understanding, based on conversations with the folks over in the Air Resources Division at the NH Department of Environmental Services, that this might come up for reassessment in the near future. They are taking into account the actions of neighboring states as well as the fact that the fuel oil industry, including refiners and wholesalers of home heating oil, are moving over to the low sulfur fuels anyway and regular higher sulfur fuels might be difficult to come by in the future.

Another sign of the change to very low sulfur fuel oils is that the Heating Oil Reserve, a federal program to keep a strategic reserve of 1 million barrels (42 million gallons)  of home heating oil in place, now requires storage of ULSD and  not  #2 Heating Oil. This reserve was created in 2000 to minimize potential disruptions in heating oil supply in the high usage Northeast area. Half of the reserve is located in Revere, MA, and the other in Groton, CT. Even the benchmark home heating oil price, the heating oil futures contract on the New York Mercantile Exchange, was changed in 2013 and is now based on the delivery of ULSD and not regular high sulfur #2 home heating oil.

In many respects, there is an inevitability to NH’s eventual conversion to ULSD home heating oil and, based on the conversations I have had with folks in the industry, everyone, from refiners to wholesalers to home heating oil retailers, wants to change to a standard home heating oil. Because of the patchwork of home heating oil regulations across New England, oil dealers and wholesalers presently have to keep track of different grades of home heating oil, including ULSD, <500 ppm sulfur fuel oil and regular high sulfur #2 home heating oil. This creates administrative, tracking, storage, logistic and cost challenges for these companies that they would like to eliminate.

The most important reason for the change is that ULSD home heating fuel is simply a cleaner burning fuel. It pollutes less, it produces less sulfur dioxide and oil service companies regularly comment on the fact that is better for oil burning devices: furnaces running ULSD show less deposit build up, the filters require less frequent changes and the units generally require less maintenance.

Let’s turn now to some New Hampshire specifics for home heating oil.  Recently Dave Brooks of the Nashua Telegraph published a great article about NH home heating oil challenges and particularly the problems that NH’s largest oil distributor was having in supplying its customers during the recent cold spell. It’s well worth a read if you haven’t seen it yet.

Like the other Northeast states, home heating oil is a big deal in NH. Data from the Energy Information Agency (EIA), shown below, indicate that 47% of NH homes still use oil heat.

However, when the long-term fuel oil figures are examined, one see that home heating oil consumption, for residential and commercial use, over the past decade has plummeted and is now about 55% off the peak 2004 levels. See the chart below.

Consider that there are 519,000 occupied housing units in NH (including multi-unit dwellings), 47% of which used oil heat and consumed the 100 million gallons used in 2012, then we can calculate that the average NH home burned only 410 gallons of oil in 2012.  Well, this calculated annual average oil consumption left me totally gobsmacked as this is a substantially lower number than the usual annual household oil consumption figure of 800 gallons per year that is used by many working in the home heating field. The 800 gallons/year figure is a number even I have  been using for years and which is in line with my own oil consumption.

This conundrum led me to dig deeper into oil consumption numbers. In the process, I learned that home heating oil consumption across the US has plummeted and that the EIA actually uses a US average of 551 gallons per year for homes with oil heat. The number for the New England states is slightly higher at 651 gallons/year. These data are based on the  2009 Residential Energy Consumption Survey and are used to forecast national heating oil consumption for the Annual Energy Outlook reports. My calculated numbers for 2009, using data from the chart above (138 million gallons of oil in 2009), yielded an average household oil consumption number of ~590 gallons/year, which is in line with the 2009 national average but somewhat lower than the EIA’s New England value. Based on my numbers, which use recent oil consumption data, it looks as though we have gone from 810 gallons/year in 2003 to 580 gallons/year in 2009 to 410 gallons/year in 2012. This is a massive decline and it begs the question: What is the reason for this big decrease?  

Others have looked at this and have noted similar trends but have not come up with definitive answers. The first conclusion that many people jump to is that there has been a big conversion to cheaper natural gas - but this is not borne out by the data.

In my subsequent investigations, I determined that the decade-long fall off in NH home heating oil use is due to a combination of factors, including the following:

• There has been a decrease in the number of NH homes that use oil heat. According to the American Community Survey, in the 10 years between 2002 and 2012, the number of homes with oil heat in NH decreased by 10% from 272,000 to 245,000. These conversions were most likely to fuels like wood pellets, natural gas and, in some cases, to propane.

• Over the past 10 years, there has been a warming trend and the winters have generally been warmer. In the blog post, A Hundred and Ten in the Shade, I introduced the concept of heating degree days and, in the chart below, I have plotted the annual heating degree days (HDD) for NH over the past decade. A decrease in heating degree days means less need for home heating. Since 2002, the heating degree days for the winter have decreased by about 10%. Considering that there is a direct correlation between HDD and oil consumption, this downward trend should manifest as an equivalent reduction in heating oil consumption.
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• An informal survey that I conducted indicated that a good number of NH homeowners who use oil heat, have, in the past decade, also installed wood pellet stoves or propane heaters into their homes to supplement their oil heat and to reduce their consumption of expensive home heating oil. It is challenging to find good data on this trend but the popularity of wood pellet stoves has certainly increased.

• With high heating costs, driven by the increase in oil prices over the past decade, many homeowners had energy audits done on their homes, and then took measures to improve the weatherization of their homes and some even installed more efficient oil-fired furnaces. According to Dana Nute, General Manager of the Resilient Buildings Group, these energy-efficiency projects can reduce home energy use by 25 to 30%.

• Finally, also according to my informal survey, part of the reduction is due to simple old-fashioned Yankee frugality. As home heating oil prices went up, some NH homeowners simply turned down their thermostats. A colleague who keeps detailed records of his NH home heating expenses, shared data with me which I have plotted in the chart below. As you can see, by the simple expedience of turning down his thermostat, he has reduced his oil consumption from ~650 to 700 gallons/year to about 450 gallons/year. A frugal Yankee indeed!
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We have certainly covered a lot of information in this blog post. We have learned that there is a movement underway and that our home heating oil will, over time, be converted to a cleaner burning and less polluting ultra low sulfur diesel fuel oil. We have also seen the dramatic decrease in home heating oil consumption in New Hampshire.

  

In researching this blog, I was also somewhat chagrined to learn that my own oil usage is higher than the US average, and not in a good way. My only mitigating factor is that I use home heating oil for both heat and hot water purposes. It is clear that I should show more Yankee frugality and that I too need to turn down the setting on my programmable thermostat. In fact, I will do so right away - so hold on a minute or two ……

…..Well I’ve returned feeling better that I have now taken some concrete action. However, it has struck me that by the time I have completed this blog post, my thermostat co-pilot will be down to visit me in my home office to inquire sweetly if there is something wrong with the oil furnace. I will then explain to her about Yankee frugality and the new temperature regime that is underway and after my explanation, she will inquire, a lot less sweetly, if there is something wrong with my mind. She will then suggest, and even encourage me to take myself, my laptop and the concept of Yankee frugality down to the unheated shed at the bottom of the garden where I should consider myself free to conduct experiments in sub-zero living to my heart’s content. On reflection, more insulation would seem to be the more prudent approach.

In my next blog I will take a look at some of the pricing issues in the home heating oil business. Until next time, remember to turn off the lights when you leave the room and maybe even turn down that thermostat by a degree or two.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

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(*Crude Oil Blues – A tune by country guitar picker and songwriter Jerry Reed with the memorable line “We’re low on heat, we’re low on gas and I’m so cold I’m about to freeze my…self”. This song was a minor hit in 1974. Jerry Reed is better known for songs like Guitar Man, recorded by Elvis, When You’re Hot, You’re Hot, and one of my favorites, She Got the Goldmine, (I Got the Shaft).)

Closer to Home* – Energy Conversion Efficiencies and Home Heating Fuels

This week I am not going to look at NH energy issues from my usual 30,000 ft viewpoint. Instead I want to focus right in on our homes and how we heat them. I was reviewing some publications from the Energy Information Agency and I was struck by the information on this map.

 

The map shows the predominant home heating fuel used in different parts of the country. In the bulk of the country, as shown by the states in blue, the key home heating fuel is natural gas. In much of the southern part of the country as well as the Pacific Northwest, most homes are heated by electricity (shown in red) and here in New England, New Hampshire is one of the handful of green states that rely on oil or kerosene for the bulk of home heating applications.

 

We in New England should be concerned about our dependence on oil for a number of reasons;

• We are reliant on a fuel source which is largely imported.
• We are reliant on a fuel source that has shown increasing price volatility over the past 10 years.
• Unlike much of the US, we are not reaping the financial and reduced carbon emissions benefits of the natural gas bonanza.

There is not much we can do in the short term to change the situation but it is important to understand the consequences of our overt dependence on oil heat. Let's look at some specifics.

 

In the table below I have listed the various home heating sources we use in New Hampshire along with their recent retail prices, their energy content in BTU/unit, their cost in $ per million BTU ($/MMBTU) and then, using the energy conversion efficiency concepts for each fuel I introduced last week, I have calculated the cost of the useful heating energy produced from each type of fuel.

 

 

I have used some of these data points to generate the chart below which allows us to directly compare the costs of the input and useful heating output values for each of these fuel sources on a common basis, $ per million BTU: the information is quite revealing.

 

 

Natural gas is by far the cheapest fuel source. In fact, electrical heating is 3.4 times as expensive and oil heating is 2.6 times more costly on a thermal energy output basis. Wood heating, either with regular firewood or wood pellets, is far better cost-wise, than oil or electrical heating. In fact, the costs for wood heating are presently only 30% higher than those for natural gas.
 

Even though natural gas is such a low cost heating fuel at the moment, most NH residents cannot avail themselves of this choice as in most parts of New Hampshire natural gas is simply not available. Without the low cost choice, we have to select between wood, fuel oil, electricity or propane.
 

Part of our choice will be influenced by the relative volatility of fuel prices. In the figure below I have plotted the historical costs of the various home heating fuels on a cost per energy content, $ per million BTU, basis. (These prices are uncorrected for efficiency factors.) The green data points show that, for a long time, wood has been the low cost fuel in NH and sometimes by a considerable margin. Oil and natural gas prices (red and blue, respectively) closely paralleled one another but, just after 2007 the prices diverged, with big increases in oil costs due to world market prices and decreases in natural gas costs due to the US natural gas supply bonanza created by fracking technology.

 

Even more recently natural gas prices have dipped below those of wood. It turns out that wood prices have a high sensitivity to the price of oil-based fuels, like kerosene, which are used extensively in the harvesting, preparation and transportation of wood-based fuels. As a result, high oil prices have lead to recent price increases in wood-based fuel sources. Electricity costs per unit of energy are substantially higher than any of the other fuels, with propane prices falling between those of electricity and oil.
 

When looking at relative fuel prices we have to take into account a number of other factors. Oil prices are generally more volatile and my guess is that they are likely to increase in the future but, on the other hand, I wonder how long the natural gas bonanza will last and whether prices will skyrocket higher sometime in the future. The relatively low cost and low volatility of wood-based heat make it an option well worth considering for home heating applications, especially if you don't have access to natural gas. 
 

I wrestle with these issues myself and I can get quite worked up about them. Like most New Englanders, I heat with oil and that drives me to distraction. I take some small comfort that oil heat is presently less expensive than electric heat and that I am able to store about a month's worth of oil on my property in the big ugly black oil tank I have in my basement. The folks reliant on natural gas have no storage capacity and a gas supply pipeline problem can result in the immediate inability to heat a home. However, that is small consolation when I consider the extra cost of heating my home. I have an average New England home and I burn about 850 gallons of oil per year for heat and hot water. This past year my costs for oil were about $3200. If I could convert to natural gas I would save almost $2000 per year. I would far rather be spending that money elsewhere than on a carbon-intensive, volatile, imported energy source.
 

Going with wood pellet heating would allow me to save about $1700 per year and, because natural gas is not even an option, maybe it is time to think seriously about the wood pellet burner for my home heating needs. I am, however, left with one nagging concern: if everyone in NH changed from oil heat to wood heat, would the New Hampshire forests be able to support that amount of tree harvesting or would we end up importing wood from Canada and the other parts of the US and therefore undo some of the cost and carbon savings associated with wood heating?
 

I trust I have left you thinking about your home heating options and their associated costs. If you have natural gas, you are indeed in a fortunate position because the rest of us are faced with heating fuel decisions that are quite complex. If you have changed over recently to wood pellet heating, let us know what your experience was.
 

Until next time, remember to turn off the lights when you leave the room.
 

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
3/31/13
    

(*Closer to Home was the third album from the 70's power trio, Grand Funk Railroad, and the song I'm Your Captain (Closer to Home) is, I think, one of their finer tunes. In fact, this was the very first American rock and roll record I was exposed to so I have a rather special connection with this album. For a bunch of guys from Flint, Michigan, they made some good music, wrote some great tunes and left a lot of good memories. This is one of those albums (along with Led Zep II and Dark Side of the Moon) that I have had on LP, 8 track, 4 track, CD and MP3 formats! I believe I am showing my age.)

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Post 11 – Keeping up with the Joneses – How are We Doing Compared to Our New England Neighbors?

Over the past months, I have lasered in on the energy profile of New Hampshire but have provided relatively little comparative data to give you a sense of how we are doing relative to our New England neighbors. So this week we are going to look over the fence and see if we are keeping up with the Joneses.  

Let's start off by looking at energy intensity. If you recall from my last post, there are two measures of energy intensity: there is the amount of energy that goes into producing one dollar of GDP and then there is energy use per person. These energy intensity measures are presented in the table below for the six New England states. Averages for New England and the US are provided for comparison.
 

 

The first thing to note is that Connecticut is the most energy efficient state as they use substantially less energy than the rest of the New England states to produce a dollar of GDP. In fact, they are at an impressive 48% of the US average consumption. New Hampshire sits squarely in the middle of the pack, with energy intensities close to the New England average. Maine has the poorest energy intensity figure for New England. Their energy requirement per dollar of GDP is even above that of the US average. Part of this is due to that fact that Maine has more energy intensity industries, particularly the paper and pulp mills. Maine uses 34% of its energy consumption for industrial usage, the highest of any of the New England states. Here in New Hampshire we only use 14% of our energy consumption for industrial purposes.

 

When we look at the energy use per capita, we note that the New England states use less energy per person than the US average. However we also note, a little unexpectedly, that little Rhode Island has the lowest use per person, which suggests a complicated relationship between economic output, personal and industrial energy usage for the New England states. (It also leaves me with a mental image of all those Rhode Islanders huddled into those big, fancy Newport, RI mansions in the winter months collectively reducing their per capita usage.)

 

Because of its energy intensive industries, Maine tops the list in per capita usage for the New England states and New Hampshire again finds itself in the middle of the pack. By both measures of energy intensity, the New England states are at about 72% of the US average.

Let's turn now to the overall energy supply portfolio and compare the New England states. Energy supply is equal to the overall gross energy inputs into the states and excludes the effect of any energy exports. This is the most straightforward basis of comparison and also allows contrast with national numbers. The two doughnut charts below show how the New England states compare to the US as a whole.

 

 

A few key differences are notable. The New England states are more heavily dependent on oil and natural gas than the rest of the US, but a substantially smaller portion of our energy supply comes from coal – only 5% of our energy consumption comes from coal vs. 21% for the US. This suggests we are more vulnerable to oil price and natural gas prices increases. On the other hand, we have more energy from non-fossil fuel sources, nuclear and renewables, 22% vs. 17% for the US.

 

The collection of charts below shows the same set of energy source allocations for the individual New England states.

 

On examination of these charts we learn the following:

• New Hampshire has the lowest dependence on oil and, except for Vermont, the lowest dependence on natural gas. Much of this is driven by the large amounts of nuclear power we generate.
• Massachusetts is highly dependent on fossil fuels, particularly oil and natural gas.
• Vermont has very little natural gas but a lot of nuclear power, no coal-burning plants, a decent amount of renewable energy and, of the New England states, the highest percentage of imported electricity. Seeing Vermont's high dependence on nuclear, all from the Vermont Yankee Nuclear Power Plant, makes one wonder what Vermont would do for power requirements if they closed down the plant.
• Maine burns almost no coal but a good amount of oil and natural gas. However the large component of renewable energy in the ME energy portfolio took me by surprise and left me scrambling to do more research. According to the Energy Information Agency, Maine generates a lot of electricity from hydroelectric operation and burns an enormous amount of wood for electricity generation and heating purposes. They also have a larger number of wind projects than the other New England states.
• Rhode Island is highly fossil-fuel dependent, with 96% of its energy requirement coming from oil and natural gas. There is no coal burning in RI and only a small amount of renewable energy.
• Connecticut is similar to New Hampshire, with a good amount of nuclear power but the state is still heavily fossil-fuel dependent and has relatively little renewable energy.

So what are our main takeaways from all this information?

1. Compared to the Joneses, i.e., our New England neighbors and the rest of the US, we, here in NH, have room for improvement. We are at 70% of the US average which is good, and we are neither the best nor worst of the New England states. Connecticut and Rhode Island set the standards for energy intensity.
2. Clearly New England, and especially our neighbors, is not coal country. There is no coal burning in Rhode Island and Vermont and very little in Maine. Coal usage is low in New Hampshire, Massachusetts, and Connecticut and, driven by cheap natural gas and more stringent environmental regulations, there will be further reductions over time.
3. Overall, in terms of renewable energy, New Hampshire does well, with 11% of the energy supply from renewable sources. Only Vermont and Maine do better. However, we are all still highly dependent on fossil fuels for our energy needs.

Each state has its own particular challenges. Vermont is struggling with decisions regarding an aging nuclear power plant, Rhode Island with its 96% dependence on oil and natural gas, and the rest of us with the fate of coal-fired power plants. Ultimately, I believe a portfolio approach to energy is best. We need more renewables, we need more nuclear, we need more natural gas and, in the meantime, coal has a place and needs to be part of our portfolio. Prudent energy planning requires that we reduce energy risk by not becoming too dependent on any one or two energy sources. We want to avoid the situation that the Rhode Island, with its over-dependence on oil and natural gas, finds itself in. Any substantial increases in the costs of these fossil fuels will have disastrous impacts on the already strained economy in Rhode Island.

 

I am fond of telling my students, in the MBA in Energy and Sustainability program at Franklin Pierce University, that when it comes to energy, there is no free lunch. Every time we turn on a light, drive to work or take a hot shower we create an impact on society, the environment and the future of our planet. Good energy decisions require data, analysis, planning, impact assessment and, ultimately, the implementation of difficult decisions that will impact someone. We owe it to future generations to make these difficult decisions now and to reduce our energy consumption. It really is time to stop kicking the empty oil can down the road or into our neighbor's yard. Most of us, I believe, understand that we need to do something concrete rather than fighting every energy project that comes our way. The challenge is figuring out what we need to do. What do you think we should be doing?

 

Until next time, remember to turn off those lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/17/13

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