I spent a few days in my home state of Pennsylvania, where everyone, of course, is braced for spending the next month and a half as the epicenter of presidential politics. The Keystone State, in fact, is a good place for the candidates to witness firsthand the havoc created in the economy by the high price of energy. The Morning Call newspaper in Allentown (where I held my first job out of school 26 years ago, writing obituaries) has this agonizing story of what has happened to some customers who tried to lock in a reasonable price for home heating oil before winter hit. In a word, they got screwed.
The author of the story, Sam Kennedy, talked with one customer who bought her winter heating oil in advance last summer at $2.50 a gallon, which would have been a remarkably smart move. That is, if her heating oil company had stayed in business. However, with cold weather still gripping Pennsylvania's Lehigh Valley, she called for a refill and found that the firm had simply shut its doors and stopped answering calls. Her tank running dry, she had to buy nearly $800 of heating oil at the current market price of $3.17 a gallon. I know I've been harping on this theme, but those economic stimulus checks certainly aren't going to go far in households that have had to pay for heating oil twice.
But this story is not only about the burden of high crude prices on customers in places like the Lehigh Valley, where some reports say one third of households are heated by oil, but also about the small-business middlemen in the energy market. Indeed, one heating oil dealer told the Morning Call that his accounts receivable had doubled, and another said he got out of the oil heat business altogether because of the volatility.
Even while high crude prices generate unimaginable wealth for the oil producers, they put the squeeze on retailers. Earlier this year, while preparing a story on the record high cost of oil heating this winter, I talked with John Huber, president of the National Oilheat Research Alliance, about the bind for those in the fuel delivery business when prices skyrocket in the middle of the winter heating season. "When the price doubles, our whole business structure changes," he says.
On the one hand, the heating oil retailer has established a line of credit with a supplier or suppliers based on that earlier, lower price of oil. Sometimes the oil companies aren't too flexible about extending that line of credit to cover the higher price. Meanwhile, "as you enter a high-priced era, the customers slow down their payments," Huber says. "As you're doing your bills, you get a $400 heating bill, and a lot of times that will go to the bottom of the pile. Instead of 30 days, they'll pay in 38 days. That creates a cash flow problem of some significance." Especially with the supplier on the other end, waiting for payment and nervous about extending too much credit.
Finally, the oil dealers are hit by an especially nettlesome problem: conservation. Yes, people turning down their thermostats, trying to use less energy. Good for the nation. Bad for heating oil dealers making money based on volume of sales. If customers cut down their fuel use, pretty soon the oil dealers find they aren't covering the costs of the trucks they've bought, their fixed assets, or their employees. And as more of them get squeezed out of business, that's a problem that circles back and hurts the customers even more, because less competition in the market will mean even higher prices.
Both Hillary Clinton and Barack Obama, in their energy plans, talk about changing the incentives for big electric and gas utilities so that they are rewarded for promoting conservation and efficiency instead of for selling more energy. This idea of "decoupling" profits from increased energy consumption is just beginning to make headway in some states, but it's probably a system easier to put into place for the few big utilities that sell electricity and natural gas than for the hundreds of small fuel oil dealers out there—mostly in the Middle Atlantic and New England states.
Since only 7 percent of households nationwide use oil heat, I think it has been easy for Washington to forget about them. That's why it's great the candidates are in Pennsylvania at the end of this winter, to see up close those bearing the brunt of the $100-a-barrel oil pain.