"Since crude oil prices account for about 58 percent of the cost of heating oil, the impact of higher crude prices is very direct for the seven percent of Americans who heat their homes with fuel oil," said Mr. Van Horn. Citing data released by the Department of Energy in October, he added, "Fuel oil prices may increase up to 16 percent this winter. He added, "Five percent of Americans who use propane for heating will be hit hard as well as the cost of propane is expected to jump up to 12.9 percent this year over last."
"Other forms of heating have somewhat better near-term pricing conditions," added Mr. Van Horn. Prices for natural gas, the largest source of residential heating fuel across the nation, (58 percent), are expected to rise six to seven percent over prices a year ago. Electricity prices are forecast to rise a relatively mild 2.3 percent, impacting approximately 30 percent of American households."
"The prospect of higher fuel costs, along with weather uncertainties, is fueling consumer anxiety," said Mr. Van Horn. "Unfortunately, with both elements of the heating bill rising, something that has not happened since the winter of 2002/2003, consumers are left with few options in the near-term other than to pay more to heat their homes this winter. Combining higher heating bills with recently declining consumer confidence levels provides a cautious outlook for consumer spending during the holidays and in the months ahead."
Nationally, the combined effect of higher input costs, the relative sizes of the residential fuel markets (heating oil, natural gas, propane, and electricity) and some growth in consumption could produce a nationwide increase in home heating expenditures of 10 percent versus a year ago.
Consumers Have Few Options In The Short-term
According to Mr. Van Horn, "For homeowners facing the most significant price increases, their options in the short-term are relatively limited. For example, the ability for fuel oil users to take advantage of natural gas prices is limited by the proximity of gas pipelines and conversion costs. Where available, natural gas competes on price (which remain competitive), delivery consistency and convenience versus other forms of heating supplies."
Mr. Van Horn also noted that the difficulty of managing price risk for residential consumers can be illustrated by the experience of "gas marketing firms". As energy services went through various stages of deregulation in the '80's and '90's, natural gas consumers were presented the ability to contract/price their gas through companies independent of those that physically deliver the fuel to the home. While the presence of "gas marketing" companies probably did add to the efficiency of the marketplace, the number of firms still involved in these services has swung dramatically. From 51 firms in 1986 to more than 350 in 1994, there may only slightly more than 100 currently.
Energy Efficient Products And Alternative Energy Sources On The Horizon
Longer term, IBISWorld expects the ability to insulate consumers from erratic fuel costs will come from continuing improvements in energy efficient products and alternative energy sources. The current momentum behind green marketing is encouraging and can affect consumer and industrial users, as well as energy producers. If and when corporate branding includes accomplishments in energy efficiency and conservation and resonates with consumers, the number of home energy audits and use of efficient light bulbs, appliances and furnaces should indeed pick up speed.
With crude oil approaching record prices in real terms, Mr. Van Horn said, "We may be closer to the tipping point where alternative energy investments will begin to gain more traction." He added, "To see a significant development of alternative energy facilities, a variety of conditions will need to line up correctly. Investors need confidence that energy prices will remain at high levels for an extended period of time. The investment in and adoption of new technologies is also sensitive to state and Federal policy supported financial inducements and the willingness of local communities to build commercial facilities.
Mr. Van Horn added, "On a much smaller scale, these same factors apply to residential applications of alternative energy. The Energy Policy Act of 1992 has been renewed and expanded several times (most recently in 2006) and as of 2005 contains benefits for residential and small businesses. The installation of renewable energy systems in dwellings or small businesses will attract a 25 percent rebate of spending on qualifying equipment or $3,000, whichever is less. Financial requirements aside, IBISWorld does expect that alternative residential systems may experience higher adoption rates in rural vs. urban areas as fewer community concerns may exist."
