Table of Contents

Fueling it like it is!

With the holiday season past, you’re beginning to settle into the rhythm of a new year when all of a sudden your electricity and gas bills arrive. You sigh in disbelief at the outrageous charges. As many of you know, the U.S. coal and electric power industries are tightly linked. Data from the U.S. Department of Energy (DOE) Web site indicate that more than 87% of domestic coal is used for power generation by utilities, and coal accounts for more than 56% of all power generation (1). Power generators will attempt to pass costs back to coal producers and carriers (primarily railroads) whenever they can. As a result, coal purchase contracts will likely become shorter in duration and lower in price. The traditionally stable coal market may absorb some of the volatility of electricity markets.

Last year, the amount of heating oil produced in the United States fell temporarily because of local refinery outages in January. The outages were a result of extremely cold weather, which paralyzed barge deliveries and stalled shipments to markets in the northeastern United States. The temporary reduction in supply drove up prices, making it harder for many consumers to pay for the heating oil they needed. According to reports by the American Petroleum Institute (API), there were several weeks last winter when average U.S. prices were twice as high as the previous winter (2). Having adequate oil supplies is a real concern for many Americans who depend on this fuel to heat their homes. The API home page is intended to help answer questions American consumers might have regarding the outlook for heating fuels this winter.

U.S. inventories of crude oil and refined products, including heating oil, are dangerously low. On September 22, 2000, in an effort to ward off growing concern about winter fuel supplies and to boost supplies, President Clinton directed DOE to exchange 30 million barrels of crude oil from the Strategic Petroleum Reserve, America’s emergency oil stockpile (3). Major oil companies have jumped on the Clinton directive by borrowing rather than purchasing crude oil from the reserve. Companies that participate in the exchange program are expected to return oil to the reserve in fall 2001. Companies that return more than the amount they borrowed will be eligible for a bonus percentage that will be specified in the offers.

Assessing the fuel oil supply

Some of the most important factors affecting heating oil supplies this season are crude oil and natural gas supplies, conflicts in the Middle East, gasoline use during the summer months, deregulation of the electricity and gas suppliers, and mergers of the big oil companies.

Crude oil supplies are tight, but according to API, crude prices are about the same as last winter’s average, which was dramatically higher than prices the previous year. Supplies are at a premium because of high worldwide demand and because the Organization of the Petroleum Exporting Countries has yet to return the millions of barrels per day of crude oil it removed from the market over the past few years. Higher crude oil prices tend to mean higher heating oil prices because the cost of crude oil may account for more of the cost of making and marketing heating oil.

Because crude oil is expensive to store, refiners hold only small amounts and may have bought less this past summer than usual. Over the summer, U.S. crude oil inventories averaged 10% less than the same time last year (2). One reason for the low inventory is that U.S. refineries made large amounts of gasoline to meet persistent domestic demand. In preparation for increased heating oil demand this winter, refiners have begun to make more heating oil and less gasoline. Companies and consumers benefit when refineries and heating oil dealers have adequate inventories to meet demand at the outset of the heating oil season.

To protect our fragile landscapes and ecosystems, the federal government prohibits further exploration and production of oil on federally owned soil. As a consequence, the United States imports more than half the crude oil it consumes.

Assessing the electricity generation markets

DOE issued a report in 1998 detailing the movement to restructure the U.S. electricity generation markets (4). The report examined the potential effects of restructuring on the markets for electricity generation fuels: coal, nuclear energy, natural gas, petroleum, and renewable energy. The report includes the following:

• a brief review of restructuring in progress at the federal and state levels; 
• detailed discussions of the major qualitative issues for each of the major fuel supply markets; and 
• a presentation of a range of possible quantitative results, based on the National Energy Modeling System of the Energy Information Administration (5). 

Trends toward deregulation

America’s electricity market is massive. Its total assets are approximately $500 billion, and it has net annual revenues of more than $200 billion (6). The size of this market is not surprising, considering that almost every American is a consumer of electricity. Unfortunately, despite the fact that millions purchase and use electricity, few have a true choice in deciding from whom they will receive their service. A confusing set of outdated, inefficient, and overlapping laws and regulations continues to govern the industry at the federal, state, and local levels (7).

As more states deregulate electricity, they enhance their competitive economic position, which may lead to changes in the financial risks and demands on the supply and transportation infrastructures for the fuels used in electricity generation. Competitive electricity generation markets also will have far-reaching implications for the coal industry. Deregulation is also likely to lead to lower costs for consumers. These lower costs have the potential to spark construction of new facilities and greater incentives for innovation and efficiency. Think of all the cost savings, innovations, and other improvements that resulted from the deregulation of the airline transportation, trucking, railroads, telecommunications, and natural gas transmission industries (8). Electric power industry restructuring is expected to result in renewed pressure for cost cutting and consolidation in the coal industry, extending the trend of the past decade.

Many deregulation initiatives have taken root at the state level. As with most broad initiatives, there is a downside to the deregulation of the electricity market. The market has become an increasingly complex web of interconnected networks that cannot be carved into neatly defined or clearly distinct markets and regulatory jurisdictions. Like the airline, trucking, and telecommunications industries, the power industry will require federal action during the deregulation process. The U.S. electricity market is said to be so large that regulation based primarily on geographic boundaries defies economic and legal logic (9). Localized regulations result in unjustifiable differences in rates from one region to the next and impose other unnecessary burdens on interstate commerce such as franchising arrangements and reciprocity concerns. Since interstate commerce is under the jurisdiction of the federal government, federal guidance will be essential to ensure that appropriate measures are taken to resolve these lingering issues regarding electricity deregulation.

Some progress has been made with the passage of the Electric Reliability 2000 Act in the Senate (S. 2071). The passage of this bill closely follows the industry’s need to have federal guidelines for deregulating the power industry. In a press release from the North American Electric Reliability Council (NERC), the organization’s president, Michehl R. Gent, said, “The passage of the bill, which closely follows the industry consensus reliability language, moves us a giant step closer to enactment of the needed legislation that would enable NERC to form a self-regulatory reliability organization” (10). The Common Purpose Institute for Energy and Environmental Solutions contains a Web page that monitors daily state and federal changes in legislation affecting the deregulation of the power industry (11). DOE has a similar site that provides an updated status report of the restructuring of the power industry (12).

Alternative fuel sources

Although gas and electricity are the major sources of energy, there are folks investigating alternative fuel sources. At Chemical Innovation, we have frequently presented articles on fuel alternatives (13–15). In the February issue, we will feature a story about microenterprise-based briquetting technology, which converts nonproductive agricultural residues, yard wastes, and junk mail into economic and environmentally sound heating and cooking fuels. In developing nations, the briquettes are sold on the open market as a less expensive alternative to wood. For a preview, see the Legacy Foundation’s Web site (16). And be sure to read Nai Y. Chen’s article on energy in the 21st century in this issue.

References

1. www.energy.gov/
2. www.api.org/consumer/ 
3. www.fe.doe.gov/ 
4. www.eia.doe.gov/cneaf/electricity/chg_str_fuel/execsumm.html 
5. www.eia.doe.gov/
6. www.heritage.org/ 
7. www.heritage.org/
8. www.nemw.org/unleashelec.htm 
9. www.heritage.org/
10. www.policy.com/issues/13/item187.asp 
11. www.serve.com/commonpurpose/dereg.html 
12. www.eia.doe.gov/cneaf/electricity/chg_str/tab5rev.html 
13. http://pubs.acs.org/
14. http://pubs.acs.org/ 
15. http://pubs.acs.org/subscribe/archive/ci/30/i10/html/10fischer.html 
16. www.legacyfound.org 

Marc C. Fitzgerald is assistant editor of Chemical Innovation.