Minimum Oil Inventories Urged to Prevent Strains on Oil Fuel Supplies and Prices

Oil industry consultants testifying at a House subcommittee hearing emphasized the need for federal regulations requiring power companies to maintain minimum oil inventories, citing the recent winter weather-related surge in demand. They highlighted the concerns of sudden price and supply strains in the Northeast and Midwest, including rolling blackouts and increased petroleum product demand. Consultants also suggested flexibility in truck driver work hours and Department of Transportation rules during emergency situations. They warned that future sudden seasonal surges in fuel demand may be increasingly difficult to handle due to industry trends, including the decline of small terminals and the complexity of new fuels.

Key Takeaways:

• Oil industry consultants proposed federal regulations requiring power companies to maintain minimum oil inventories to prevent strains on supplies and prices.
• During January's intense cold, oil burn by electric utilities in the Northeast and Midwest increased by at least 225,000 barrels per day (b/d).
• The increase was mostly residual fuel oil, with 35,000 b/d of distillate fuel sufficient to heat 225,000 homes per day.
• At least 50 utilities in the Northeast and Midwest registered new winter electricity demand peaks, resulting in rolling blackouts and a sudden need to switch to oil-fired power generation.
• Pirinc estimates that demand for all types of petroleum products rose more than 700,000 b/d in January.
• Heavy intermittent demand imposes significant seasonal costs on oil fuels, which consultants say should be kept within the systems of the users.
• Utilities are tending to stockpile as little oil as possible, with residential users normally carrying a 25- to 30-day supply.
• Increased flexibility is needed in Department of Transportation rules on truck driver work hours during emergency situations, such as icy roads and snow.
• Trends in the oil industry, including the decline of small terminals and the complexity of new fuels, may make it challenging to handle future sudden seasonal surges in fuel demand.
• The amount of residual fuel oil sold has been declining annually, forcing oil companies to downsize their resid operations and reduce their inventory.
• The number of companies operating oil barges is shrinking due to a new federal requirement for double-hulled barges.

Statistics:

• 225,000 barrels per day (b/d) increase in oil burn by electric utilities in the Northeast and Midwest during January's cold spell.
• 35,000 b/d of distillate fuel sufficient to heat 225,000 homes per day.
• 700,000 b/d rise in demand for all types of petroleum products by all consumers in January.
• 15% increase in temperature, compared to the normal January temperature.
• 36% colder temperature in December 1989, which led to a steep spike in fuel prices.
• 4¢/gallon increase in the average retail price of No. 2 heating oil in New York state in January.
• 3¢/gallon increase in wholesale prices of No. 2 at New York Harbor by mid-February.
• 8¢/gallon increase in wholesale prices of No. 2 at New York Harbor in January.
• 7¢/gallon increase in wholesale prices of No. 2 at New York Harbor to mid-February.

Sources:

• New York-based Petroleum Industry Research Foundation Inc. (Pirinc)
• House subcommittee on energy and power
• John H. Litchblau, Lawrence J. Goldstein, and Cheryl J. Trench, top officials of Pirinc.