Heating oil price sets record

As the price of heating oil hits $2.78 a gallon and keeps rising, state officials and stores fear the economic impact.

By TUX TURKEL Staff Writer November 3, 2007

The average price of heating oil in Maine has broken an all-time
record, passing inflation-adjusted peaks that date back to 1981.

Maine's average oil price last month hit $2.78 a gallon. That's 11
cents higher than the annual average reached 26 years ago,
according to calculations done for the Portland Press Herald/
Maine Sunday Telegram by the U.S. Energy Information
Administration. The agency used the Consumer Price Index to
calculate the real-price comparison.

High as it is, the October figure masks the full impact of what's
happening in the market. Average prices are continuing to
climb, up 6 cents in the most recent weekly surveys done by the
state, to $2.85. That average is likely to rise again Monday,
when the next survey is done.

Record crude oil prices are among the factors driving the run-up
for heating fuels. They are even prompting the Energy
Information Administration to revise its winter fuels outlook.
Last month, the EIA projected that heating oil prices would rise
but might ease a bit by January. That hope is expected to vanish
when the agency updates its national outlook Tuesday.

"It will be different," said Paul Hesse, an EIA information
specialist who carried out the Press Herald's heating oil
calculations. "Actual prices will be higher than what we forecast
in October."

The impact of higher prices already has begun to ripple through
Maine's economy, state officials say, eroding sales tax revenue.
They fear the erosion will get worse this winter if people have to
choose between shopping and buying oil.

One thing is becoming clear: Many of the state's poorest
residents will struggle to stay warm in their homes.

Fuel prices are an important economic consideration in Maine
because eight out of 10 homes are warmed by oil or kerosene. A
typical home burns 850 gallons a season. Prices fluctuate during
the winter, but at current costs, seasonal heating bills would
easily top $2,000. That's about $416 more than in 2006, if the
current price stays fixed at $2.78. It's likely to rise, however.

The cost of fuel oil has shifted dramatically over the past
quarter-century.

The average annual price shot up to $1.20 a gallon in 1981. In
today's dollars, that equals $2.67. The federal government didn't
track monthly data for the states back then. But high prices
throughout 2007, the monthly figure for October and
projections for higher prices in November and December are
pushing the annual tally into record territory.

In historic terms, prices began to moderate after 1981. They fell
to a low of 79 cents a gallon in 1998, the equivalent of 97 cents
in today's dollars. Prices jumped sharply in 2000, but didn't
break $2 a gallon in real dollars until two years ago. Oil has
stayed high since then, but unlike price shocks in 1974 and
1979, for instance, increases have been gradual.

"This one has kind of snuck up on us," said Charles Colgan, a
former state economist and University of Southern Maine
professor who follows energy issues. Oddly, he said, Mainers
may have been surprised by the price jump because they are
better prepared to weather oil shocks. Homes are tighter and
heating systems are more efficient.

However, when people spend more money to stay warm and to
keep their cars moving, they have less disposable income for
clothing, electronics and other general merchandise. "The
combination of the hit in housing-related wealth plus high oil
prices will dampen the purchase of big-ticket items," Colgan
said.

That's especially true for low- and moderate-income Mainers,
according to Maine's current state economist, Catherine Reilly.
Energy is a larger percentage of the household budget, so
people tend to cut back. That behavior already is starting to
show up in sales tax revenue, she said.

The trend is clearly visible to Michael Allen, director of economic
research for Maine Revenue Services.

Over the past two years, Allen has noticed a link between high
energy prices and consumer spending on general merchandise
at stores such as Wal-Mart and Target. Sales tax revenue in that
category has grown at a much slower pace than that from
specialty stores, such as jewelers or sporting goods, which cater
to more-affluent consumers.

"Gasoline plays a role," Allen said. "But home heating oil has a
much bigger impact. People get very fearful, and you can really
see people draw back on their purchasing."

The prospect of high oil prices this winter may prompt
government revenue forecasters to cut projections for how much
the state can collect from sales taxes to balance the budget,
Allen said. Projections for the first quarter of the fiscal year
already are behind forecasts.

"We're very concerned about the holiday shopping season," he
said.

Retailers share that concern. Sales tied to the Christmas holiday
account for 30 percent of revenue for some stores, said Jim
McGregor, executive vice president of the Maine Merchants
Association. McGregor said he expects the group's board to
discuss the issue when it meets later this month.

"If consumers are spending more on home heating oil, they're
spending less on other things," he said.

Record oil prices have officials bracing for a wave of requests at
Maine's 10 Community Action Program agencies.

The People's Regional Opportunity Program in Portland already
has received 2,500 applications for low-income heating
assistance. That's a lot, said Betsy Sawyer-Manter, PROP's
housing director, considering the unseasonably warm autumn.

The average benefit for the assistance program this year is $544
per household. That will buy roughly 190 gallons at today's
prices, Sawyer-Manter estimated.

"That doesn't even fill the tank," she said.

In the past, Congress has released supplemental money for the
program. Sawyer-Manter said she hopes that will happen this
season, during an election year.

"People who are getting benefits now are going to be in
desperate need come January," she said.

Staff Writer Tux Turkel can be contacted at 791-6462 or at:

tturkel@pressherald.com

Copyright © 2007 Blethen Maine Newspapers