There’s a lot behind the high price of oil

A ship is seen docked at Buckeye Partners L.P. oil terminal in South Portland. (photo courtesy of Buckeye Partners)

By Sen. Russell Black

AUGUSTA – Maine consumers were shocked when the price of heating fuel oil spiked by 10 percent or more the past couple of weeks. For some residents on automatic delivery, their shock came when they saw their delivery ticket after coming home from work one evening. For others, it was the price they saw on the screen or heard over the phone when placing their delivery.

Sen. Russell Black – Franklin

There’s been a lot of talk about what has driven these prices to their current highs. Biden’s environmental war against fossil fuels through his shutdown of pipeline projects, cancellation of drilling leases and a war in Ukraine amid cutbacks by OPEC has undoubtedly provided plenty of political fodder for those who argue that he’s responsible for the nation’s low inventories.

At the same time, however, speculative consumer behavior has also affected the current price. This behavior, which I’ll get to later, is nearly opposite to the hoarding we saw during the start of the pandemic when toilet paper, flour and just about any cleaning agent you can imagine disappeared off grocery store shelves.

During most winter seasons, heating oil prices usually move in tandem as demand for fuel increases when the weather turns colder. This pattern usually begins in September and cycles up through winter’s peak usage around February.

The current problem generating the most headlines, however, is the fact that prices now are already so much higher than last year. And as prices spike suddenly as they did last week, the concern for many families facing the choice between food and heat is quite real.

The average price for heating oil in Maine was relatively stable in September, ranging about $4.40-$4.59 per gallon for the month. When I say stable, however, last month’s average price of $4.50/gal. was up by 68% from September 2021’s average of $2.67/gal. While we may believe that heating oil delivery companies have the greater say in setting that price, they are only a small piece in a much larger puzzle.

Oil distributors across the state have the terminals where delivery companies go to get their supply. These distributors are the ones who set wholesale prices – called the rack price – that delivery companies pay.

For example, Buckeye Partners, L.P., owns the 140,000-barrel terminal in Bangor and co-owns the 725,000-barrel marine terminal in Portland with Irving Oil. Buckeye also owns the 124-mile pipeline that connects Portland to its Bangor location and the nearby Coldbrook Energy terminal, which also supplies distillates in Hampden. These terminals then supply wholesale fuel to the upper and eastern parts of the state.

According to several distributors and industry professionals, fuel oil prices are determined primarily by the New York Harbor Spot Fuel Market, which sets pricing for gasoline, diesel and jet fuel for the Northeast. Once the oil arrives, pricing adjusts further by how much additional processing takes place. In Maine, terminal distributors are required to put dyes and lubricity chemicals in home heating oil and off-road diesel fuel and are responsible for injecting ethanol into gasoline mixes before delivery to Maine gas stations.

For them, however, the underlying cause behind last week’s price spike is that consumers in Maine and across the Northeast have been playing a speculative waiting game all summer long in the hopes that fuel oil prices would come down before topping off. Unfortunately, they never did – and now everyone needs it.

Meanwhile, inventory started building up in May when demand dropped off amid April’s price spikes. However, refineries never ramped up summer production to replace depleted stocks since they only produce at the rate of demand to avoid backwardation, which is when the current price of oil is higher than those in the futures market. And while refineries can easily cut production during low demand, there are capacity constraints on the upside when demand surges.

Therefore, the speculative delay by consumers over the summer has disrupted what should have been a typical October distribution cycle, which in turn forces prices even higher since distributors must now compete with each other to meet the pent up demand.

While we know what is happening, it’s of little consolation to Maine’s families and we have to do all we can at the State level to help them get through it. This includes allocating more funds for heating assistance. One thing the Mills Administration can do right now is grant a waiver to allow the importation of non-ultra-low sulfur diesel that is currently banned but readily available in Canada. More inventory would bring prices down immediately.

Senator Russell Black is in his second term in the Maine Senate and represents District 17. He is the Senate Republican Lead for the Legislature’s Agriculture, Conservation and Forestry Committee and the Inland Fisheries and Wildlife Committee.

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