Price Parity Could Come Sooner Than Expected

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Save customers from an expensive mistake

By Richard Rutigliano, PriMedia Inc.

It’s official: Switching from heating oil to natural gas makes no sense.

Natural gas has enjoyed a heyday in recent years, leveraging its price advantage to lure thousands of heating oil customers to the utilities – and causing a lot of grief for independent energy marketers. Now, a new set of facts is emerging that is changing the equation: Heating oil has come down by 40 or 50 cents per gallon, while natural gas is threatened with potential cost increases on several fronts. The much-needed return to price parity could arrive sooner than expected, leaving those who have converted to gas wondering where their windfall went.

Price is the most important issue driving fuel conversions, but it is not the only one. Natural gas has also been marketed as a cleaner fuel than heating oil, which has helped drive its popularity. Now, an ever-growing chorus of environmentalists is turning away from natural gas because of the methane emissions it creates throughout the supply chain, from leaks at production, to leaks during transmission, to leaks from the gas pipelines under many city streets. At the same time, heating oil is getting cleaner and improving it emissions profile.

Honeymoon Is Over

Does this mean that homeowners will abandon their fascination with natural gas and recognize that heating oil is their better choice? No, it does not. It merely means that the argument for converting from heating oil to natural gas has lost all its validity. The utilities will continue trying to plunder the heating oil base, and customers will continue to listen, but heating oil dealers can now draw on readily available facts to demonstrate that fuel conversion is a fool’s errand.

Consider these recent headlines disseminated by the American Energy Coalition (AEC), a grassroots group that helps heating oil dealers defend their turf:

  • Natural Gas in Northeast Hits Highest Price in 14 Years
  • Mass. Utility to Turn Down New Gas Customers Due to Pipeline Constraints
  • USA Today Exposes Natural Gas ‘Deadly Problem’
  • Natural Gas Exports Could Increase Prices
  • Do Methane Emissions Make Natural Gas No Cleaner Than Coal?
  • U.S. Oil Production Expected to Be Highest Since 1972
  • Governors’ Natural Gas Proposal Too Expensive and Rushed, CLF Says

It is truly great news that heating oil prices are plunging and environmentalists are fleeing the natural gas camp, but this news will not spread itself. The media is decidedly prejudiced against petroleum, and we would all perish waiting for a new wave of positive news reports about heating oil. It’s not fashionable to write kindly about petroleum, which means that the burden falls to the industry and its participants to influence customer perceptions.

AEC is already carrying the ball, so all that the individual dealers need to do is use the resources that the Coalition is providing and add some local amplification. In some key markets in New York, Connecticut and Massachusetts, AEC is laying a foundation with radio commercials that challenge popular perceptions about natural gas and heating oil. Consumers who hear the AEC ads are well prepared to doubt the utilities, and it’s up to the dealers to follow through and reinforce the theme.

You can send a powerful message with a special edition company newsletter that focuses on fuel comparison. Highlight the numerous upward threats to natural gas prices (more to come on this below), while reporting on the climate change impact of methane and reminding customers how much better it is to work with your team than to be stuck with utility service.

Social media is another helpful tool. Report all the AEC news updates in your Facebook and Twitter feeds and write additional posts whenever the news media reports on any of natural gas’s numerous flaws, such as leaking pipes or collusion between utility executives and public officials. Don’t rely exclusively on social media, however, because Facebook and Twitter have limited reach. All your oil accounts contribute to the bottom line, so it makes sense to wield your influence with your entire customer base, not just a segment. Bill inserts are also very helpful and should be used, but there is no substitute for direct communications from you in the form of letters and/or newsletters.

Bring your staff together to discuss customer communications regarding fuel conversion. Develop a simple, powerful set of talking points so that you make the best use of your limited opportunities for one-on-one contact. Be prepared to mail additional information on fuel conversion to any customers who wants to know more. Technicians should carry informational handouts and be prepared to answer questions effectively.

Looming Price Threats

If you follow energy news closely, you are aware of how much sobering publicity there has been about natural gas in recent months. Most importantly, natural gas prices face lots of upward price pressure. When an energy source enjoys favorable pricing, it draws a crowd, and then prices rise in response to the increasing demand. That is exactly what is happening with U.S. natural gas. Let’s take a look at the primary sources of that increasing demand.

  • The power industry is rapidly retiring coal-fired and nuclear power plants and replacing much of the lost capacity with natural gas. The U.S. Energy Information Administration (EIA) in its Annual Energy Outlook 2014 predicted that natural gas use for electricity generation would increase by 13 percent by 2020, by 22 percent by 2025, and by 29 percent by 2030. Unexpected factors can also serve to accelerate the transition, such as in California, where natural gas usage for power generation has increased by 16 percent due to a severe drought that has reduced hydropower availability. Standard & Poor’s recently predicted that increased demand in the power sector alone would drive natural gas prices up by 41 percent between 2012 and 2017.
  • Low natural gas prices are attracting manufacturers in energy-intensive industries, who are drawn by the prospect of lower costs. The American Chemistry Council reported in August, “In the chemistry industry, a historic expansion is well underway. To date, 194 projects representing $123 billion in new chemical industry investment is planned for the U.S., and 64 percent is by companies based abroad. Plentiful, affordable supplies of natural gas and natural gas liquids from shale have lowered costs and made U.S.-based production more attractive.” MIT Technology Review reported in September that inexpensive natural gas is fueling a large expansion of petrochemical manufacturing. “Ten years ago everyone was talking about projects in the Middle East,” Fernando Musa, CEO of Braskem America, told the Review. “Now if you go to industry forums in the U.S., Europe, or Asia, everyone is talking about investing here in the U.S.”
  • The current surfeit of U.S. natural gas has spawned an export industry for natural gas. The U.S. Department of Energy has already approved two LNG export facilities that could ship as much as 3.9 billion cubic feet a day of U.S. natural gas overseas, and four more facilities have been conditionally approved.

With all the new users bellying up to the natural gas trough, there is plenty of reason to anticipate higher natural gas prices. Since most home heat customers who convert are pursuing a lower price, they could be in for a rude surprise in a few years when they find that savings aren’t there. Do your customers a favor and warn them now. Once natural gas costs rise, they’ll appreciate that you saved them from a costly mistake.

Wait, There’s More

While increasing demand alone could drive natural gas prices higher, it is not the only upward price threat. Methane leakage is gaining lots of public attention because methane is a potent greenhouse gas with 80 times global warming potential of carbon dioxide over a 20-year time frame. If President Obama orders natural gas producers and utilities to reduce methane emissions, which he is expected to do, the costs will be passed on to consumers in the form of higher natural gas prices.

There is another ticking time bomb for natural gas prices that is poised to go off. Natural gas pipelines in cities like New York, Philadelphia and Boston are badly outdated and have been cited as the cause of numerous fires and explosions, as highlighted in a recent USA Today exposé. One New York City utility, Con Edison, estimates the cost of upgrading its pipelines at $10 billion. If the utilities bow to pressure and accelerate the rate of pipeline replacement, natural gas customers could face substantial price increases.

And while the upward price threats facing natural gas customers just keep growing, heating oil is benefiting form the same energy renaissance that has driven down natural gas prices. U.S. Crude oil production in 2014 is expected to be the highest since 1986, and next year’s production is expected to be the highest since 1970.

At the same time, heating oil is undergoing a positive makeover. Six key states have already switched to reduced sulfur fuel, and most of the supply will be at 15ppm by 2018. If ASTM approves new grades for B20 heating oil this winter, dealers may soon be selling B20 ultra low sulfur heating oil, which would burn at least as cleanly as natural gas.

With all these facts readily available in the public realm, we can expect policymakers to turn away eventually from natural gas expansion, as the Massachusetts legislature already did in August by declining to sign on to incentives for pipeline builders in New England. We don’t know when that day will come, though, so for now the Oilheat industry must do our customers a favor and spread the news ourselves.

If you would like help communicating with your customers about the changing energy picture, PriMedia is happy to help. Please call me at 800-796-3342 or e-mail me at rrutigliano@primedian.com to get started.

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