Ukraine Conflict Could Influence Struggle Between Heating Oil and Natural Gas

The conflict in Ukraine pitting Russia against the West could wind up affecting the market share struggle between heating oil and natural gas by driving up natural gas prices sooner than expected.

Natural gas heat is making inroads in Northeast markets on the strength of its favorable price. Natural gas production from shale gas wells increased by 250 percent between 2008 and 2012, according to the U.S. Energy Information Administration (EIA). This caused the average wellhead price to fall from 9.18 per thousand cubic feet in 2008 to $2.66 in 2012 – a decrease of 66 percent.

One of the fastest ways to drive natural gas prices up would be to add new demand at higher prices. That’s precisely the outcome that U.S. natural gas producers are seeking by exporting liquefied natural gas. Gas producers and their allies in Congress have seized on the Ukraine conflict as a reason to accelerate the approval of new natural gas expert facilities, so that Russian President Vladimir Putin will have less control over natural gas supplies in Europe.

The U.S. Department of Energy yesterday approved exports of liquefied natural gas from the Jordan Cove LNG Terminal in Coos Bay, Ore., in an apparent response to the clamor over Ukraine. It is the sixth facility to gain federal approval to export liquefied natural gas.

Exports are not expected to begin for several years, but the race to export natural gas could influence consumers who are considering natural gas heat and, more importantly, government officials who have supported natural gas expansion. New England governors and other officials have been out front in efforts to expand the use of natural gas for home heating, largely because of natural gas’s current price advantage. Should they conclude that natural gas pricing is merely a short-term phenomenon – as the heating oil advocates point out at every opportunity – they might think twice about committing public resources to support natural gas expansion.

The heating oil trade associations are working hard to prevent state officials from giving utilities carte blanche to expand natural gas heat without risking any capital, but the price argument is a daunting one that is difficult to combat. What public official would not want to facilitate cost savings for their constituents?

The utilities still have the upper hand, but recent news developments have been more negative than positive. Natural gas is coming under fire for its role in driving climate change and the poor condition of its infrastructure. The case for natural gas “cleanliness” is crumbling just as the heating oil industry is transitioning to reduced-sulfur heating oil that is less polluting than natural gas.

The heating oil industry is fighting to avoid being marginalized by an aggressive alliance of utilities and government officials. It’s important to seize on the negative news about natural gas and to pressure public officials who are now in the natural gas camp. There is a strong connection between natural gas exports and domestic natural gas prices, and it is vital to drive this message home, along with the other troubling news about natural gas.

The industry can’t expect public officials and consumers to connect the dots on their own. We need to help governors and other officials see that converting customers to natural gas and undercutting excellent local companies is, in fact, poor policy and bad leadership that will cause more harm than good.

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