The New Energy Crisis: A Survival Guide: The Perfect Storm-Personal Finance

The New Energy Crisis: A Survival Guide: The Perfect Storm

The Perfect Storm

Winter storms may be hard to predict, but here's a forecast you can bank on: Home heating bills will go through the roof this season.

According to the federal government's Energy Information Administration (EIA), the price you pay for natural gas (the most common heating fuel in America) is likely to jump 7.5 percent over last winter. The price of home heating oil, commonly used in the Northeast, will rise 17 percent this winter. And don't think you're off the hook if you heat your Home with electricity, the choice in much of the South and Southwest. Wired heat is predicted to be up nearly 2 percent from last winter.

Now for the really chilling news.

Those projections are based on average winter temperatures. "A really cold winter could drive prices much higher," says Dave Costello, who monitors short-term energy rates at the EIA. Talk about a squeeze play: For instance, you will pay more for the natural gas itself and burn more of it to boot -- perhaps 33 percent higher if the mercury plunges just 10 percent.

What's going on here? When did Jack Frost switch from nipping at your nose to picking your pocket? It sure sounds like price gouging to the average Joe, but Costello blames a more basic economic force: supply and demand. "Cold weather puts huge pressure on the natural gas market," he explains. "U.S. gas production is stagnant, and Canadian supplies have been in decline since 2002." Overseas gas has to arrive by ship, in liquefied form -- and there are only four liquefied natural gas facilities in the country, in part because communities are scared of them. "It's very flammable stuff," says Costello, "but the safety record has been quite good."

U.S. Oil Imports

The oil situation looks equally shaky. "World oil markets have been tight for a while," notes Costello, who points to burgeoning oil use in China as one reason why supplies are low. Right now the entire world burns through more than 82 million barrels a day -- a number expected to reach 84 million in 2005-- straining the ability of suppliers to keep up. But aren't there still huge proven oil reserves in countries like Saudi Arabia and Iraq? Yes, says Robert Kaufmann, an economist at Boston University's Center for Energy and Environmental Studies. "But there's a limited ability to pump oil from the ground," he notes. "It costs a lot to drill a well and hook it up to a pipeline. The operable capacity of OPEC -- what you can pump today if you wanted to -- hasn't changed much in 20 years. So now we have demand for oil that's just about at capacity."

To make matters worse, says Kaufmann, technology has made it easier for refiners to cut down on their stocks -- the oil they keep in storage. That saves them money but makes it harder to supply consumers when demand runs high.

Energy Consumption by Country

Political turmoil in oil-producing countries could drive prices even higher. "It's the fear factor," says Kaufmann. Production in Iraq, a country with the world's second largest proven oil reserves, has slowed considerably since the war began.

Other fear-factor hot spots include Russia, where the huge privatized oil company Yukos is in hot water over charges of financial mismanagement. And in Venezuela, the largest oil producer outside of the Middle East, leftist president Hugo Chavez has rattled markets with his anti-Western sentiments. "I don't want to say it's a perfect storm," says Kaufmann, "but right now we've got a confluence of low inventory and production, as well as instability."

That explains why crude oil prices rose by nearly 25 percent earlier this year, to more than $45 per barrel. "If something bad happens in Saudi Arabia," says Kaufmann, "we'll think $45 is a bargain."

Some experts say oil is a bargain -- especially in America, where fuel prices are comparatively cheap. (Europeans pay the equivalent of about $4 per gallon of gasoline.) Low U.S. taxes explain the difference, making it easy for Americans to drive gas-guzzling cars -- and ignore some of the energy-saving appliances and habits that are mandated in other countries. As scientist David Goodstein writes in Out of Gas, "Cheap gasoline is not the solution; it's a big part of the problem."

Indeed, recent history has shown that Americans tend to "spend" energy efficiency on more luxurious products, not "bank" it on energy savings. In the 1990s, when engines and furnaces became more efficient, we bought SUVs and built bigger homes. (According to the National Association of Home Builders, the average American house has grown by more than 200 square feet -- the size of an extra family room -- since 1990, to 2,320 square feet.) So instead of using less fuel, we are burning more and more -- nearly one-fourth of the entire world's oil production.

It's a habit that we will soon be forced to break. Experts disagree on when the world will run out of fossil fuels (including gas and coal, used to generate most U.S. electricity), but just about everyone says that the crisis will come sometime in this century. Naturally, as these precious fuels become scarcer, we will pay more.

In anticipation of the looming crisis, both Presidential candidates supported increased federal spending on research and development of alternative energy, such as wind power, and cutting-edge fuels like hydrogen cells that may someday run cars.

New coal-fired power plants that virtually eliminate greenhouse emissions (using what's known as clean coal technology) could help improve the environment. And today's appliances are saving more energy than ever. A new Energy Star-qualified clothes washer costs just $21 a year on average to run. By contrast, a ten-year-old model costs $74 a year -- over three times as much. Even compact fluorescent light bulbs have tripled in efficiency -- costing just $3 a year, as opposed to $9 a decade ago.

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