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Need to Know: Home Heating Crisis Ahead? (8/08/08)

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Thanks for joining us. I'm Julie Philipp. Members of the New York State Energy Committee have been traveling around the state this week. The Democrats are pushing a plan to spend hundreds of millions of dollars helping more low and fixed income residents pay their home heating bills this winter and to help them winterize and insulate their homes. Committee chair Kevin Cahill stopped in Rochester. Kevin Cahill: The cost of home heating has gone up so astronomically that many people will be unable to heat their homes this winter. Let's be clear what we're talking about here. People will be choosing between food and fuel. People will be choosing between the medicines that they need and the heat that they need. And this is not something that is limited to poor people. More and more every single day people are calling our offices. They are calling because they don't know how they will make it this winter. They don't know how they are going to afford a utility bill. Let's take oil for example - oil that's gone up over 68% in the last year. Julie Philipp: Cahill was joined by Blair Horner, Legislative Director for the New York Public Interest Research Group or NYPIRG. That group backs the Assembly majority's plan to pay for the additional home heating assistance with a 2% gross receipt tax on oil company earnings. Blair Horner: The question then is How do you pay for it? The state has a serious fiscal problem. It makes perfect sense to us that the oil companies pick up the tab. They testify before Congress and say, "It's not our fault that we're getting such big profits. It's the marketplace. It's not our fault." Well if that's true, then they should be happy to be spending some of their profits to make sure that New Yorkers and Americans don't freeze this winter. Philipp: To help us bring these chilling forecasts into perspective, is Ben Ebenhack, who is a faculty member at the University of Rochester and a former petroleum engineer for big oil. Welcome and thanks for coming in. Ben Ebenhack: Thank you. Philipp: So, right off the bat, you hear a politician say "crisis." Are we in crisis mode? Are we looking at a crisis in a couple of months? Ebenhack:We could be. Certainly it's demonstrably true that the prices have increased as they've been discussing. And I don't see any real likelihood of significant retraction of the prices ever....really....within my lifetime. In fact, I would argue that if there is a little drop in prices, a noticeable drop in prices would probably be the worst thing for our future possible, because I think it would be one more case of the little boy crying wolf and going back to the notion of, oh, it was just a bauble. We're going to have cheap energy for the future. And in the long run, that's not true. Philipp: They specifically mentioned oil, up 68%. Is it just oil customers that need to worry right now about the coming winter, or are natural gas customers also going to be impacted? I would say everyone's going to be impacted; crude oil is the marker price commodity for energy globally, and energy prices tend to follow crude oil prices. Natural gas will probably not be as impacted, because natural gas, for one thing, is more abundant in the United States. We have more of it, relatively speaking, partly because natural gas was a less valued commodity for many years. So oil companies called themselves oil companies because oil was their preferred commodity. Philipp: And at one point, not maybe just ten years ago, oil was cheaper than natural gas. What happened? How come the flip? Ebenhack: Well, crude oil is a totally globally traded commodity, and we're seeing disruptions, we're seeing a lot of speculation in the petroleum markets that relate to things like the disturbances in the Middle East, the wars in the Middle East to concerns of growing demand in countries like China and India that could drive us into a shortage, sooner rather than later. So, a lot of the price we're seeing with crude oil is speculation. Philipp: Explain to me, what is speculation? Ebenhack: OK, well, understand this is an engineer's explanation of an economic phenomenon. But as I understand it, as I observe, a speculation is that people speculate that prices will likely go up. It's really what the stock market is all about. And with commodities like crude oil, we know that we're going to reach a global peak at some point. It has to happen when you have exponential demand on a finite supply. So speculation that we may be nearing that peak is pushing it, yes. Philipp: OK. The oil companies are making record profits because of this. Is it a good idea to start taking some of that in the interest of the public, like they're suggesting, or does that kind of do a short term solution at the expense of a longer term solution that might reduce oil prices? Ebenhack: I think it's a little of each. Certainly the profits are growing rapidly. I still have some profit sharing stock from my days in the oil business and I'm happy about that. Philipp: So you're pretty comfortable right now. Ebenhack: I wish I'd held on to more of it. And I'd say probably a majority of Americans have some of their investments in the big oil that we love to hate, and those investments should be doing well for the most part for many years to come. As prices go up, inevitably the taxes the companies pay go up as well because a fair amount of that is ad valorem kinds of taxes. So, we are seeing some growth in tax revenues. To add a tax for non-discretionary use like home heating, I am a little ambivalent about. On the one hand, I think consumers need to be seeing higher prices, because we've not been valuing our energy. We've been treating it as prodigal children treating their inheritance and squandering it. And I think that we really need to see those higher prices but it's most important, in my opinion, that we see those in our most discretionary uses, which would primarily be our vehicular uses, our most discretionary. Philipp: OK, so you can do something about it, whereas home heating, you have to keep warm, depending on the winter. So, the idea, in long term solution, to get oil prices down, we need to get away from oil to create less demand. Is that the bottom line? Ebenhack: Well, I would actually say it still won't bring oil prices down significantly. I think we're going to have to get used to the notion of paying for our energy in a noticeable fashion. The energy prices, I don't expect really to see them go down. I think that even as alternatives become competitive, it will be partly because energy prices have risen dramatically, and there may be a leveling off, and perhaps we'll reach a plateau that has a slight decline. I don't expect to live to see that. Philipp: So this recent little drop in gas prices at the pump, isn't significant. We'll continue to see $4.00 and perhaps $5.00 and it will continue to go up, you think? Ebenhack: In the big picture view, yes. There will be fluctuations, and I think one of the most dangerous things is that a fair amount of the price is speculation right now. So there is a possibility, that if consumers and investors got feeling very optimistic, prices would fall and then consumers would get optimistic about consuming.... Phillip: What's the likelihood of this optimism? I think increasingly less, as time goes on, because I don't see peace breaking out in the Middle East, unfortunately, any time soon. I don't see the growing demand of China and India plateauing very rapidly, and even if it were, there's another billion people in developing countries who ultimately aspire to the kind of growth that India and China are seeing now. Philipp: OK, so if there is no real solution that would bring down oil prices maybe some stopgap measures and that sort of thing, but in the big picture oil prices are going to be high consumption need to change ... it did change in the 70's. Ebenhack: Absolutely. We actually turned around the exponential growth curve and had a few percent decline in global energy demand. Really unprecedented. And I would argue it's largely because of price. Philipp: And what kinds of things do people need to do to get enough lowered consumption that it shows up globally? that it impacts this? Ebenhack: Well, one of the pieces of good news is that American choices can really make an impact. We're currently consuming a quarter of the world's oil with 5% of the world's population. About half of our oil is being consumed directly in the transportation sector. So, with today's consumption levels that's about eleven million barrels of oil a day that we can consume in the transportation sector. If we are deliberate about minor things such as Senator Obama mentioned -- inflating our tires, taking better care of our cars, or little bigger things like being more deliberate about looking for vehicles with good fuel economy, trying to live closer to our work, and having less discretionary consumption actually could impact that and forestall the real crisis when we reach a peak. Philipp: Now, you've brought up the Democratic side. The Republicans say, "Why not open up more oil fields and drill more of our own?" Ebenhack: Of course, as a petroleum engineer, I have a hard time not liking the idea of drilling. But I think we need to keep some perspective though, on what we can expect from that. I think, over time, we're probably..... personally I think oil is going to be a valuable commodity for at least 200 years... and I think over time, we'll probably be drilling in places we're not opening to drilling now. I think it would be a mistake to do a carte blanche kind of "Well, then just drill anywhere, all at once," especially if the hope is to lower energy prices, because it won't work. It really will take time. I was seeing on last night's news reports some reports of people's comments on the lead time getting shorter and shorter and shorter. And the lead time is real. It will take several years from the time a new province is opened for exploration until any oil could come on...... Philipp: it could impact any prices. Ebenhack: And that will be a short term impact. The production from any given field reaches a peak and begins to decline in a few years, normally. Saudi Arabia's Ghawar field is a notable exception because it is simply so big. Philipp: Getting back to the 70's again, when there was an impact and Americans clearly made some changes in how they consumed fuel, was there legislation at that time that encouraged them to do so, or was this something that people finally got, that they had to do that in order to protect their own wallets? Ebenhack: I think it was some of each. Of course, the DOE, the Department of Energy, was created during that time. There were tax incentives for home insulation improvements and so on that, as I recall, were a little more sweeping than what we have today, such as through NYSERTA. They, uh, there was a good deal of legislation trying to regulate how oil companies reported reserves, what kinds of prices oil companies got for different kinds of oil ...uh.. There were several tiers of oil prices from old/new, new/new ,,, uh ,,,old/old and stripper oil. Philipp: The government did do something fairly significant to help reduce the prices. Ebenhack: Yes, although I would argue it didn't actually achieve that Philipp: We're going to have to save that discussion for another time because our time is up, but thank you so much. You've been very helpful. Ebenhack: Okay, thank you. Phillip: Thank you. Ben Ebenhack lectures at the University of Rochester. WXXI's Bud Lowell is following this issue and will have a number of reports next week on WXXI-AM 1370. These air weekdays during Morning Edition and All Things Considered, or you can check for his latest report on our web site: (Music)

Video Details

Duration: 14 minutes and 55 seconds
Country: United States
Language: English
Genre: None
Producer: J Philipp
Director: K Nestle
Views: 125
Posted by: jphilipp on Sep 3, 2008

Some state leaders are warning a home heating crisis looms this winter.

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