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Heating oil users face costly winter

Soaring fuel prices take ever-harsher toll in N.E.

Sheila Larson, pictured with her dogs, and her husband John Larson (in background), already pay a whopping $5,700 a year to heat their Victorian-style home in Boston.
Sheila Larson, pictured with her dogs, and her husband John Larson (in background), already pay a whopping $5,700 a year to heat their Victorian-style home in Boston. (John Bohn / Globe Staff Photo)

As the price of crude oil approaches $100 a barrel, New Englanders are bracing for their most expensive winter ever.

One of every two homes in New England burns heating oil, compared with just one in 20 in the rest of the country, where most homes use natural gas, according to the Energy Department. Now, as heating oil follows crude to record prices - the state this week reported the average cost of heating oil was $2.91 a gallon, up 24 percent from a year ago - the impact will fall most heavily on New England, economists said.

"Prices are crazy," said Patrick Melia, owner of Melia Fuel in Marshfield. "People are scared, and they should be."

Madeline Sanabria, a single mother of three, certainly is. Sanabria, 29, who makes just under $40,000 a year as a medical biller, said she hasn't turned on the heat yet in her Roslindale apartment, telling her children on chilly nights to throw another comforter on the bed. She has also stopped buying snack cakes and other treats for her children in anticipation of sharply higher winter heating bills.

"Do you choose food, or do you choose to be heated?" she said. "Just hearing the news about oil, you have to cut back."

As energy costs rise, consumers have less to spend on everything else, creating another headwind for an economy already slowed by the plunging housing market, said Alan Clayton-Matthews, a University of Massachusetts at Boston professor who studies the state economy. The full impact of higher heating oil prices will depend on the severity of the winter, he said, but the increase "will definitely affect consumer spending, particularly households with tight budgets."

Higher energy costs and a softer economy are cutting into sales at Papa Gino's, the Dedham restaurant chain, said Michael McManama, senior vice president for brand development. In recent years, the company's pizza sales grew at more than twice the industry average, McManama said. Now they are flat.

"People have to make choices," McManama said, "and we believe they are eating out less."

John Larson, a self-employed carpenter, is among those staying home - and bundling up. He and his wife, Sheila, a Boston schoolteacher, own a three-story Italianate Victorian on Dorchester's Ashmont Hill, and their heating bills have become the stuff of nightmares as oil prices have climbed in recent years. When friends visit during the winter and complain about the cold, Larson said, he doesn't turn up the heat. He tells them to put on a sweater.

The Larsons have spent about $20,000 since they bought the house nine years ago to replace storm windows, insulate, and winterize the 137-year old home. But rising heating oil prices gobbled any savings from improved energy efficiency. A year after buying the home, the winter heating bill was about $3,000. This year, the Larsons, on a monthly budget plan, are on track to pay $5,700 - based on current prices.

"Just when you think oil can't go any higher, it breaks $90 a barrel," Larson said. "I'm terrified."

Heating oil prices have climbed steadily in recent weeks, despite healthy inventories, mild temperatures, and shrinking demand. The reason: record crude prices. Crude accounts for at least 60 percent of the cost of heating oil, and yesterday it surged by more than $4 a barrel during trading in New York to close at a record $94.53.

Supporting crude prices are strong global demand and tight supplies, said Mary Novak, energy economist at Global Insight, a Waltham forecasting firm. The world's thirst for oil is growing by 1.5 million barrels a day, up from 1 million last year, and oil producers can barely keep up.

As a result, Novak said, the Organization of Petroleum Exporting Countries' reserve capacity has plunged to 1 percent of total production from about 5 percent in 2004, meaning there's not much more oil that can be brought to the market should war or disaster interrupt supplies. That has attracted hedge funds and other speculative investors that bid up crude at any hint of a supply disruption that could lead prices to spike.

Crude oil has been rising steadily since August, setting records almost daily in response to world events. Earlier this week, for example, it climbed $1.67 a barrel after Mexico said it would shut some off-shore production because of storms. Last week, tensions between Iraq and Turkey over Kurdish guerillas pushed crude past $90 for the first time. All told, economists said, speculation has probably boosted crude prices by $10 to $20 a barrel, adding about 40 cents to a gallon of heating oil.

"This is an investment-led rally, built on what if something happens," said Darin Newsom, senior analyst at DTN, a commodities research firm in Omaha. "I don't think we've topped out yet."

New England's heating oil market is increasingly at the mercy of these global forces. Many heating oil dealers have stopped offering season-long contracts at fixed prices because the market has become so volatile and unpredictable. Two years ago, the cost of heating with oil or natural gas, the two most popular fuels, was roughly the same; today, oil is so expensive that the cost difference between the two is the largest it has been since at least 1991.

Local fuel-oil dealers buy in the same markets as global hedge funds, lightly regulated investment vehicles that use complex strategies to boost returns for wealthy clients. Before hedge funds poured into energy markets, dealers say, they could reasonably forecast prices based on fundamentals like supply, demand, and weather. Then they would put together a mix of futures contracts, which guarantee prices several months in advance, and spot purchases to offer fixed rates to customers without risking their business.

Now, local dealers say that strategy is too risky.

"How do you explain hedge funds to Mrs. McCarthy?" Melia asked.

The poor, who spend a higher share of income on heating, will bear most of the pain, economists said. Though prices have soared, federal fuel assistance has declined. In 2005, when the average price of heating oil in Massachusetts hit $2.49 a gallon, a family of four earning $21,000 qualified for about $1,100 to help cover heating bills, according to Action for Boston Community Development, a nonprofit that administers the program locally.

Now, with the average price at $2.91 and climbing, the program pays that family just $715. Yesterday, Governor Deval Patrick said the state would contribute $15 million to the fuel assistance program, which would provide $150 more in aid to that family, according to the agency. Still, a current prices, that's barely enough to fill the typical 250-gallon tank, and New England households usually need two to three tanks of oil to get through the winter.

"The misery index is just going to rise," said John Drew, the nonprofit's executive vice president. "And it's only going to get worse as the winter gets colder."

Ellen Sdrollas of West Roxbury lives with her 17-year-old son on a $635-a-month disability check. Even with the new state money, they will likely receive less than $500 in fuel assistance for the winter. Last year, they suffered through a month of midwinter without heat, huddling around a gas oven while they scraped together money to fill the oil tank. Now, she despairs at how long they might go without heat this winter.

"I just don't know what to do," said Sdrollas, 51. "We barely eat already."

Robert Gavin can be reached at rgavin@globe.com.

Correction: Because of a reporting error, a Page One story yesterday about heating oil prices misstated the growth of worldwide demand for oil. Currently, demand is 1.5 million barrels a day more than last year.

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