Oil woes putting strain on suppliers / Some distributors may have to close Source: The Patriot Ledger Quincy, MA Publication date: Feb 05, 2000

For oil heat customers, astronomical prices have made this winter one of the most miserable in memory. In the simplest terms, they're on the losing end of the most basic economic equation: decreased supply plus increased demand equals higher prices.

But as consumers have struggled the entire supply chain that delivers oil to their doors is also straining to provide a commodity that suddenly became scarce after years of abundance and low prices. The strain could reshape the oil delivery industry in the Northeast if, as some insiders predict, delivery companies are forced to close as customers are unable to pay.

John Stiles, manager of Hingham Oil, said, "I believe a lot of companies will go out of business, because no one can afford to extend credit at these levels, and most people cannot afford to write out a check for $300 or $400 a month."

Distributors are at the end of a long line of commercial transactions that determines how much oil arrives here, when it arrives, and at what cost.

The complexity of those transactions makes it difficult to predict exactly when and where oil stocks will get to port more than a few hours before their arrival in Boston, Quincy or other East Coast ports.

"We can get an (estimated time of arrival) of a ship due tomorrow and sometime in the evening or the next morning it can get diverted," said Arthur Whittemore, president of Boston Pilots, the dockworkers who guide ships into port.

Cargo ships carrying as much as 100,000 barrels, or 4.2 million gallons, of oil set out from fields in Norway, the Middle East, or other oil-exporting countries with no definite destination. Crude oil must go to refineries, none of which are farther north than New Jersey, but refined heating oil may go anywhere on the East Coast.

Their load may have been purchased by one oil importer when they set out, but, "ownership of crude oil can change hands 20 to 100 times as it makes its trip across the Atlantic," explained Aileen Bohn, a spokeswoman with the federal Energy Information Administration.

When ships arrive in New England with refined oil, they pour their product into terminals, or tanks where distributors then fill up their oil trucks to deliver it to homes and businesses.

But as supplies have grown short, some wholesale terminals have run out of fuel. Trucks have waited in line as long as four hours in some cases, only to be turned away and forced to drive to another terminal, according to Loretta T. DeGrazia, owner of East Coast Petroleum Corp. in Quincy.

While the driver was waiting, the price of oil on the New York spot market -- which sets the price for oil bought on demand rather than purchased through a contract -- may have changed, prompting the wholesaler to increase the price.

"There's another four hours of labor cost, and no productivity, and (the dealer) is paying the higher price when he gets to Revere," DeGrazia said.

So who benefits from the higher prices?

The easy answer is the Organization of Petroleum Exporting Countries, or OPEC, the same cartel of oil-rich nations who helped to spike gasoline prices in the 1970s.

According to Standard & Poor's oil industry analyst Bruce Schwartz, record low oil prices -- $10 a barrel for crude last year, compared to $30 this year -- were straining OPEC nations' domestic economies. In order to boost those low prices, which had dropped for three years in a row, OPEC radically cut oil production last March by 2.1 million barrels a day, or 2.6 percent of the world's total oil supply.

"What was lost in this story is that the oil industry suffered some of the worst times in its history, and a lot of companies went bankrupt," he said.

The production limits drove up the price of crude, which made refineries reluctant to buy. They didn't want expensive supplies and low prices this winter, Schwartz said.

So New England's oil stocks ran at 14 million barrels, actually a bit higher than normal, at the end of October, said Michael Ferrante of the Massachusetts Oil Heat Council.

But in November and December refineries quit producing heating oil. By the end of December, when stocks are usually still on the rise, they stood at 8 million barrels.

Had this winter followed the warm patterns of the past two, the drop in inventory would not have had as dramatic an effect on prices and inventory. Last week, there were only 3.5 million barrels in New England, and retail prices in Massachusetts were at an average of $1.80.

Now, high prices are still frightening refineries, according to Richard Larkin of Hedge Solutions, an East-Coast oil consulting company.

"If they bring it in at $1.40 a gallon, they know as early as tomorrow it could be $1.20 a gallon," he said. "The game of chicken kind of prolongs the agony."

Larkin predicts high prices for at least another 60 days, unless the weather warms significantly and for more than a day or two. Schwartz said OPEC plans to loosen production limits somewhat at the end of March -- too late for much of an impact this heating season.

Publication date: Feb 05, 2000 ) 2000, NewsReal, Inc.

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-- Carl Jenkins (Somewherepress@aol.com), February 08, 2000

Answers

"Larkin predicts high prices for at least another 60 days, unless the weather warms significantly and for more than a day or two."

SIXTY days? And the chief spokesman for heating oil dealers in Maine is *still* saying prices will drop to "normal" levels in a few days. Can't anyone in the industry tell the truth for even a few minutes?

-- Cash (cash@andcarry.com), February 08, 2000.

You're assuming that they know the truth, Cash? Some of 'em just talk to hear themselves.

-- rocky (rknolls@no.spam), February 08, 2000.

Rocky, you said,

"You're assuming that they know the truth, Cash? Some of 'em just talk to hear themselves. "

While I understand the sentiment, I think you're being a bit too hard on them. When people perceive themselves as suffering, (IMO) they look for someone to tell them when it will be over or what the solution is. The poor guy in the oil industry shirt probably got "elected" to give *some* answer to the public whether he wanted to or not or for that matter whether he knew anything or not. I wouldn't be suprised if he was just guessing like everyone else, but wouldn't assume he was doing so out of malice or greed.

Ranting for some unknown reason,

Frank

-- Someone (ChimingIn@twocents.cam), February 08, 2000.

But in November and December refineries quit producing heating oil.

Huh?

Had this winter followed the warm patterns of the past two, the drop in inventory would not have had as dramatic an effect on prices and inventory.

You mean it didn't get below 30 degrees in New England in the last two years? These guys will print anything........ It doesn't even need to make any sense.

-- Y2kObserver (Y2kObserver@nowhere.com), February 09, 2000.