Utility bills skyrocket from rising prices for oil

Utility bills are soaring this winter, hurting homeowners and businesses alike, for reasons that have less to do with nasty weather than with tight supplies of natural gas and oil.

While brief cold snaps can magnify the impact by temporarily driving up energy consumption, what's been driving prices higher in recent months is a combination of factors including supply constraints, the economic recovery and the declining dollar.

With frigid air enveloping the Northeast on Friday, oil prices settled above $35 a barrel on futures markets for the first time in 10 months.

This winter actually has been warmer than usual so far, according to the National Oceanic and Atmospheric Administration. Nationwide, there have been 10 percent fewer "heating degree" days -- an index that reflects home-heating demand -- from July through December, compared with the average for that period between 1971 and 2000.

But commercial inventories of crude, the raw material for heating oil, are at the lowest level since the government began tracking weekly data in 1982, "and probably the lowest since the autumn of 1975," according to the Energy Department.

Meanwhile, the weakening dollar gives foreign oil producers less incentive to increase output since crude is denominated in dollars in world markets, analysts said.

On Friday, the price of oil for February delivery briefly hit $35.30 per barrel, before settling at $35.07 on the New York Mercantile Exchange. The last time the front-month futures contract settled above $35 was March 14, about a week before the invasion of Iraq.

"Right now, there's no fear of shortages," said Phil Flynn, an analyst for Alaron Trading in Chicago. "But if you project out to the end of the year, people are worried."

When U.S. inventories of crude fall below 270 million barrels -- the so-called operating minimum -- it can trigger reductions in refinery output, government and industry officials said. For the week ending Jan. 9, commercial supplies stood at 264.0 million barrels, or 33.7 million barrels below the five-year average for this time of year, according to the Energy Department.

Another pressure point on oil markets has been the high price of natural gas, as some utilities and industrial users that normally rely on natural gas have the ability to switch fuels when prices get too high -- which then drives up demand for crude-derived products, analysts said.

The futures price of natural gas is up more than 20 percent since Thanksgiving, settling Friday at $5.940 per 1,000 cubic feet on the Nymex. The price had been above $7 earlier in the month.

Moreover, the fuel injected into underground storage facilities over the summer -- when prices are traditionally lower -- was unseasonably expensive as traders fretted whether supplies for the home-heating season would be adequate.

While tight supplies heading into winter played a supporting role in pushing natural gas prices higher, analysts said the sharp run-up this winter was actually more a function of technical trading.

Speculators who had anticipated that prices would decline this winter were caught off guard when the futures contract began rising in early December, analysts said, and they were subsequently forced to become buyers to cover their losing bets.

"The economy in the U.S., as well as other parts of the world, rebounded a lot quicker than anybody had anticipated," Flynn said.

Of course, high energy prices have hindered the rate of recovery for many industries, including airlines, shippers and chemical manufacturers.

The toll has been particularly tough on energy-intensive small businesses.

Russel Vogelsong, the owner of Summit Art Glass in Rootstown, Ohio, refinanced his home last year to pay his monthly utility bills and for a $19,000 retrofit of his furnace. The furnace burns 750,000 cubic feet of natural gas a month to stay heated at about 2,000 degrees, day and night.

Ten years ago, the business' monthly gas bill was consistently around $3,000. In recent years, Vogelsong has sometimes paid double that amount. The furnace has been off entirely since August, due to a lightning strike that damaged his equipment, and Vogelsong has been selling off inventory while he upgrades the furnace with energy-efficient equipment intended to cut his bills by 30 percent or more.

David Donoho, 66, of Halethorpe, Md., insulated his home with non-pressure foam to limit his exposure to high heating bills. Though he pays an average of $130-$150 per month to heat his home, he recently paid $222.99 for a single month's supply.

"It's a little bit of a shock," Donoho said. He usually sets his thermostat between 66 and 68 degrees but said he has cranked it up recently to battle the cold.

Yet even in Texas, where it was in the 60s on Friday, homeowners are getting pinched. TXU Gas, which serves 1.5 million customers, said utility customers paid an average of 37 percent more in December than they had a year ago.

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Associated Press Writers Margaret Stafford in Kansas City and Julie Halenar in Baltimore contributed to this report.