Competition Heats Up

Last year's high crude oil prices prompted many home heating oil consumers to brace for a dramatic price increase, but in November, prices were actually lower than they were the previous year, which could make biodiesel-blended fuel a less attractive option. On the bright side, low-priced heating oil may prevent customers from switching to natural gas, and Bioheat is easier on the environment than fossil fuels.
By Erin Voegele | January 01, 2009
Less than six months ago, analysts were projecting huge spikes in the price of home heating oil, leaving consumers wondering how they were going to come up with enough money to heat their homes in the winter. Then the price of crude oil dropped from about $147 per barrel in July to $58 in November. Because markets are currently characterized by volatility, it's nearly impossible to predict what will happen next.

On Oct. 7, the Energy Information Administration projected crude oil prices would average approximately $112 per barrel for the remainder of 2008 and into 2009. At this time, EIA also estimated homeowners would pay approximately 24 percent more for heating oil during the 2008-'09 winter than they did in 2007-'08 based on a projected price increase of 18 percent and 5 percent increase in consumption. Home heating oil was expected to cost approximately $3.90 per gallon over the 2008-'09 winter, which is up about 59 cents per gallon when compared with the average price of $3.31 during the winter of 2007-'08.

Barely one month later on Nov. 12, the EIA dramatically dropped is projected price for home heating oil to $2.75 per gallon, which is about 17 percent lower than the price of home heating oil during the winter of 2007-'08. In addition, the forecasted price for crude oil was reduced by nearly $60 per barrel, and the price outlook for gasoline and heating oil dropped by more than $1.40 in some months. "EIA has never before revised its short-term oil price forecast by such a large amount," according to a statement the EIA released on Nov. 13. The revisions were largely due to the impact of the economic crisis.

This means that the demand and price for home heating oil are actually expected to be lower this year than last year. The comparatively high cost of biodiesel is likely to make Bioheat, which is a blend of heating oil and at least 2 percent B100, a less attractive option to wholesalers and retail customers than it would have been had petroleum prices remained high.

According to the EIA, approximately 8 million of the 107 million households in the United State use heating oil as their main heating fuel. Of those 8 million households, 6.2 million, or approximately 78 percent are located in the Northeast region of the country.

Brian Milne, DTN's refined fuels editor, says the Northeast is the world's largest market for home heating oil. According to Paul Nazzaro, president of Advanced Fuel Solutions and petroleum liaison for the National Biodiesel Board, approximately 9 billion gallons of home heating oil were used last winter. Assuming a 5 percent inclusion rate of biodiesel into the 9 billion gallon heating oil market, there is a potential market for about 450 million gallons of biodiesel in the Northeast.

Factors Limiting Bioheat
There are various factors that limit the exploitation of this 450 million gallon market and price is one of them. "It's not cheaper," says Kevin Rooney, chief executive of the Oil Heat Institute of Long Island in New York. The relatively high price of biodiesel compared with petroleum-based home heating oil will likely keep some customers from using the product.

While the EIA projects home heating oil will sell for approximately $2.75 per gallon this winter, ICIS Pricing shows B100 was selling for between $3.10 and $3.30 per gallon in mid-November. "Right now [Bioheat] is a hard sell," says Mike Cox, the president of Allied Washoe Petroleum, a Reno, Nev.-based heating oil retailer. "People want the cheapest product, and Bioheat is not the cheapest."

The financial crisis isn't helping matters, as most consumers are hesitant to spend money unnecessarily. Although New York residents can claim a tax credit of a penny per percentage of Bioheat that they purchase up to a B20 blend, customers want the best price upfront, and don't want to have to wait to claim the tax credit, says Ray Hart, president of New York-based Hart Petroleum. "You can't blame them," he says. "We've all had some energy shocks in the past year and a half."

According to Nazzaro, transportation and infrastructure issues are also holding the industry back. To fill the estimated 450 million gallon market potential, truck, rail and pipeline transportation are needed to ensure Bioheat can reach Northeast markets.

"We're working very hard at the NBB, with assistance from many of the national pipeline organizations, to get biodiesel approved for use in pipes," Nazzaro says. "We feel very comfortable that a 5 percent [Bioheat] blend in the pipe is OK." Before pipeline shipments can begin, however, it is necessary to ensure Bioheat won't contaminate other products, such as jet fuel, that are shipped through the pipeline networks. Pipeline transportation is desirable because it's cheaper than other transportation methods. "The biodiesel industry can't afford to have more costs added on to its price per gallon because of transportation inefficiencies," Nazzaro says.

Additionally, few terminals in the Northeast are equipped to properly blend the fuels. It can cost millions of dollars for a terminal to install the necessary tanks and electronic hardware needed to blend fuels. Nazzaro says many are hesitant to purchase the equipment because there is no guarantee the biodiesel blending credit will be renewed. Without the blending credit, many terminals would find it difficult to recoup the expense of adding the infrastructure.

Factors Leading to Success
Although Bioheat has its challenges, there are also opportunities. For years, the home heating oil industry has been losing customers to natural gas because of its comparative affordability and environmental advantages. The reduction in home heating oil prices this winter may help mitigate this loss.

Bioheat also improves the environmental impact of home heating oil. Five years ago, heating oil had a sulfur content of 1,500 parts per million or higher, Rooney says. "Today, we are selling heating oil that is generally 500 parts per million of sulfur," he says. In the next five years, Rooney expects the industry will be selling an ultra-low sulfur product with 15 parts per million of sulfur in 5 percent to 20 percent biodiesel. "What we are going to be selling five years from now will bear absolutely no resemblance to what we sold five years ago," he says. "We will cut our emissions by better than 97 percent to 98 percent, and we will be burning a fuel that is as clean-if not cleaner-than natural gas."

The revision of ASTM D396-08b, a specification for fuel oil, should also bolster the bioheat industry. Under the newly revised standard, up to 5 percent biodiesel is considered a fungible component of home heating oil. "The ASTM standard really means something," Milne says. "It's not just a marketing ploy." It allows wholesalers, retailers and customers to be comfortable with the quality and performance of a B5 Bioheat blend. "[The ASTM standard] was a major milestone," Nazzaro says. "It opened up the door for fuel dealers to know they would be buying a fuel that is legal, fit for use and supported by ASTM."

The renewable fuels standard, which mandates the use of 500 million gallons of biodiesel in 2009, should also help drive demand for Bioheat. "If the price doesn't improve with respect to biodiesel, it's going to be difficult to get too far above 500 million gallons," Milne says. "It is going to be about price."

Wholesale and retail interest seems to be growing. "I know of approximately 180 companies that have registered to utilize the Bioheat trademark, which the NBB owns," Nazzaro says. Nelson Driver, owner of Driver Heating Oil Inc. in Waynesboro, Va., says his company sold a B5 bioheat blend in the past, but currently lacks a biodiesel supplier. "I certainly hope to get back into it sometime this season," he says.

Cox says his goal is to have all the fuel his company supplies be at least a B2 Bioheat blend. "[Customers] won't have an option," he says. "We, as a company, will only sell Bioheat." Before that can happen, the company needs to solve its problems with storage and to secure a reliable supply of biodiesel.

Acme Fuel Co. in Olympia, Wash., was selling a B20 Bioheat blend but will likely switch to a B5 blend, says Thomas Allen, the company's president. "Right now B20 is 50 cents more per gallon than regular heating fuel," he says, which is more than most customers are willing to spend.

Hart Petroleum supplied a B20 Bioheat blend last year. "We had absolutely no problems, it was very successful," Hart says. However, "to keep costs in line because of constant changes in the market, we decided this year to reduce it to a B5." He estimates B5 Bioheat will cost between 2 and 5 cents more per gallon than straight petroleum-based home heating oil.

Many wholesalers and retailers who are adding Bioheat to their product offerings seem to be doing it quietly. In fact, many customers may not even realize they are using a B5 Bioheat product to heat their homes. In addition, many retailers are looking at Bioheat as a way to help undo some of the damage that has been done to the industry as customers have have switched to natural gas. "What Bioheat brings to the table is it's a new fuel-it's a green fuel," Milne says. "It brings certain associations to consumers, and that's a good thing."

Erin Voegele is a Biodiesel Magazine staff writer. Reach her at [email protected] or (701) 373-8040.
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