Many people, including Treasury Secretary Janet Yellen, warn of possible price spikes that could send shivers through Americans this winter when they see their heating bills or pump gasoline.
“This winter, the European Union will cease, for the most part, buying Russian oil, and in addition, they will ban the provision of services that enable Russia to ship oil by tanker,” Yellen said in a CNN interview on Sunday. “It is possible that could cause a spike in oil prices.”
But there are other factors, too, that could make this winter more expensive. President Joe Biden’s 1-million-barrels-a-day oil release from the country’s emergency reserves is set to end in October, Europe’s energy crisis is expected to hit hardest during the cold winter months, and the largest oil-producing countries could cut production, other analysts noted.
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Which fuels will cost more?
Prices of oil and natural gas have room to rise, which consumers would feel at the pump and at home, analysts say.
Oil makes up about half the price of a gallon of gasoline, and diesel fuel for vehicles like trucks and heating oil for homes are distilled from oil. Most U.S. residential sector and commercial sector heating oil consumption occurs in the New England and the mid-Atlantic regions.
About half of U.S. homes use natural gas to heat homes and water. Natural gas also is often used to generate electricity, which is why electricity prices have risen 15.8% in the 12 months to August. Because of Europe’s struggle to fill its natural gas inventory before winter, natural gas prices have spiked to a 14-year high.
High natural gas prices have prompted some switching to burning oil or coal for electricity.
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How much more could Americans pay in their homes this winter?
The average cost of home heating is expected to rise 17.2% from last winter to $1,202, the second consecutive year of major prices increases and the highest price in more than a decade, the National Energy Assistance Directors Association (NEADA) said.
Already, more than 20 million families, or about 1 of 6 American families, are behind on their utility bills, it said.
“The rise in home energy costs this winter will put millions of lower-income families at risk of falling behind on their energy bills and having no choice but to make difficult decisions between paying for food, medicine and rent,” said Mark Wolfe, NEADA's executive director.
For 2022, NEADA sees the cost of utility services rising to $3,803, reflecting high prices for natural gas, heating oil and propane and this summer’s heat waves. The high temperatures increased air conditioning costs to about $600 from $450, on average, last summer.
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But haven’t gasoline and oil prices fallen?
Yes, oil and gasoline prices fell sharply on less demand as drivers cut back this summer when pump prices surged, prospects grew for recessions around the globe, and China locked down regions as it tried to halt the spread of COVID-19.
The gasoline index shed 10.6% in August from July, said the Bureau of Labor Statistics in its consumer price index report on Tuesday. That reflected the steady decline this summer in the national average for a gallon of regular unleaded gasoline to $3.71 this week, a level not seen since the beginning of March and mostly on the heels of lower oil prices, AAA said on Monday. Oil prices are down about a third from their June peaks that pushed gas prices just above $5 a gallon.
But as those fell, natural gas prices continued to climb as Russia cut its supply to Europe, creating frantic global demand.
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Why could prices rise now?
First, Biden’s daily releases from the strategic petroleum reserves end next month if the administration doesn’t extend it, which would eliminate one supply source. Further, the reserves have fallen to their lowest since October 1984, U.S. Department of Energy data show, and those reserves eventually will have to be replaced, taking out future supply.
“If they do, Russia says it’s cutting everything – oil and natural gas exports – off,” said Joe Brusuelas, chief economist at RSM US LLP. If that happens, “oil prices will retest the highs set in June and cause the average price of regular gas to move well back above the current $3.70 per gallon.”
And natural gas prices probably would surge again.
How does a price cap on Russian oil work?
By not buying Russian oil above a certain price still be determined, G7 countries would limit Russia’s oil revenue to finance its war in Ukraine.
Enforcing the cap would rely heavily on denying London-brokered shipping insurance, which covers about 95% of the world's tanker fleet, and finance to cargo priced above the cap.
The cap avoids an outright ban of Russian oil that could have sent world oil prices surging since Russia is the world’s largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia. Caps ensure Russian oil can continue to flow but still deplete Russia’s coffers.
In response, Moscow warned it would stop selling oil and natural gas to countries imposing price caps on Russian energy exports. That, analysts say, would cut supply and send prices of both fuels higher.
Can’t OPEC+ produce more oil?
The Organization of the Petroleum Exporting Countries (OPEC) and 10 other major non-OPEC oil-exporting nations (collectively called OPEC+) could agree to raise oil production, but it has been loath to do so.
After oil prices plummeted when economies closed to slow the spread of COVID-19 in March 2020, OPEC+ has been cautious in raising production for fear of getting burned again. Earlier this month, the group surprised markets and trimmed production targets by about 100,000 barrels a day from October. It was seen as a symbolic move to telegraph that it’s monitoring oil prices and wouldn’t hesitate to act if it felt oil prices were falling too fast or too much.
Some also question whether OPEC+ can even produce much more oil. The group has regularly failed to meet its own production quota because of capacity constraints in some countries.
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Who would hurt the most?
Europeans, because they rely on Russian natural gas. Russia already has closed two major pipelines to Europe. That has sent prices up 300% from last year to the highest levels since 2008.
But Americans also are feeling pain. The U.S. has sent record liquefied natural gas exports to Europe to help it boost supplies before winter. But now, as prices climb, the U.S. finds its stockpiles low.
“We appreciate that the Biden Administration has been working with European allies to expand fuel exports to Europe,” six New England governors wrote in a letter to Energy Secretary Jennifer Granholm in July. “A similar effort should be made for New England,” the only U.S. region that imports liquefied natural gas because it doesn’t have ready access to U.S. supplies.
East Coast distillates, including diesel, and gasoline inventories also linger near record seasonal lows.
Why can’t America just stockpile fuel?
Granholm has asked major producers to export less fuel to Europe and other countries, but that’s not likely to help because energy markets are global, analysts say. Slowing exports to regions that need oil or gas will increase the prices there and everywhere, analysts say.
Instead, analysts say the administration needs to tackle supply.
“If we had the Marcellus pipeline to Pennsylvania, this wouldn’t be an issue,” said David Rewcastle, University of New Haven analyst and economics professor. A pipeline between the lush natural gas Marcellus shale and New England was blocked by former New York Gov. Andrew Cuomo.
Chevron chief executive Mike Wirth also has criticized the government for crushing incentives for companies to produce more oil with calls for windfall taxes and ending fossil fuels in coming years.
“We will be paying for it,” Rewcastle said, noting there’s no short-term solution. “Maybe this will be a teachable moment.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning
This article originally appeared on USA TODAY: Expect higher energy bills this winter, analysts say. Here's why.