I’ve lived in New England all my life. I’m used to cold weather; I actually like it. But the cooler temperatures serve as an ominous reminder… winter is coming. And it is the most vulnerable members of society, people on fixed incomes, that will be most affected by surging energy prices if we have a cold winter.
- Kelly Barner, Dial P for Procurement
Episode Summary
Energy costs are surging, partially because of a lack of supply and partially about the constraints placed on the movement of existing supplies. The Northeastern United States is in a particularly precarious position because of the supply chain modes used to transport the fuel needed to heat people’s homes.
As with all Dial P topics, energy is complicated – and the sources of fuel that we think of as separate actually quite interconnected.
In this episode of Dial P, host Kelly Barner reviews a few energy-related questions which sound simple enough but get very complicated when you put them together:
• What determines the cost and prices of diesel fuel, home heating oil, natural gas, and electricity?
• How available are these different sources of energy?
• When is product availability an issue and when is the ability to move them from point A to point B the real problem?
Episode Transcript
Intro/Outrp (00:01):
Welcome to Dial P for procurement, A show focused on today’s biggest spin supplier and contract management related business opportunities. Dial P investigates the nuanced and constantly evolving boundary of the procurement supply chain divide with a broadcast of engaged executives, providers, and thought leaders. Give us an hour and we’ll provide you with a new perspective on supply chain value. And now it’s time to dial P for procurement.
Kelly Barner (00:31):
We are currently about one month from the start of winter. According to the National Weather Service, Boston’s high temperature of 76 degrees on November 12th matched the city’s record for the day set in 1906. And since every Zoom meeting in Microsoft team’s call starts with a perfunctory discussion of the weather. I know that most of the US was unseasonably warm a week ago, but now temperatures have dropped. Boston is expected to have highs in the forties all week. Tonight is probably going to be our first hard frost of the year. I’ve lived in New England all my life. I’m used to cold weather and truthfully I even like it, but it does serve as an ominous reminder. Winter is coming. In this case, the trouble comes from the cost and availability of the different fuel sources used to heat people’s homes. And the Northeast US is in a particularly precarious position because of the supply chain modes used to transport fuel.
Kelly Barner (01:40):
Here in this episode of Dial P, I’ll review a few questions, which sound simple enough, but get very complicated when you put them together. What determines the cost and prices of diesel fuel, home heating, oil, natural gas, and electricity? How available are they these different sources of energy? And when is product availability an issue? And when is the ability to move the product from point A to point B, the real problem? But before we go any further, let me introduce myself. I’m Kelly Barner. I’m the co-founder and managing director of Buyers Meeting Point, a partner at Art of Procurement and your host for Dial P here on supply chain. Now, I’m constantly scanning the news for complex topics to discuss things that are interesting but may escape people’s notice. Dial P releases a new podcast episode or interview every Thursday. So be on the lookout for future episodes and don’t forget to check out past episodes as well.
Kelly Barner (02:50):
Before we get back to today’s topic, I have a quick favor to ask. I believe you’re going to find value in the time we’re about to spend together. If you do, please find a way to engage with this content. Give us a review on iTunes, offer up some stars, maybe share this post on LinkedIn or retweet on Twitter. Maybe you just need to send the audio to a colleague. I’m incredibly grateful for everyone’s interest and attention to what we’re building here at Dial P, and I genuinely mean it when I say I wanna hear from you. Now, the stories we cover on Dial P don’t usually have the personal connection that this one does for me. And while home heating costs and fuel supplies are just starting to make national headlines, there were signs this summer that trouble was ahead starting with anticipated price spikes.
Kelly Barner (03:48):
So what determines the cost and price of diesel fuel, home heating, oil, natural gas, and electricity? Let’s start with oil. About 36% of the homes in New England are heated with oil. The Energy Information Administration says that the typical family will spend about 23% more to heat their home this year than it did last year. And anticipation of that over the summer, oil delivery companies started reaching out to customers about the option to prepay and lock in more favorable oil prices. These companies know that people on fixed incomes are going to be the most affected by high prices. Their budgets just don’t have the flexibility to accommodate it without making very real tradeoffs. Now, this usually means that elderly people and low income families are the ones that are impacted. So these companies put together plans and allowed people to spread out their payments over a greater number of months based on their households estimated consumption, rather than paying in the actual month by what was used and what it cost at the time.
Kelly Barner (05:04):
That is great, and I’m glad that everyone is thinking ahead and I hope everyone takes advantage of the option that makes the most sense for them. But I am genuinely worried some of the most vulnerable people in our society are going to be the most harmed by all of this. And that’s in addition to inflated food costs and paying more at the pump, and it doesn’t just impact home heating oil. Natural gas prices are going up to 47% of US homes rely on natural gas for heat. And the energy Information administration anticipates that this year there will be a 28% year over year increase in cost. Since Russia is a major gas supplier on the global stage, this increase may go to help fund their war on Ukraine. And because supplies are closely tied to this, the whole situation has been made worse by the nor stream pipeline’s, ongoing maintenance and reduced output.
Kelly Barner (06:09):
Talk about bringing a global problem right close to home. So we’ve talked about oil and we’ve talked about natural gas. What about electricity? Electricity costs are the most interesting of all, and I’m partial because there’s some procurement in there ever. Source energy is the top electric utility in New England. Now, they don’t produce electricity, they just distribute it, and so therefore, they are somewhat at the mercy of wholesale energy suppliers. On December 6th, just a couple of weeks from now, there will be a four hour live auction during which suppliers can post their rates, and Eversource will have to make decisions about which contracts to sign based on anticipated demand. The result of that four hour auction will set the electric rates, Consumers will pay between February and August of 2023. There are already concerns about a shortage of supply and shortage of supply. Means rates are likely to go up.
Kelly Barner (07:21):
These rate increases become a direct pass through to consumers. So here’s an example. New Hampshire, they are already paying double in the current rate period then they did in the last just six months or so ago. Now, if Eversource can’t meet demand through these contracts, they have proposed switching to a daily buy. And so each day they would purchase the electricity for the next day. Now, certainly this would make rates far more volatile because they would be changing potentially every single day as opposed to every six months. And if you’ve ever negotiated anything, you know that a shortage of time completely destroys your leverage. It also increases the challenge for any consumers trying to live on a budget. Now, I didn’t know there was such a thing as a utility attorney, but utility attorney Jessica Chiarra has said that recent auction results indicate a complete breakdown in the competitive market.
Kelly Barner (08:31):
And I don’t think you have to have spent any time working in procurement to know that that’s bad for everyone. When the competition goes away and the leverage goes away, costs go up, service goes down, and no one is better off. So by now, I probably have you worried about the cost of oil, the cost of natural gas, the cost of electricity, but what if you can’t get the fuel you need even at an outrageously high price? So let’s go back and again, start with oil. The east coast of the US is the one region in the country that is dependent on foreign exports of oil. That means that, again, because of Russia’s war on Ukraine, we are now competing with everyone else in the world that’s scrambling to replace their Russian sources. Most of that oil will come from Canada, but some of it comes from Europe as well.
Kelly Barner (09:35):
Now, the interesting thing, and we’ll we’ll talk about some choices as we go through this. Diesel fuel and home heating oil are basically the same product. The major difference is that diesel fuel includes a road tax. So if we’re talking about home heating oil shortages, you know, that means that diesel shortages are possible as well, and that could prevent food and other necessary supplies from reaching stores and therefore consumers. Now, oil stockpiles are currently low. Overall, New England reserves are currently at one third of the normal levels they would be at this time of year. New Hampshire, their oil stores are at 60% of the historical average, and the supply problem isn’t just related to oil. Natural gas is also low. Now, unlike oil where supplies are the issue, the case with natural gas is the pipeline capacity is a problem. For instance, there is plenty of shale gas in Pennsylvania, but not that many ways to get it to New England.
Kelly Barner (10:46):
And this has been a problem for a long time. The existing pipelines into New England are simply not big enough for the volume that needs to move through them, especially during those peak times in the winter when they are the most important and the most people depend upon them. On peak demand days, which are brought about by those cold snaps that you get in New England, natural gas serves as a critical pressure reliever for the entire system. Now because of those inland pipeline constraints, 35% of the natural gas actually comes to us in liquified form in tankers referred to as lng, liquified natural gas. LNG tankers come to the Boston area from Trinidad and Nigeria among other places. And again, there are complexities there from a supply chain standpoint. Now that’s oil and that’s gas. But again, electricity is incredibly interesting. It’s very different from the other sources of energy.
Kelly Barner (11:54):
The most important reason that it’s so different is that electricity is a secondary energy source. It has to come from another source and be converted. So 61% of the US’ electricity comes from fossil fuels, oil and gas, 20% currently comes from renewables, things like solar, wind, hydro, and then 19% comes from nuclear sources. We’ve already talked about the fact that oil and gas supplies are low, albeit for different reasons. And what this ends up creating is a very complicated set of choices. Half of the electricity in New England comes from natural gas. So if we have a cold winter heating, people’s homes may take precedence over supplies of electricity For other things. There has already been a lot of talk of brownouts. These are forced periods without electricity because the utilities recognize they don’t have the supply to meet demand. This sounds awful, but they actually do it to prevent blackouts, which are worse because everyone’s, everything is turned off.
Kelly Barner (13:17):
Now, I don’t mean to start a fight, but I feel like this is the elephant in the room here. We’re having all of these energy issues, and that’s without pushing to add electric vehicles, adding that additional demand for a secondary energy source. Currently with the system that we have, it is not going to make any of this any simpler, any cheaper, or any more available. There’s just some maturity in the energy space that needs to take place before the whole system is really ready to bear that. There are a few other odd twists in this situation that I think are worth mentioning. We know there’s a national oil reserve, and the Biden administration has released 180 million barrels of oil from that reserve. It currently sits at a 40 year low, and they’ve been predominantly drawing it down to make up for reduced output from OPEC and to try to keep those gas prices low so that people can afford to get to work in the store.
Kelly Barner (14:28):
Now, even if they were to release an awful lot more, those barrels of oil don’t go directly into people’s cars or directly into their home furnace. It has to be refined, and that’s another capacity issue. Refineries are already running flat out, and so even if more were released, there isn’t enough refinery capacity to turn them into something that consumers want to buy. Now, we haven’t talked about coal. Most of the coal fired power plants in the US that would’ve been a source of electricity in the past have been closed for one of two common reasons. The first one is probably, as you would expect, environmental pressures. And the second one is because natural gas has been so cheap and available until now that truthfully coal fired electricity couldn’t compete. Now gas prices are going up, supplies are constrained, and coal isn’t even there as a fallback option.
Kelly Barner (15:32):
So you no longer get that choice of, well, it’s not ideal, but it’s better than a brown out or a blackout, nor in most cases is nuclear power. And interestingly, nuclear has the highest capacity factor, meaning that nuclear power plants can produce maximum power for more than 92% of the time during the year. In fact, scr, France is scrambling to bring nuclear plants back online to help meet Western Europe’s energy demands this winter. Germany in particular is counting on France’s ability to do this. And finally, we have some quirks in the supply chain. This would not be a good Dial P episode on supply chain. Now, if we didn’t talk about some weird stuff in the supply chain, we actually have to go back in time for this. Over a hundred years, the Merchant Marines Active 1920, which is still on the books and still fully active.
Kelly Barner (16:33):
That’s becoming a problem. And the current CEO of Eversource Energy is actually calling on the Biden administration to waive one part of it, The Jones Act, that’s the name that’s been given to section 27 of the Merchant Marines Act. And it states that all goods shipped between US ports must travel in US flagged vessels that are built, operated, and owned by US citizens or permanent US residents. Now here’s the problem. There currently are no l and g tankers that meet this requirement. So New England is forced to get its liquified natural gas from abroad. Even if there were another port in the United States that could put the supply into a tanker and sail that tanker to Boston, there is not a ship in existence that can legally make that trip and pull into the Port of Boston. So my key takeaways from today’s episode are that like it or not, we aren’t yet in a position to rely upon renewable energy for anything near what the US needs, either residential or commercially.
Kelly Barner (17:55):
I think we have to be very careful when we find ourselves thinking of electricity as its own energy source. It’s usually just reformatted oil and gas. So all of those big complex batteries are great, but the stuff that you put in them is not just coming out of the air. Most of it’s coming from fossil fuels. And finally, please join me in hoping and praying for a mild winter. I hate to think of what we may read in the papers if it gets really cold for an extended period of time. Now, that’s my point of view on this. But what do you think? Do we need to do a better job of understanding what drives the costs and prices of the energy we rely upon? If you were the one that had to decide between heating homes and ensuring a steady supply of electricity or heating homes and moving food to supermarkets, which would you choose? And finally, that supply chain consideration. Supply chains are not just trucks and planes and ocean freight, right? Do we need to reconsider pipelines, tanker capacity and regulations that constrain how energy can be moved from production locations to consumers? It’s not simple. If it were, it wouldn’t be worth us covering it. But again, that’s my point of view. And so until next time, I’m Kelly Barner on behalf of Dial P for procurement and the entire team at Supply Chain. Now stay warm everybody, and have a great rest of your day.
Intro/Outrp (19:46):
Thank you for joining us for this episode of Dial P for procurement, and for being an active part of the supply chain Now community. Please check out all of our shows and events@supplychainnow.com. Make sure you follow Dial P four procurement on LinkedIn, Twitter, and Facebook to catch all the latest programming details. We’ll see you soon for the next episode of Dial P four, Procurement.
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