Heating fuel prices down

Some experts say oil prices will increase as economy strengthens

Posted: Monday, October 19, 2009

Fuel oil and diesel prices are down from last year's record highs, a relief for Alaskans who heat with oil and who are supplied with electricity generated by diesel.

Still, fuel distributors say consumers are worried about the possibility of another spike in oil prices.

Meera Kohler, president of Alaska Village Electric Cooperative, said her co-op has paid an average of $3.20 per gallon for diesel this year for the electric utilities in 53 rural communities owned and operated by AVEC.

That's down sharply from an average of $4.73 a gallon paid last year, and it will allow AVEC to reduce the price it charges for power in communities where the co-op operates, Kohler said.

Most of AVEC's utilities receive fuel by barge during the summer months, some receiving only one shipment a year.

Oil was successfully delivered to all of AVEC's communities, although fuel is now flown every year into Noatak, in Northwest Alaska, because water depths on the Noatak River are not deep enough to handle fuel delivery by barge. Delivery by air adds to costs, resulting in fuel oil prices of $7 per gallon in some communities, Kohler said.

AVEC watches crude oil price trends as an indicator of where diesel prices will go, and crude oil is now in the range of $70 a barrel.

Many experts believe crude oil prices will increase again if the national economic recovery gains strength, Kohler said. A price of $100 per barrel would translate roughly to a diesel price of $4.25 for the co-op, but AVEC has its winter fuel supply and won't need to order again until next spring.

In Fairbanks, Ehren Schachle, owner of distributor Polar Fuel, said fuel oil is now selling for about $2.69 per gallon, a decline of about 65 cents from prices at this time last year.

"Prices are now back down to levels they were in 2006, but my customers are still very price sensitive," Schachle said.

Many of Polar Fuel's customers actually missed the worst effects of last year's price spike because the highest prices occurred during spring and summer of 2008, when customers were using less fuel oil, he said.

Although diesel and home heating oil prices are down from last year, they have not dropped by as much as crude oil prices have declined.

Distributors say the situation in Alaska with diesel and home heating oil is similar to that with gasoline. The market is small and competition among the state's three refineries is limited, which results in refined fuel prices not falling, at least as quickly, when crude prices decline.

The ability of new distributors entering the market is limited because the refineries - Tesoro, Flint Hills Resources and Petro Star - own most of the bulk storage capacity in the state.

Most of the more rural areas across the state depend on fuel oil to heat homes and buildings, while the more urban areas have other options.

Interior Alaska and most rural communities depend on oil for heating and power generation. Golden Valley Electric Association, the Interior electric cooperative, generates some of its power with coal but is dependent on electricity made with naphtha, an oil product, for most of its power supply.

In Southeast, hydro projects provide most of the electricity used, but communities in the region still depend on fuel oil for heating. Some Southeast communities not connected to the regional power grid also produce electricity with diesel.

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