Last December's spectacular increase in home heating oil prices and the temporary shortage of propane were caused by the record-breaking cold wave and breakdowns in the distribution network, not by the oil companies, according to an analysis by the U.S. Energy Information Administration.
The report offers a point-by-point rebuttal to charges by consumer activists and some members of Congress that oil refiners engineered an oil shortage to increase their profits.
In fact, the report says, oil companies made a lot less money on their refining and marketing operations in the last quarter of 1989 than they did in the same quarter a year earlier.
Retail heating oil dealers "with the good fortune to have a large inventory of lower-cost product would have profited by reselling at the prices that prevailed in the cold spell," the report noted.
But no individual heating oil dealer is large enough to control prices beyond its own service area. Among the major oil companies and independent refiners that produce the heating oil, the report said, "the lack of price uniformity across companies ... is indicative of the competitive process at work rather than the result of collusion."
Release of the report represents a last hurrah for Helmut A. Merklein, director of the Energy Information Administration.
When some members of Congress were looking for someone to blame to appease constituents shocked by the sudden run-up of their fuel bills, Merklein angered them by refusing to criticize the oil refiners, insisting that more data and more careful analysis were needed. His resignation, announced in the spring and effective at the end of last month, came as no surprise to the energy industry.
In his letter of transmittal to the Senate Governmental Affairs Committee and the House Subcommittee on Energy and Power, Merklein said the report shows that "most of the price increase in December can be accounted for by the extraordinary cold snap early in the season. Transportation problems, refinery mishaps and freezing pipes and gas wells exacerbated the situation."
By the time winter was over, the report said, consumers had suffered little economic hardship because December's arctic cold was followed by an exceptionally mild January and February.
Heating oil prices in the Northeast increased from approximately 87 cents a gallon in October to $1.18 in January, but then receded quickly. Overall, the average heating expenditure per household during the winter of 1989-90 was $445, up from $374 the year before.
This is an increase of nearly 19 percent, but most of that can be attributed to an increase in the price that refiners were paying for crude oil, rather than to profiteering, the report stated.
As the winter heating season began, U.S. fuel oil stocks were near normal levels and forecasters were predicting an average winter.
When the temperature plummeted, several things happened to drive up fuel oil prices:
Electric utilities, forced to generate more power, used up their oil reserves and were "forced to compete for petroleum fuels at high prices."
Fuel oil dealers who had hedged against a price increase by buying contracts on the New York futures market actually took delivery, rather than simply reselling the contracts. In industry parlance, fuel oil dealers demanded "wet barrels" instead of paper barrels.
Refiners attempting to produce more fuel oil and less gasoline, contrary to what they had expected, were forced to make "unplanned, rapid changes in the product slate," and passed the costs along to consumers.
Several refineries suffered fires and mechanical breakdowns.
High prices and cold weather in Europe reduced the amount of fuel oil available for import into the United States.
Overall, the report said, the law of supply and demand drove prices up as much as the market would allow.
"The spot markets for both heating oil and propane moved in accordance with established patterns, with only the magnitude of the price changes being out of the ordinary," it said.