Heating Oil
Markets an Overview (Date: 2001)
 Escalating
heating oil prices sparked concern during the 1999-2000 heating
oil seasons as homeowners and industrial heating oil customers
faced significantly higher heating bills as well shrinking
supply. According to the U.S. Department of Energy (DOE),
consumers paid an average of $1.21 per gallon throughout
that winter; however, during late January to early February
2000 heating oil prices rose from $1.21 to $1.99 per gallon.
An alternative fuel commonly manufactured from soybean oil
quickly gained visibility as a way to heat homes and buildings
while extending the supply of heating oil which would contribute
to a more stable price structure. “Biodiesel” became
and has remained the buzzword among energy insiders in Washington
and in the Northeast where today both field and laboratory
testing continue to demonstrate that Biodiesel could not
only extend the heating oil inventory, but also enhance the
properties of heating oil which have been clearly identified
as requiring attention to its basic properties.
Biodiesel was among the first alternatives
to be considered in light of future heating oil needs, for
good reason. Biodiesel can be used in any diesel engine,
usually with no hardware modifications. It can be blended
with distillates at any level, and in fact blends in seamlessly
with the existing petroleum infrastructure that stores, blends
and distributes our conventional fuel oil and gasoline products.
It is similar to diesel in performance and is the safest
fuel to use, handle and store. More than eighty fleets use
the fuel and it has been proven successful in more than 40
million on-road miles, plus countless off-road and marine
miles.
“The use of Biodiesel as a
heating oil has been overlooked in the past due to the availability
and historical low costs of petroleum fuels,” said
Paul Nazzaro, president of Advanced Fuel Solutions, Inc,
an energy consulting company based in Massachusetts and lead
National Biodiesel Board contractor spearheading the evaluation
of this emerging biodiesel market. “However with the
ongoing interest in reducing foreign oil imports and resolving
the continuous supply disruptions that are now all too common
in the Northeast, biodiesel may offer niche markets with
a viable liquid alternative to Number 2 heating oil.” Another
driving force that makes the oil heat industry eager to understand
biodiesel properties and application to heating oil is its
desire to re-claim market share lost over the past twenty
years to natural gas. It is not a secret that the heating
oil industry has been losing market share since the 1970’s
when 20% of American households heated their homes with oil
to the current use which is below 10%. Today only 4% of new
homes use heating oil as its primary heat source.
Recognizing the need to modernize
and develop marketing campaigns to compete against natural
gas utilities the industry lobbied Congress successfully
to establish a national check-off program in 2000. It is
called the National Oilheat Research Alliance (NORA). The
goals of the program are to support oilheat technology improvements,
production of clean oil and improved storage and transportation
of same. These improvements will be communicated via advertising
expenditures to improve the public perception of oilheat,
enter stage left, biodiesel.
No. 2 heating oil, a product refined
from crude oil, is used as a heating fuel primarily in the
Central Atlantic and New England states. It is a liquid fuel
compatible with biodiesel. At this time a blend of 20% biodiesel
continues to be used by the Warwick School Department in
Rhode Island following a one year field test where 10%, 15%
and 20% blends of biodiesel demonstrated to be an overwhelming
success. All throughout New England numerous micro-managed
pilot projects are underway many not being managed as professionally
as we would like. However, all those we spoke with have provided
encouraging results that improved operational performance
was realized with blends of 10 - 20%.
One fuel oil dealer in Maine claims
to be providing a homeowner with 100% biodiesel at the request
of his customer and has enjoyed problem free operation. It
is not recommend at this time for blends higher than 20%
to be used until industry leadership completes the well thought
out testing protocols which have been designed to validate
all parameters of biodiesel blends performance from emissions
to overall operational impacts.
Biodiesel has proven environmentally
superior over No. 2 heating oil as a sole heating fuel. But
not surprisingly its cost and generic handling characteristics
are potential roadblocks to go it alone. At this time the
recommended maximum blend ratio appears to be 20%. Two factors
place biodiesel in a strong, timely market position as consumers
are increasingly environmentally conscience while at the
same time cognizant of the problems associated with our nations
continued dependency on foreign oil.
Facts about
the Heating Oil Market
Market Size & Economics
Based on data collected by the EIA
(Energy Information Agency) for the year 2000, No. 2 heating
oil is consumed in 7.7 million homes in the United States,
of which 69% or 5.3 million homes are located in the Northeast
corridor. Residential consumption of No. 2 heating oil in
2000 was 6.7 billion gallons of which 88% or 5.5 billion
gallons were consumed in the 11 Mid-Atlantic and Northeastern
states. This makes for a desirable blend market for biodiesel
and one that must be taken seriously by biodiesel stakeholders
for future industry growth.
The wholesale cost of No. 2 heating
oil is a function of crude oil costs, refining cost, transportation,
and supply and demand. “Projecting prices for commodities
such as oil is a very complicated process that is impacted
by political and economic factors that are dynamic.” says
Lewis DeRosa, president of PetroHedge a New Hampshire based
petroleum hedging company. It is not practical to introduce
or discuss pricing in this article because it would be irrelevant
and outdated by time the reader reviewed this document. To
keep the document fresh and timely we encourage you if interested
in economic comparisons between the fuels to visit www.nymex.com to
see current trading ranges of heating oil or by contacting
a local fuel distributor in your area to ascertain prevailing
real-time market prices for heating oil. You can do the same
for biodiesel by contacting any of the biodiesel suppliers
listed on this website.
Industry Fuel Quality Dilemma
It is widely known that poor fuel
quality and sulfur emissions contribute to the fouling of
heating oil burners and boilers. This condition lowers the
efficiency of the heating system and demands more frequent
cleaning. The cost of lower efficiency results in higher
fuel consumption. The cleaning cost is paid by the consumer
or by the retailer of fuel oil in the event the consumer
has a service contract (which is a common business practice
in the industry). Cleaner fuels have a positive impact on
the retailer’s bottom line in lower service expenses.
Our Warwick Rhode Island study, (sponsored by the National
Renewable Energy Lab) (see PowerPoint presentation) has unequivocally
shown that Biodiesel blends up to 20% have positively impacted
the cleanliness of filters, strainers and nozzles all fuel
wetted parts that have chronically damaged a fuel oil dealers
bottom-lines because of premature failure.
Biodiesel
and Heating Oil a Perfect Match
It is clear that biodiesel can mitigate
some of the negative attributes of heating oil since the
sulfur content is virtually zero it will have a positive
impact on the burner reliability and efficiency, it will
reduce foreign imports of crude oil, is biodegradable and
produced domestically. NORA (National Oilheat Research Alliance)
realizes the potential of biodiesel to improve the marketing
image of heating oil and has authorized funds to continue
the work Advanced Fuel Solutions, National Renewable Energy
Labs and Warwick Rhode School Department started last heating
season. The purpose of this test project is to evaluate biodiesel
and generic fuel oils in a range of furnaces and boilers,
and analyze combustion performance over the various operating
conditions. The objective is to identify potential benefits
in combustion performance and lowered air pollutant emissions,
while noting any combustion problems caused by using biodiesel
blends. The program principal investigator is John E. Batey,
P.E., president, Energy Research Center, Inc. home based
in Connecticut. This data will be available for review early
2003.
Testing Background
to Date
The use of biodiesel to heat homes
and buildings is common practice in Italy, but it is a new
concept in the United States. American studies of blends
of biodiesel and heating oil have been completed by Brookhaven
National Laboratory, Upton, NY, “Biodiesel Blends in
Space Heating Equipment” C.R. Krishna, December 2001,
funded by National Renewable Energy Laboratory, Program Manager,
and Dr. Shaine K. Tyson. The report number is BNL-68852 and
can only be accessed through Brookhaven Labs with NREL authorization.
A preliminary analysis of biodiesel
produced from soybean oil had been conducted in a Beckett
Oil Burner which is one of several popular oil burners in
use throughout the saturated home heating oil marketplace
noted earlier in this paper. In cooperative spirit with Ag
Environmental Products this material was released to NBB
and is titled Soy Diesel: An Investigation of Its Use in
a Beckett Oil Burner, dated April 22, 1993. This was possibly
the first official investigation of biodiesel as a home heating
oil replacement or heating oil blend stock ever prepared.
Some key highlights of this early evaluation uncovered the
following highlights:
- Both the soy diesel and fuel oil
were close in performance (similar BTU content and combustion
characteristics with the soy diesel showing a tendency
toward less smoke and sulfur oxides while the fuel oil
showed a slightly brighter flame.
- The materials in the burner were
compatible with soy diesel with the exception of some gaskets
and label adhesives which runs parallel with what we know
of material compatibility issues with biodiesel in the
diesel fuel marketplace which is clearly outlined on our
website listed under the Fuel Facts.
- Soy diesel appeared very thermally
stable compared to fuel oil.
- Soy diesel has virtually no sulfur
which helped reduced sulfur oxides emissions, the leading
cause of maintenance issues.
ARS Program
A few years back one government agency
took action to help alleviate the projected shortage of heating
oil by using Biodiesel to heat some of its buildings. The
Agricultural Research Service (ARS) in Beltsville, MD., used
a blend of five percent Biodiesel (B5) in its heating oil
throughout the winter. ARS is the research agency within
the U.S. Department of Agriculture. The goal of this project
and still remains its goal to date is to demonstrate that
it can work as home heating oil and to raise awareness in
the government that it is an option to stretch our heating
oil supply moving into the future. More on ARS in web article
listed on our site.
 The
most current testing and most comprehensive to date remains
to be the Warwick School Department study detailed in the
this Power
Point presentation. Spearheaded by Paul Nazzaro, president
of Advanced Fuel Solutions and contracted and funded by the
National Renewable Energy Labs and Robert Cerio, Energy Director,
Warwick Public Schools, this one year evaluation which continues
independently today with state funding demonstrating that
biodiesel blended up to 20% improved both emissions and operational
performance. Along with evaluating these critical areas,
AFS worked towards identifying methods of distribution that
would promote efficient and economical broad based distribution
of biodiesel blends as the industry matures and becomes more
receptive to depending on biodiesel as a heating oil blend
stock. For more details regarding this test contact Paul
Nazzaro at 978-664-5923 or Robert Cerio 401-734-3219 x 320.
Summary
The momentum is building and the
likelihood that biodiesel ends up being blended with heating
oil in residential and commercial boilers appears to be stronger
than ever. When the oilheat industry officially embraces
this liquid blend stock option it may offer substantial opportunities
for marketers in the heating oil industry.
Historically petroleum marketers
are eager to deliver products to their local marketplace
that their customers can benefit from and biodiesel will
certainly become one of those products. Noted benefits of
Biodiesel to fuel marketers include, but are not limited
to:
- Development of a “green
fuel” liquid product line.
- Contributing to sulfur reductions,
improved (air quality).
- Lower maintenance costs from sulfur
reductions.
- Capturing consumer confidence
in heating oil.
- Flexibility to reduce economic
volatility caused by refinery disruptions.
- Domestic production potential
in all regions of the country.
- Reduces the public perception
that oil is dirty, sooty and smelly.
- Disarms issues suggesting that
oil causes higher maintenance costs versus natural gas.
- Diminishes every consumers perception
that there fuel distributor is tied to “Big Oil.”
- Alleviates fears that long-term
availability is in peril and absolutely contributes to
the reduction in foreign oil supply.
Because of biodiesel’s environmental
attributes, biodiesel blends could be used to develop a diversified
market structure, e.g., “regular” heating oil
and a “premium” heating or “green” heating
oil. Biodiesel fuels produce 78% less carbon dioxide on a
life cycle basis compared to Number 2 fuel oil. Most biodiesel
contains less than 15 ppm sulfur and some fuels could be
virtually sulfur free. Biodiesel has the highest BTU content
of any alternative fuel and blends reduce the heating content
of the fuel by very little depending on the amount of biodiesel
being used.
This structure would allow for variable
markup structure and hopefully, some increase in profitability
for the industry. A green fuel line can be used to develop
environmental public images and thus gain some leverage to
compete for market share within the communities they compete
in.
There is an emerging possibility
that carbon dioxide credits could be generated from biodiesel
that have global market value. Similarly, sulfur credits
produced by reducing fuel sulfur content may be marketable
among commercial and industrial users. Reducing fuel sulfur
may also lead to lower maintenance costs though reduced corrosion
and fouling of heat exchanges. Add to that biodiesel’s
superior lubricity, and these savings would be revealed through
lower maintenance contract costs and fewer service calls.
Another key role for biodiesel use
in heating oil markets would be to introduce the fuel to
the industrial commercial interruptible gas consumer who
predictably seizes dangerously low levels of heating oil
causing panic and price spikes during unseasonably cold weather.
When winter temperatures challenge the system ,natural gas
companies notify the commercial customers advising them that
they will now have to turn to oil to meet the demands of
heat and production. From that point the reliability and
dependability of the petroleum industry takes over and always
fulfills the supply demands, but not without compromising
inventory disruptions that impacts costs which drive the
homeowner’s fuel oil to record highs - as was the case
in 1999-2000.
The visionary fuel marketer has a
real business opportunity if they embrace biodiesel distribution
with an eye wide opened approach. They could very well deliver
biodiesel both into the heating oil pool as well the diesel
fuel pool. Markets exist with military bases, utility companies,
state and federal fleets and some municipal and private fleets
(refuse trucks and school buses to name a few). Along with
these noted markets you have electricity generation, marine
fuels and national parks and mining.
Fuel suppliers that maximize
throughput, minimize storage costs, and expand into new
market segments at lower risk will ensure success in this
new area. Biodiesel has enjoyed progressive yet rapid growth
these last few years and although there is much more road
to travel before wide acceptance is attained, it is clearly
an intelligent choice to any diesel-powered engine, as
well as residential and commercial fuel oil burners. Product
economics and distribution strategies are currently being
reviewed to smooth the transition of this unique liquid
fuel option, but ultimate market acceptance is now being
measured in feet not miles. For more information regarding
heating oil or electrical generation markets contact Paul
Nazzaro, president, Advanced Fuel Solutions, Inc., 978-664-5923.
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