To Keep Homes Warm, Oil May Be Best Buy

Even before the first big cold snap hits, or even a frost, the price of natural gas is rising.

If the spike - which amounts to a 45-percent jump since June - continues and prices remain high for any length of time, it is likely to mean higher home heating costs for many consumers this winter. Although the price is rising, there are no signs that natural gas is in short supply. Pipeline companies are not reporting any bottlenecks and gas companies are trying to reassure their customers.

It appears one reason the price may be rising is because some utilities are starting to build up their inventory after last November when temperatures were about 20 percent colder than normal.

This drove fuel prices up sharply as utilities scrambled to beef up their supplies. By the time winter came, some consumers were paying fuel bills that were 70 percent higher. "This prompted all kinds of investigations by state public utility commissions," says Charlotte LeGates, a spokesperson for the Natural Gas Supply Association in Washington.

This year, however, the nation's climate is expected to be governed by the El Nio effect, a warm body of water in the South Pacific.

Early forecasts are for a warmer than normal winter in the northern half of the country but colder than normal in the southern half. "We'll have to wait to see how this El Nio pans out," says a natural-gas securities analyst in Houston.

Home-heating oil's price is steady

Consumers may start to shift to home heating oil, which has yet to shoot up in the same way. The price of home-heating oil is basically unchanged since midyear.

If the winter turns out to be mild, energy prices should start to fall in late December or early January. However, there will be a lag of a few months until consumers benefit from the falling prices, since utilities will still have higher-priced gas in their inventories.

When gas prices shot up last winter, there were accusations that some gas companies had stopped production in the hope of getting higher prices. However, Theodore Spar, a vice president of Brooklyn Union Gas, says gas companies are producing all the gas they can.

But gas production has fallen slightly for the year. Reserves have also dropped for the first time in years.

The falling reserves and production come at a time when the fuel is now being used all year. In the past, natural gas was mainly considered a winter-heating fuel. Now, it is also being used to power air conditioning. The natural-gas companies in recent years have mounted effective marketing campaigns that promote the fuel as a clean alternative to oil.

Some natural-gas analysts believe additional demand is being stimulated by utilities, which have had to shut down nuclear power plants for maintenance.

"It may be adding to the peak load for gas," says David Shin, an economist with the American Gas Association.

Many of these nuclear plants are expected to be back on line at the beginning of the year.

Industrial demand for natural gas has also remained robust, as key gas-using industries, such as autos, ceramics, and agriculture experience strong growth.

Storing up for winter

But, by far, the largest users of gas are utilities, which buy the fuel in the summer to use during the winter-heating season. At Brooklyn Union Gas, for example, this process began in June when natural-gas prices were significantly lower than the same time last year. As a result, Michael O'Grady, planning coordinator at Brooklyn Union, says the company's costs are modestly lower than last year at the same time. "Our strategy is to buy during the entire summer to mitigate price spikes," says Mr. O'Grady. So far, that strategy has worked for those firms that bought early.