Fuel Oil

Abstract

As the price of petroleum has increased, the power industry has displaced a great deal of more expensive petroleum and natural gas with coal and nuclear power. The petroleum industry has installed processing facilities to upgrade its heavy fuel oil to make lighter products. These two actions, when combined, have effectively resulted in producing clean products indirectly from coal. A profitable synfuels industry has been created by the refining and power industries without conscious direction on their part—and without government support. The net effect has been to substantially reduce demand for both crude oil and natural gas, stretching future supplies of petroleum energy.

This displacement has contributed to the temporary bubble in natural gas and the present oversupply of crude oil, creating downward price pressures on both crude oil and products. Even so, fuel oil prices have remained relatively stable because the industry has installed sufficient capability through its refinery improvements to upgrade fuel oil into more clean products, thereby reducing production of heavy fuel oil.

In the future, we can expect the interaction among these fuels to continue to exert their effects. Since there are many consumers who can use either natural gas or fuel oil, their prices will remain tied to each other. Fuel oil prices will set the upper limits to which the burner tip price of natural gas can rise. Conversely, natural gas prices will tend to set the floor under fuel oil prices.