Predictions for the winter of 2015

The past two winters have featured frigid cold over much of the country. And in both cases, that nasty weather gave the U.S. economy a bad case of the flu. There’s no telling for sure what this winter has in store, but there’s good reason to believe we’re in for a break.

Hello, El Niño

The first quarters of 2014 and 2015 are periods that many folks would probably prefer to forget. Both saw outbreaks of extreme cold across much of the Midwest and the Northeast. Boston set a snowfall record. High heating bills no doubt put a dent in many household budgets. And both quarters saw economic growth all but freeze up: negative in the first quarter of 2014 and a paltry 0.6% in the same period of 2015.

Mother Nature could prove kinder this time around. Long-term predictions favor a milder pattern over the parts of the country that were recently slammed by the Polar Express. The National Oceanic and Atmospheric Administration, for instance, is calling for above-average temperatures across the northern tier of the country, thanks to the phenomenon of warming Pacific Ocean waters known as El Niño. Though weather forecasts are, of course, notoriously fickle, Niño winters typically tend to favor rainy and cool (but not frigid) weather in the South, increased chances for rainfall in California and milder-than-average temperatures throughout the North.

Even if the weather forecasts don’t pan out, consumers and businesses can look forward to abundant supplies of all the major heating fuels: natural gas, heating oil and propane. That’s in sharp contrast to two winters ago, when extremely high demand drew down stockpiles, causing shortages of heating oil and propane, and painful price spikes for all three fuels. Last winter, supplies were large enough to cope with heavy demand, but consumers still paid a stiff price.

Residential heating oil, for instance, averaged $2.89 per gallon by the end of last winter, with propane at $2.29 per gallon. Today, the averages are $2.44 per gallon for heating oil and $1.91 per gallon for propane. Meanwhile, stocks of heating oil in the Northeast are at their highest level since 2011. Propane stockpiles have set an all-time record: a whopping 102 million barrels. That should keep prices of both fuels from rising much during the winter.

Natural gas prices figure to climb as winter sets in. But the gain should be modest, thanks to ample stockpiles building up in storage now. The Department of Energy expects that gas in storage will reach a record by Halloween, around the time colder weather typically perks up heating demand, shrinking stockpiles. At about $2.50 per million British thermal units (MMBtu), the benchmark price of natural gas is more than $1 per MMBtu cheaper than a year ago. We see prices advancing to about $3 per MMBtu sometime this winter, with a proportional rise in the price most consumers pay. If that pans out, the average gas bill should come in moderately lower than last year.

More Relief at the Pump

At the same time that consumers stand to save on their heating bills, they’re also likely to pocket more cash at the gas pump. Now at $2.24 per gallon, the national average price of regular unleaded is only a tad more than the lowest price recorded in 2015. And we expect pump prices to keep easing, now that the summer driving season is in the rearview mirror. Barring a sudden spike in oil prices caused by some sort of geopolitical shock, odds are good that gasoline will keep slipping this winter, possibly returning to the roughly $2 per gallon reached last January. An even steeper drop can’t be ruled out.

Lower gasoline prices could give a real lift to the economy, not just because drivers would have more cash to spend on purchases other than gas, but also because a further price drop would come as a pleasant surprise to most consumers. According to a survey by the National Association of Convenience Stores, which represents many of the nation’s gas stations, only about one-fifth of drivers expect gas prices to keep declining. So, if our forecast for a further drop holds up, look for a bit more consumer spending this winter — another nice change of pace from the deep freezes of 2014 and 2015.

U.S. Crude Oil Exports? Someday

On an unrelated note: Low oil prices have U.S. oil producers hoping for access to new markets. Most U.S.-pumped crude cannot be sent overseas, thanks to the 1970s-era ban on exports enacted in the wake of the OPEC oil embargo and the resulting oil price spikes. That prohibition didn’t matter much when the U.S. needed to import most of its oil, but the production renaissance of recent years has raised the realistic possibility that the domestic market could become saturated with domestic crude. (The U.S. is still a net importer, though soaring output of light, sweet crude oil threatens to outrun the refining industry’s ability to process that grade of oil.)

Lifting the export ban would bring some much-needed relief to a beleaguered industry. But don’t bet on it just yet. The U.S. House of Representatives recently passed a bill ending the ban, but its passage in the Senate looks iffy. And the White House has gone on record as opposing the bill, suggesting that a presidential veto would be forthcoming if the Senate did follow the House’s lead.

Jack Gerard, president of the American Petroleum Institute, the oil industry trade group, recently held a conference call expressing API’s optimism that a deal to end the export ban is within reach. His optimism is understandable, given that selling U.S. crude to overseas buyers would help offset the financial pain of today’s low oil prices by opening up new markets. But when pressed by reporters to lay out a strategy for getting the House’s bill through the Senate and past a White House veto, Gerard couldn’t outline one.

Instead, we look for American crude to trickle out of the country in small volumes, as the government continues to loosen the export ban without formally repealing it. Recent decisions by the Department of Commerce to allow exports of minimally processed condensate (a form of very light crude), as well as a deal with Mexico to let American firms swap some light, sweet U.S. crude for the heavy Mexican variety that many refineries here are designed to process, are prime examples.

A ban that gets a little looser but largely stays in place won’t give oil producers much to cheer about. But it’s good news for U.S. refiners, who will continue to profit from buying abundant American crude at a discount to the global benchmark. After all, there’s no ban on exporting refined fuels, and refiners are acting accordingly.

Can Volkswagen overcome its troubles; and what’s the impact on diesel?

Volkswagen’s ongoing scandal over phony diesel emissions isn’t just a big story in the auto industry. It also raises key questions for diesel as a transportation fuel at a time when automakers are striving to meet ever-tougher government fuel economy rules.

Just how serious is the revelation that VW, the largest automaker in the world, used special software in some of its diesel-powered cars to cheat on emissions tests? First, consider the numbers. The company estimates that about half a million of the cars it sold in the U.S. with four-cylinder diesel engines during the past five years were programmed to emit fewer pollutants when undergoing emissions test. Worldwide, the total might be as high as 11 million vehicles sporting the “defeat device” software.

The resulting fines from regulators in the U.S. and other countries could run into the billions of dollars. (No wonder VW’s stock has plummeted by 36% since news of the emissions cheating broke.) Even more crucially, the company may have seriously undermined its reputation with customers, many of whom are undoubtedly feeling less inclined to trust a brand that actively sought to evade the rules. The fact that VW markets these polluting engines as “clean diesels” that get great fuel economy adds insult to injury.

“It really is a giant deal” for Volkswagen’s brand perception, says Kelley Blue Book Executive Market Analyst Jack Nerad, though he warns that it’s too soon to gauge the financial impact of all the fines and lost sales the company will suffer. The brand’s loyalists, who are devoted to VW in general and its diesel-powered cars in particular, will be especially put off, he reckons.

“I would say it’s egregious,” adds longtime auto industry analyst and independent consultant Bill Visnic. Rigging cars with software to cheat on emissions tests points to an “institutionalized” problem at VW. This wasn’t the act of some rogue engineer or an oversight borne of cost cutting, but rather a “concerted effort to skirt regulations.”

VW is under pressure to fix the problem in millions of faulty cars. But any solution is going to be painful. Because diesel engines tend to emit more oxides of nitrogen (or NOx) than gas-powered units, carmakers normally add special exhaust treatment gear to their diesel models to meet clean air rules. Typically, that requires a system to inject a chemical called urea into the exhaust, thus neutralizing the harmful NOx emissions. Nerad thinks VW will have to retrofit its affected cars with such a system, which could cost thousands of dollars per vehicle. Visnic thinks VW will opt for a software fix that will reprogram the cars to emit less NOx. The company might also have to install a new catalytic converter. Or it might do some combination of the three.

Any physical retrofit will be expensive and tough to carry out. A software fix might be cheap, but it will probably cost horsepower and fuel economy, making the car less enjoyable and economical to drive. In other words: Spend a fortune on a complicated recall or degrade the driving experience for your customers. Aren’t you glad you aren’t in VW management right now?

The Fallout for Diesel

Are VW’s woes the death knell for diesel-powered cars, though? Long a niche market in the U.S., diesel has been enjoying a modest resurgence in recent years. Modern diesels are very different from the wheezy, smoke-spewing versions many drivers might remember from a few decades ago. And because diesels tend to be more fuel efficient than their gas-powered cousins, some automakers have been hoping they can reach their government-mandated fuel economy goals in part by selling more diesels. In the past few years, there’s been an increase in the availability of diesel models, not just from VW, but also from Mercedes-Benz, BMW, Ram, Jeep and other brands.

Despite the stigma, odds are customers who wanted a diesel before will still want one, says Visnic. Those drivers tend to be familiar with the technology and the unique advantages of diesel engines (lots of torque and towing capability, along with high fuel mileage). And those folks will probably understand that what VW did doesn’t indict diesel power entirely.

Savvy buyers might use the current situation to their advantage. VW can’t sell new four-cylinder diesel models until they get the emissions up to snuff, but that shouldn’t take too long. When those cars return to dealers’ lots in a few months, they’ll likely require some pretty enticing discounts to win back apprehensive or angry customers. Normally, VW’s “clean diesel” models sell at a premium to comparable gas-powered versions, but odds are good shoppers who aren’t put off by the recent deception will see some sweet bargains. Moreover, they’ll have plenty of leverage to negotiate a better price, since Volkswagen’s U.S. sales depend pretty heavily on a high diesel take rate. When it comes to clean diesel, it’s going to be a buyer’s market.

A “Black Eye”

Lost in all the talk about VW’s perfidy in cheating the emissions tests is the fact that they were able to get away with it for such a long time. Only when a private research consortium started studying the company’s diesel emissions did word start leaking out that something was amiss. Otherwise, it’s impossible to say when, or if, the U.S. Environmental Protection Agency would have caught on.

That failure is a “black eye for the regulators,” says Nerad. The fact is, the agency doesn’t test every new car to verify the maker’s claimed fuel efficiency, and it doesn’t have the resources to look too closely at emissions compliance, either.

But look for EPA to compensate by scrutinizing other brands’ diesel models much more closely now. Whether the agency uncovers any more funny business is impossible to predict, though it should be noted that other automakers use expensive chemical injection systems to clean up their diesels’ exhaust, and it seems unlikely that they’d go to such an expense if they weren’t trying to comply with the rules. Still, when regulators suddenly focus their attention on a problem they’d missed for years, you can never be sure what else they’ll find.