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Why Look at Fuel Oil?
The large majority of oil products purchased by manufacturers to produce heat and power are distillate and residual fuel oils. Distillate fuel oil, the lighter product, is also used for heating of homes and commercial buildings. Residual oil is a much denser, heavier product not ordinarily used in residential or commercial building applications. Manufacturers have reduced their consumption of fuel oil as a fuel source between 1974 and 1994. As a proportion of total heat content (Btu) of purchased fuels and electricity, fuel oil reached a high of 16.5 percent in 1977 and decreased to a low of 4.5 percent in 1994. Distillate fuel oil represented 5.5 percent of all fuels used in 1974, but by 1994 accounted for just 1.2 percent. (See Figure 1.) Residual fuel oil reached a high of 12.4 percent of purchased energy for fuel in 1978 but by 1994, had dropped to 3.3 percent of the total. By contrast, the share of purchased energy for fuel represented by natural gas has remained relatively stable throughout the 1974-1994 period, ranging from 47 to 50 percent. Coal’s share of the total purchased fuel grew steadily from 9.4 percent in 1974 to a high of 13.3 percent in 1985 but then dropped as steadily to 10 percent in 1994, close to the levels in the mid-1970’s. Finally, purchased electricity’s share climbed steadily until it reached 23 percent in 1985 where it has since remained. For further information see:
Relative price change appears to have had a greater effect on residual fuel oil than distillate fuel oil. Between 1974 and 1994, the amount and share of fuel oil use have declined substantially. In the mid-1970's, oil prices rose substantially as a result of limited supplies of crude oil used to make refined products. Were manufacturers reducing their fuel oil as a result of these price changes? It is useful to compare the quantities and prices of fuel oil to those of natural gas. Natural gas is an appropriate comparison because it is used in many of the same situations as fuel oil. Also, many manufacturers have the ability to switch between fuel oil and natural gas as a response to different situations. In terms of heat content, distillate fuel oil use was 10 percent of natural gas purchased fuel use in 1975, 9 percent in 1978 (a decrease of more than 9 percent), and 3 percent by 1981 (a decrease from 1975 of 66 percent). Meanwhile, the price of distillate fuel oil relative to natural gas for equivalent amounts in terms of heat content decreased from 236 percent in 1975 to 164 percent in 1978 (representing a decrease of 30 percent) then increased to 209 percent in 1981 (an increase from 1978 but still a decrease from 1975 of
11 percent). As Figure 2 graphically summarizes the changes using 1975 as the origin, the relative price of distillate fuel oil both decreased and increased through 1981 but the relative quantity only declined. Even as the relative price declined in 1985, manufactures did not increase their share of distillate fuel oil purchases appreciably. As relative price continued to rise and fall, manufacturers continued to decrease their purchases of distillate fuel to the low found in 1994. Figure 3 shows the same comparison of residual fuel oil to natural gas. In the 1970's, residual fuel shows the same drop in use relative to natural gas that distillate fuel oil did from 1978 to 1981. There is evidence that immediately before and after 1978, manufactures were much more responsive to relative price changes between residual fuel oil and natural gas. However, by the time of the 1990's, manufacturers had reduced their residual fuel oil use considerably and did not seem inclined to increase its use relative to gas, even in the face of more equivalent prices.
Fuel Switching Manufacturers prefer natural gas to fuel oil when they can reasonably choose either fuel. One avenue of inquiry may be found in manufactures’ abilities to replace one fuel with another. Even in 1985, the first year for which such data were available, manufacturers had displayed a preference for using as little fuel oil as possible. This concept can be measured by comparing the actual consumption of a given fuel compared to:
As can be seen in Table 1, and Figure 4, the actual consumption of distillate fuel oil was close to the minimum possible both in 1985 and 1994 expressed as a discretionary use rate of approximately 3 percent1. Residual fuel oil shows an increase in discretionary use rate from 17 percent to around 20 percent from 1985 to 1994. In both cases, natural gas can substitute for and be substituted by the fuel oils more than any other fuel. Interestingly, the discretionary rate for natural gas is much closer to the maximum amount possible, at 77 percent in 1985 and 73 percent in 1994. Thus, the picture has not changed all that much between 1985 and 1994. These rates indicate that when they have flexibility in their fuel choices, manufacturers have favored natural gas over fuel oil. This relationship has persisted since 1985, despite fluctuations in relative average prices between fuel oil and natural gas. See Tables of the 1994 Manufacturing Energy Consumption Survey (MECS):
In 1994, a much greater proportion of manufacturers switched out of residual fuel oil into natural gas than from natural gas into residual fuel oil. The 1994 MECS asked about actual fuel-switching behavior for the first time. Natural gas and residual fuel oil were selected because historically, they have shown the greatest potential for mutual substitution. Of the estimated 159,773 establishments in the population that use natural gas for fuel, 5,779 establishments were able to switch to residual fuel oil. Only 1,279 (22 percent of the total able to do so) did switch into residual fuel oil from natural gas during 1994. Conversely, 1,496 establishments out of 3,080 residual fuel oil users could switch from residual fuel oil to natural gas. Of those, 997 (67 percent) actually made a switch. Thus, even though the prices in 1994 were quite similar on a Btu basis, manufacturers exhibited a strong preference for natural gas. (See Table 2.) Seventy percent of the establishments that chose to switch from natural gas reported that one reason for switching was a shortage of supplies and 43 percent answered that residual fuel oil was less expensive at the time of the switch. Of those establishments making a switch from residual fuel oil to natural gas, 82 percent cited gas as a less expensive alternative as their primary reason. No other reason was cited by more than 15 percent of the respondents, including environmental restriction on emissions or waste (13 percent). See 1994 MECS Tables:
Manufacturers' fuel oil storage capacity is declining rapidly. Another indication of the declining reliance on fuel oil by manufactures is the on-site storage capacity of the fuel oils. One of the problems of fuel oil relative to other fuels is that manufacturers must maintain large storage tanks. This can prove to be an added expense beyond the price of the fuel. Manufacturers must also guard against the environmental hazards brought about by faulty underground storage tanks. As shown in Table 3, storage capacity has declined by 60 percent for distillate fuel oil and 37 percent for residual fuel oil. See the following references:
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