Heating Bills to Send Chill Through Americans’ Finances

While higher prices at the pump tend to capture consumers’ attention immediately, heating bills comprise almost as much wallet share as gasoline. In 2021, the average American consumer spent roughly $179 on gasoline and $176.67 on heating (electricity, natural gas and fuel oil) a month, each accounting for roughly 3% of total expenditures, according to survey data from the Bureau of Labor Statistics. 

The size of the winter sticker shock will be shaped by three important variables: the primary fuel used for heating, the local electricity market structure and, of course, the weather. Given the relatively mild rise in electricity prices, parts of the country that rely more on it for heat, largely in the South, might experience less of a shock. With the exception of Texas, many states in the South also have regulated electricity markets where power prices are more shielded from the ups and downs of natural-gas prices because they tend to reflect the average cost of generation, which include sources such as nuclear, solar and wind energy. By contrast, power prices in deregulated markets tend to reflect that of natural gas, which sets the marginal cost of generation.

The Northeast has all the ingredients for a perfect storm this winter. For one, based on the outlook from the National Oceanic and Atmospheric Administration, the EIA forecasts that the Northeast will be 5% colder this winter compared with the last one. Moreover, about 18% of households in the Northeast still use heating oil as a primary heating fuel. Supplies on the East Coast are 32% below last year’s levels, EIA data show.

While part of the tightness is due to a lack of local refining capacity, much is global in nature. The U.S. and U.K.’s sanctions on Russian distillate imports have limited the supply of the fuel. The shortage could worsen starting in early February when the European Union’s ban on Russian petroleum products goes into effect. Another wrinkle is that, when natural-gas prices are high, more power plants around the world switch from natural gas to heating oil.

Even electricity prices are set to surge in parts of the Northeast. Around 17% of households in the region primarily use electricity as their heating source, according to the EIA. Power markets in much of the Northeast are deregulated, which means electricity prices eventually will reflect the price of natural gas, even if there is a bit of a time lag. For example, the average residential electricity rate of National Grid customers in Massachusetts is expected to surge to 51 cents per kilowatt-hour in December, up 73% from a year earlier, according to data on utility rates and bills gathered by consumer advocacy group Power for Tomorrow. For a household that consumes a typical 1,000 kilowatt-hours a month, that translates to a roughly $510 monthly electricity bill, up from $295 a year earlier.

Market and weather forces could make for a chilling combination this winter. 

Write to Jinjoo Lee at jinjoo.lee@wsj.com