Heating Oil Dealers Unsure of Prices or Strategy This Year

By David Krechevsky, Waterbury Republican-American, Conn.

May 18–Memorial Day is still a week away, but heating oil dealers in the region are already thinking about winter.

With oil prices fluctuating as wildly as Connecticut temperatures in spring, there is considerable uncertainty among customers and dealers about what prices will be in the fall, and what pricing plans, if any, will be offered.

A random, unscientific telephone survey of oil dealers in the region found retail heating oil prices ranging from $4.08 to $4.44 a gallon on Friday. Some dealers were offering a discount for the first fill-up by new customers. Scasco Energy Services, for example, offered a discounted price of $3.989, a savings of about 45 cents per gallon off its price on Friday.

Despite the high, and highly volatile, prices for oil, many companies still plan to offer capped prices or other pricing plans for their customers later this summer. But what those plans will look like, no one yet knows.

“Customers are still asking for pricing protection options, both in fixed prices and in price caps,” said Craig Snyder, president of Wesson Energy Inc. in Waterbury. “We plan on doing what our customers are asking for.”

Tom Devino, of Mercury Fuel Service Inc. in Waterbury, said his company also will offer pricing options later this summer. “I think that the programs work,” Devino said. “History has proven they do work. Some years, it’s not a money-maker, but it’s not designed to be. … I think people will be very concerned about locking a price in this year.”

Eugene A. Guilford Jr., executive director and chief executive officer of the Independent Connecticut Petroleum Association, said the economics of some programs — such as prepaid contracts, in which customers pay in advance for a season’s worth of oil — have changed dramatically this year.

Companies that offer prepaid contracts are required by state law to secure those contracts with a surety bond, or to buy in advance, at a fixed price, at least 75 percent of the oil promised. But buying so much oil at a fixed price now poses a substantial risk for oil companies, Guilford said.

“If you look at it from five years ago, a typical 2.5-million-gallon heating oil dealer, in order to buy wholesale heating oil over the course of a season, had to put together about $1.1 million,” Guilford said. “For the next heating season, given where the price is headed, … you’re looking at having to capitalize about $9 million for that same amount of oil. It’s a pretty astonishingly dramatic difference.” His $9 million estimate is based on a wholesale price of $3.60 a gallon. Companies, he said, have no way to know what will happen to the price of oil in the next few months. Nor do they know what to expect from the weather, which can dramatically influence demand and raise or lower prices.

“This is something of an enormous risk for a heating oil company,” Guilford said.

As an example, Guilford contrasted the current situation with what happened to F&S Oil Inc., which abruptly closed March 7 because of financial problems in part created because the company did not purchase enough oil to cover its prepaid contracts.

“This situation is actually worse than F&S, because you could go out and do everything right … and still lose your entire company,” he said. “That 2.5-million-gallon company is looking at betting more than the entire value of the company on that prebuy plan.” Both Snyder and Devino said the customer also faces significant risk. “Take a customer who uses 1,000 gallons in a season and do the math,” Snyder said. “You are looking at such a significant amount of money that they have to come up with for a prepaid contract, it therefore prohibits a lot of customers from participating.”

“The amount of money they are going to have to outlay is going to be so high they will need a payment plan to spread their payments out,” Devino said.

In addition, Snyder said, if a customer prepays for 1,000 gallons and the price of oil later drops by a dollar, “that’s $1,000 they just lost.”

Devino said that, because of volatility in the market, it is a good year to consider a price cap program. “The potential for the market to fall is so great, it makes a lot of sense with the price so high,” he said. Attorney General Richard Blumenthal said the risks involved mean consumers must be cautious and informed as they decide on the various plans that will be offered.

“People should shop around and seek references on heating oil dealers, and be wary of prices that seem too good to be true,” he said. “They should read the fine print for additional fees and charges, and they should contact my office to check on specific companies.” Blumenthal said he proposed two bills during the just completed session of the state legislature that would have put additional safeguards in place to protect consumers, but neither was adopted. One would require written contracts whenever there are fees or charges in addition to the unit price per gallon, he said, while the other would have given consumers higher standing when a receiver is appointed for a failed company like F&S Oil.

He said he also has concerns about enforcing the state law regarding prepaid contracts, and hopes to focus on that in the legislature’s next session.

“Right now there seems to be a gap in the law that essentially states the requirement for covering contracts with commitments for supplies, but it has no means of ongoing reporting,” Blumenthal said. “We are proposing legislation to require routine and regular reporting to ensure there is compliance.”

He added that consumers need to be aware of the risks created by a volatile market.

“Nobody is forcing the dealer to offer prepay contracts, or the consumer to buy them,” he said. “Prepaid contracts may simply have a degree of risk in this market that is unacceptable to the dealer or the consumer.”

—–

To see more of the Waterbury Republican-American, or to subscribe to the newspaper, go to http://www.rep-am.com.

Copyright (c) 2008, Waterbury Republican-American, Conn.

Distributed by McClatchy-Tribune Information Services.

For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.