September 15, 2008

Heating Oil Costs Expected to Increase This Winter


With winter just around the corner, home heating-oil customers are already thinking about looming energy bills and many will find the going rates for filling their furnace or boiler tanks quite chilling.

Heating oil is one of the more volatile markets of fossil fuels and is subject to drastic fluctuations in the short-term, due to speculators, weather and supply, according to energy experts.

This season refinery plants are operating at 86 percent of capacity because of small profit margins. That's 6 percent lower than the rate refiners were running at the same time in 2007. And when supplies are low, the prices tend to go sky-high.

The big picture for this season is not a bright one, as Maryland seems to be getting hit harder than many other states by the trend. For example, the retail prices for Marylanders averaged about $4.03 per gallon in May, when prices were averaging at $3.92 across the country.

As of Aug. 26, Energy Information Administration statistics show the national spot price for heating oil was $3.20 per gallon - higher than the same week last year when it was $1.95 per gallon. The spot price is the price the oil trades for and is often lower than the prices customers pay.

Cost-conscious customers are feeling cornered by the expense this winter and are faced with an encroaching dilemma: Wait it out and hope to snag a low rate; lock in a rate early with a delivery company at the risk of being undersold down the road; invest thousands of dollars in a new electric or natural gas heat system, though both are also seeing increases this year; or lower their furnace-heat consumption and stock up on accessory heat sources, such as firewood and small electric, propane or kerosene space heaters.

To many who are desperate for savings, none of these options seem promising.

Christopher Astor, a landlord in Harundale, has made the decision to convert from heating oil to electric on his rental property. On Aug. 15 he put up a Web ad to give away the 150 gallons of fuel in his old above-ground tank, as long as the individuals came ready to pump it into a proper fuel drum and haul it themselves.

Within the same day of posting the ad, more than 60 people responded, eager to front the manual labor for free fuel.

"Oh, yeah, the phone kept ringing, but the problem was people wanted it but a lot of them didn't have a way of siphoning it," he said. "One guy wanted to use a gardening hose, but I wouldn't have that because I was worried about spillage."

Mr. Astor said he was able to get the fuel off his hands that same day.

"They were real excited about it," he said. "I mean at $4 a gallon today, that's quite a savings."

But not everyone can invest the money necessary to convert their homes to another heating system.

Janet Gellici, who just moved to Annapolis this year from Arizona, now owns a home heated by an oil-burning furnace. This winter will be her first experience with it, as her last home used natural gas heat and hardly needed to be used in the hot climate of the Southwest.

Though she anticipated high heating-oil expenses once the months got colder, she doesn't plan to make any switches to other heat sources because she doesn't know how long she will live in the same house.

"To me, I don't see any really good options," she said. "Natural gas is a really volatile market, and it's got a history of that. Electricity would be less expensive but still it would be volatile. I mean, anything you do right now is going to be expensive."

Oil heat, also know as No. 2 distillate, is a liquid petroleum product, similar but not identical to diesel and kerosene.

Its prices are easily impacted within even short time-frames because consumers are often looking for it when it is in high demand. For instance, if temperatures suddenly drop at the same time when harbors and rivers are frozen, which would interrupt deliveries of oil supplies, the available stored heating oil is used faster than it can be replaced.

As a result, refiners can't keep up with consumption. If wholesale buyers become concerned about not being able to meet consumer needs, they then tend to bid up prices for available heating oil.

Carl Hein of Hein Bros. in Glen Burnie also said he is worried about what this year's market will do to his business.

On Aug. 18 his prices were $4.25 per gallon, but during the same morning the market price had already gone up. Mr. Hein said when that happens, he waits a full day or two before changing rates because the prices can vary rapidly.

"It's creating a problem for us because we have to buy it and pay our supplier or else we're getting cut off," Mr. Hein said. "It's causing a financial problem. It all depends on the weather."

It's a common expression, but when Mr. Hein says prices depend on the weather, he means it quite literally. Earlier in the month, he was keeping an eye on Tropical Storm Fay in Florida, unsure of how it could possibly affect U.S. Gulf Coast supply shipments. Now, it's Hanna and maybe even Ike that's worrying heating-oil sellers.

Mark Murphy, part owner of Murphy Fuel Oil company, said he is optimistic that prices will steady soon. He advised customers not to have too much anxiety over recent price ripples.

Last month Murphy's prices were at $4.69 per gallon but they fell to about $3.89 in the middle of August, he said.

For businesses like his, they have an advantage in pricing, he said, because they don't store oil on site. Mr. Murphy said his company has the flexibility to adjust prices day-to-day without needing huge margins to stay profitable.

"It ain't like I'm sitting on 50,000 gallons out back," he said. {Corrections:} {Status:}


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