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The Cost Of Heating Oil - Six Things to Know 

What consumer must know about the heating oil marketplace.

 

A better understanding of the heating oil industry will allow consumers to make adjustments in their current heating programs to accommodate fluctuations in market pricing throughout the heating season.

1. What exactly is heating oil?
Heating oil is a petroleum distillate product manufactured as a byproduct of crude oil. Refineries produce heating oil as a part of the distillate fuel oil family of products; including heating oils and diesel fuel.

2. Where does heating oil come from?
The two sources of heating oil used by the United States are from domestic refineries and imports from foreign countries such as Canada, the Virgin Islands, and Venezuela.

Refiners and other suppliers bring heating oil to oil storage terminals. Heating oil may be delivered to a central distribution area where it is then redistributed throughout the United States by pipelines, barges, tankers, trucks and rail cars. Once heating oil has reached the general area where it will be consumed, it is redistributed by truck to smaller storage tanks near the retail dealers customers, or directly to residential customers.

3. Who uses heating oil?
Like any other market commodity, prices for home heating oil are subject to the effects of supply and demand. An estimated 8.1 million American households, mostly in the Northeastern states, rely on heating oil to keep warm in winter. Although there are limited industrial and commercial uses for heating oil, the primary use is in residential space heating, making the demand highly seasonal. Most of the heating oil use occurs during October through March.

4. How much does a gallon of heating oil cost?
Heating oil prices are determined by three contributing factors: the cost of crude oil, the cost of refining, the cost to market and distribute the product. This determines the cost to the local dealer who then tacks a marginal profit onto it to remain competitive.

The following table breaks the cost down into components and percentages. Distribution, marketing and processing comprises the relatively fixed liabilities with the cost of crude oil being the largest single variable cost.

Component of Cost

Percentage of Cost

Distribution and Marketing

 46%

Crude Oil

 42%

Refinery Processing

 12%

  

 ----------

Total Cost per Gallon

 100%

5.  What causes the continuous fluctuations in the market price of heating oil?
T he price of crude oil coupled with available supply and consumer demand is the largest factor effecting the cost of heating oil.

The conversion of crude oil into gasoline, diesel or heating oil is not a 1:1 transition. Simply put, one barrel of oil does not make one barrel of gasoline, one barrel of diesel or one barrel of anything. Each product is a byproduct in a refining process that is not 100% efficient in producing a singular product. As a result, when the marketable demand for gasoline or diesel is down, fuel oil production is subsequently reduced too. If this reduction occurs at a time of low inventories and high demand, the price for heating oil rises. Learn more about this at Heating Oil Things You Should Know

6. What can consumers do to position themselves to get the most out of their dollar when purchasing heating oil?
 Heating Oil Prices Follow Crude Oil.  This figure shows monthly prices from January 1987 to  the present at cents per gallon. Fill your heating oil tank in late summer or early fall when prices are generally lower.

  • Ask your heating oil dealer about budget plans to help stabilize your monthly bill.
     
  • Ask your heating oil dealer about capped or fixed price protection programs
     
  • Ask around the community about buying groups that purchase discount heating oil. Federal and State energy assistance programs are available to heating oil customers who have a limited budget.

Arm yourself with as much knowledge on the local heating oil industry as you can. Do your research and save yourself some money. More information on maximizing your heating program is available at the Heating Oil Things You Should Know page. STAY WARM!

                            

LUnderstanding factors that drive the volatility in residential heating oil prices.

Fluctuations: Variations that occur in the price of petroleum distillate products due to incremental, somewhat
predictable, changes in the supply and demand of such products.

More consumers begin using heating oil as a secondary heating source:

Some consumers may use heating oil to augment their existing heat source in times of extreme cold.
Prices of other heating fuels (such as natural gas or kerosene) may increase even more than heating oil
during these periods.

Wholesale buyers and anxious consumers drive the market up:

Resupply may be weeks away. Concerned that supplies will not cover short-term customer demand, wholesale
buyers bid up prices for available product. All the while the regional inventory is being depleted.
Consumers become anxious about their short-term needs and continue buying up the current inventory; driving
prices up sharply until the new supply arrives.

Seasonal demand for heating oil:

Where the consumer lives also plays a significant part in the seasonal demand for heating oil. A homeowner in
the Northeast might use 650-1000 gallons of heating oil during a typical winter, while their counterpart in South
Carolina may use half as much

There is an appreciable amount of oil-heated homes located in New England and the Central Atlantic States.
Approximately 6.3 million homes of the 8.1 million households nationwide that heat with oil are located in the
northeastern part of the United States. That comprises roughly 78 percent of the total U.S. heating oil market.
The seasonal increase in inventories and demand is largely confined to the Northeast. It is not uncommon for
the total receipts for heating oil sales in the Northeast to exceed 80 percent of gross sales in any given year.

 

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