Located in the woods between Kalamazoo and Battle Creek, Mich., where snowfall reaches six-and-a-half feet annually, Matthew Share's winter home is large, drafty and difficult to heat. But this year, Share's isn't going to worry about that after prebuying $1,700 worth of heating oil to carry him through the winter months.
"I did it last year, too. But it was really two reasons this year," said Share, a marketing director at a law firm. "I have the convenience of knowing that it's already paid for. And with everything going on globally, like with Iraq, I don't think it'll fall. It seemed like the sensible thing to do, especially after the information from the Department of Energy."
Indeed, earlier this month, the Energy Information Administration warned consumers that their heating bills would be $100 to $300 more than last year, on average. "Higher energy demand due to colder weather and higher prices than those of last winter are the reasons for increased household heating expenditures," the EIA said.
But it's all relative. The winter of 2001-2002 was the warmest on record, sapping demand for heating oil, which is one reason why the EIA says bills will be 45% higher for heating oil customers.
Much Ado About Nothing
And while it may seem sensible to lock in heating oil prices before America commits troops to topple Iraq, a closer look at the decision reveals it is much ado about nothing.
"This is a very difficult decision for people to make," said John Maniscalco, executive vice president of the New York Heating Oil Association. "But what drives the price of heating oil is supply and demand. And there's no guarantee that the price of oil will escalate."
For one, there's no reason to believe that aggression against Iraq will reduce supplies of heating oil, causing prices to spike. Back in 1991, the last time a recession-bound America was contemplating a winter attack on Iraq, Maniscalco points out "oil went up the day we went in, but then fell like a rock after that. A war premium had already been established."
With the price of crude oil pushing $30 a barrel, a $10 jump since early February, a war premium has been growing. According to Maniscalco, market psychology, not the laws of supply and demand, has pushed the price higher. "After all, no one has cut production," he said. "And Iraq is not a major supplier. Three out of the four top suppliers of oil to the U.S. aren't from the Middle East."
And unlike 11 years ago, America is better prepared now to deal with a sudden shift in either demand or supply, because Congress established an 84-gallon heating oil reserve after an extremely cold winter two years ago drove up prices. "When push comes to shove, we have 19.5% more reserves this year than last year," Maniscalco said.
Ultimately, homeowners would be wise to check their oil tanks before deciding to pre-purchase oil. Because of last year's warm winter, most tanks are full or near full, an uncounted source of inventory over and above what is out there already.
Let's Talk About the Weather
One factor will have a definite affect on demand, however -- the weather.
The EIA thinks the price of heating oil will hit $1.32 a gallon, 22 cents higher than last year, based on the expectation that winter weather will return to its frigid ways.
But predictions from the National Oceanic and Atmospheric Administration, the government's weather forecaster, maintain winter will be warmer-than-usual across the northeast, where demand for heating oil is concentrated, due to El Nino. If that happens, then locking in heating oil supply would cost you money -- just like last winter.
In August 2001, the spot price of one gallon of heating oil from New York Harbor, the dominant source of wholesale supply for Northeastern oil retailers, was 73.3 cents, according to EIA stats. By November 2001, prices slid to 55.68 cents a gallon, a sign those who locked early got a raw deal on the retail level.
"Last year, people who locked in their rate were unilaterally screwed. They paid too much and watched as the price of heating oil slid all winter," said Vic Allienello, president of East Providence Fuel Oil and chairman of the Oil Heat Institute of Rhode Island.
That's not to say there aren't advantages to locking in a rate. For people like Share who would like peace of mind and a no-hassle winter, prepaying is a better alternative than worrying about the consequences of war or weather.
"These are the same people who get warranties when they buy a stereo at Circuit City," said John Huber, president of the National Oil Heat Research Center. "It let's you fix a budget for the winter and you don't ever have to worry if the grass is greener on the other side. You're done."
But those who want security without commitment should consider capped rates offered by oil suppliers. Under such an arrangement, customers agree to pay the current market rate on heating oil, with a limit on how much they'll pay. In today's market, you can expect to pay around $1.20 a gallon with a cap of 10 cents, which means you'll never pay more than $1.30 a gallon.
Most oil companies offer cap rates, but you'll have to ask around because terms vary greatly. To qualify for the cap rate, you'll usually need to meet a minimum purchase requirement, so the oil supplier can hedge the supply in case prices rise. But if you're asked to pay a fee for the privilege, keep on shopping -- many companies, like Allienello's, won't charge you a thing.
And let's keep these costs in perspective. The National Oil Heat Research Institute estimates that people use 800 gallons of oil, on average, per winter. So even if prices were to swing by 25 cents, we're only talking $200 over four months.
"Home heating pricing has been a tremendous value over where it was in the 70s and 80s," said Huber. "A lot of this is less important than it used to be."