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 the administration.

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 the May, when prices were averaging at $3.92 across the country.

As of Aug. 26, the most recent date available, 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 created an advertisement on Craigslist.org, a popular Web site akin to an Internet yard sale, 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.

C. Hoffberger Co. is a heating oil delivery business that has a local Annapolis office. Marketing Vice President Chris Carini said one reason for the high prices may be that commodity markets are insufficiently regulated and large-scale traders may be manipulating prices.

"Customers are concerned that their prices have increased in the last year, but most realize it's not the fuel-oil dealer's fault," Mr. Carini said. "The consumer sees the increases in the gasoline they use in their car and the electricity they use for their house, so they know the increases are not limited to heating oil."

The owner of one Anne Arundel County-based heating oil delivery company, Carl Hein of Hein Bros., 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.

Chloe Griffis has already begun comparison shopping for the best rate on heating oil for her home. Though many oil-heat customers contract with companies, Ms. Griffis calls around at the end of each summer and then her husband maintains their house's furnace himself.

Each year, the Griffis' purchase one 250-gallon tank full of oil to last the entire winter, and they supplement that with a woodburning stove to keep out the chill.

"We spent $500 last year on oil, and it looks like this year, it'll come out to more like $1,000," she said. "It just occurred to me that a lot of people don't think about oil until they have to, and now they do."

To save costs, she will inspect all of her door seals and insulation.

"We'll just have to keep the temperature lower, as much as my kids can stand it," she said. "We'll stick to about 60 (degrees) at night."

With last month's slight drop in heating-oil prices, wholesalers and distributors will likely be reluctant to keep large supplies. That worries many about what's in store for the future market.

"Keep your thermostat low as you can and make your furnace clean, that's about all I can tell you," Mr. Hein said.