This September, homeowners and public officials who had signed contracts for locked-in heating oil prices during the price spike began to feel the sting of buyer’s remorse. Prices continued to fall in October, and are currently at the lowest levels of the year. People in locked-in contracts are unable to take advantage of the historically-low prices, and are frustrated. How did this happen? If a heating oil consumer is currently in a locked-in price contract, what can he or she do about it?

Understandably, many heating oil customers were alarmed by soaring prices in July, when crude oil hit its peak price of $147 a barrel. They wanted to protect themselves from from a seemingly endless escalation of prices, and turned to locked-in price contracts as a solution. Locked-in contracts are essentially a gamble–a bet that heating oil prices will move higher over the time period covered by the contract. This gamble can be risky, mostly because “there are too many variables at play,” as an article on 27east.com explained. Accurate predictions of the movements heating oil prices, or any commodity for that matter, are effectively impossible.

Although some people are blaming heating oil retailers for now-unfavorable locked-in contracts, the truth is that when heating oil companies enter into a contract with a customer, they make the same contract with their wholesale heating oil provider. In fact, as ConnPost.com reported on December 3rd, Connecticut state law requires that retailers purchase wholesale oil immediately after a customer signs a locked-in contract, ensuring that the retailer will have enough oil to cover that contract during the heating season. When customers locked in high retail prices over the summer, retailers locked in high wholesale prices. While it may seem like heating oil retailers are reaping big profits from their customers’ high priced locked-in contracts, they cause the dealer to suffer in the same way the customer does. TimesUnion.com reported on December 3rd on one dealer who strongly discouraged his customers from signing price-lock contracts. Of the customers who demanded he lock in their prices, he said, some of them have now called to ask him to release them from the contract.

So if a person has signed a contract that obliges him or her to pay a locked-in price that is higher than the current market price, is there a way out? The answer is yes–but for a price. Contracts, if drafted correctly and put in writing, are legally-binding for both parties involved–neither side can decide to nullify or amend the contract because prices have changed. Most contracts, however, do include an escape clause that involves the customer paying a fee of $500 or more to get out of it. It is a hefty price to pay, but is really the only option. Some smaller dealers have already been put out of business by locked-in contracts this season, as too many of their customers have opted to pay the fee and cancel their contracts. In most cases, the cancellation fee does not cover the wholesale cost of the oil that the retailer purchased when the contract was signed, leaving him with an obligation to buy wholesale oil that he can’t sell and therefore can’t pay for.

The best course of action for customers locked in at high prices is to first examine their written contract to make sure it is complete with the lock-in price, delivery methods, and the cancellation fee. If consumers think their contracts are incomplete or inaccurate, they should contact their State Attorney General’s office. Assuming the contract is complete and legal, the customer should, as Connecticut Attorney General Richard Blumenthal advised in the ConnPost.com article: “calculate how much product they used heating their homes last year, multiply that by the difference in the current market rate versus the contracted rate, then calculate whether that amount exceeds the potential contractual penalty.”

The unpredictability of heating oil prices is the main reason why HEAT USA only offers automatic delivery contracts at a discounted price that is tied to the daily price of heating oil. HEAT USA President Andrew Heaney commented on this year’s high priced lock-in contracts, and encouraged conservation as a sure-fire way to save money when he was interviewed by BusinessWeek T.V. in late October.

Customers who desire to cancel their price-lock contracts should contact HEAT USA at 1-888-HEAT-USA (1-888-432-8872). An Outreach representative can provide assistance in calculating whether or not it is to each customer’s advantage to pay his or her contract’s cancellation fee.

For more news coverage of this topic, visit:
Courant.com
Newsday.com
LoHud.com

HEAT USA and The HEAT Zone are now on twitter. Get the latest updates on heating oil in the Northeast directly to your Twitter account on your computer or mobile device. Go to twitter.com to sign up, search the HEAT USA twitter user name “heatingoil,” click the user name, and click “follow.” The HEAT Zone will update several times a day with price info, heating oil news, and links to the latest blogs. When you use twitter, to follow HEAT USA and The HEAT Zone you’ll be the first to know!

A HEAT USA member recently contacted us with a great question: “I have always wondered why the price of heating [oil] is more than regular gasoline, when there are no taxes on it.” Actually, it is more of a statement, but still an interesting subject to wonder about.

It is logical to think that, since they are both refined from crude oil, that heating and gasoline should have similar prices per gallon. Add the state and federal taxes on gasoline, and you can expect gasoline to consistently cost more than heating oil, which is not taxed. Although this is sometimes the case, it is certainly not always the case. A quick look at the Energy Information Administration’s short-term energy outlook shows that on average, gasoline prices were in fact slightly higher than heating oil prices in 2006 and 2007. However, 2008 price averages and 2009 projected averages both show heating oil as slightly more expensive than gasoline.

So what accounts for these shifting price differences? First, we should note that gasoline and heating oil prices vary quite a bit in different areas of the country. A resident of New England might be paying $2.70 per gallon for gasoline and $2.95 per gallon for heating oil while a resident of Southern California might pay $3.05 per gallon of gasoline and $2.80 per gallon of heating oil. The point is, the most influential factor that determines how much you pay for gas and heating oil is where you live.

As for prices in the Northeast region right now, it seems that heating oil is more expensive than gasoline in most areas. There are two basic explanations for the current situation:

Supply and demand. Over the last few months, government statistics have repeatedly shown a steep drop-off in American demand for gasoline. Because of the tough economic times, Americans are driving less and therefore using less gasoline. Because demand for gasoline is historically low, oil companies are forced to lower retail prices to make sure they are still attracting customers. On the flip side, temperatures are dropping throughout the Northeast and winter is coming soon, so people are using more heating oil than they did three or six months ago. Higher demand for heating oil means that oil companies (both wholesalers and retailers) can raise their prices and still keep customers. In the summer of 2009, when Americans will be driving more and heating less, prices will most likely shift in the opposite direction.

Vertical consolidation. In the case of gasoline, most oil companies have what I call “pump-to-pump” control of the product. A huge multinational corporation like Shell owns the oil pump that extracts crude from the ground in Nigeria or the Middle East, owns the refinery that makes gasoline from the crude, and owns the pump that you use to put unleaded gas in your car. One company controlling the product through the entire production and retail process means the retail price is insulated from outside influences mainly profits taken by middlemen. Shell may be currently selling gasoline at a break-even price or even take some losses in order to keep sales up. When gasoline demand increases again (which it almost certainly will–the only question is when), Shell can then raise prices and recover most or all of the losses they incurred during the current low-demand period.

The extraction, buying and selling, and market trading of crude oil and its products like gasoline and heating oil are all incredibly complex processes. Although the simple explanations offered above to provide some insight as to how and why prices change, they cannot completely explain, much less predict, oil price trends.

The New York Times reported today on New York area residents who were lamenting their choice to lock in their heating oil prices while the price was near its peak this summer.  Like many other residents of the Northeast, the heating oil customers in the article are cringing at the current low prices of heating oil that their contracts prevent them from enjoying.  Many consumers are requesting their heating oil companies to allow them to re-negotiate their contracts.

Andrew J. Spano, the county executive in Westchester, echoed recent comments by Senator Chuck Schumer (covered by the Zone on Tuesday), writing a letter to local heating oil companies, urging them to lower prices: “Some customers, particularly seniors who were worried that there was no end in sight to the cost of oil, locked in rates over the summer when they were at their peak…These consumers are now locked into sky-high prices, even though much lower-priced heating oil is available.”

Meanwhile, Maine officials took a different approach, advising unhappy heating oil consumers to stick to their contracts, as reported by Portland TV station WMTW.

Newsday published a report last night on falling gasoline and heating oil prices in New York.  The article quoted the average price for heating oil on Long Island, determined by the New York State Energy Research and Development Authority (NYSERDA), as $3.617 per gallon.

HEAT USA price experts reported the average price per gallon for HEAT members on Long Island to be $0.50 lower than the NYSERDA average in the Newsday report.  Members can call HEAT USA Member Services at 1-800-660-4328 for specific price quotes for their area.

With a slow economy thinning out Americans’ wallets and high energy prices foreshadowing an expensive winter, a new criminal trend is emerging: heating oil theft.  A handful of cases have been reported since last winter, with new incidents in Mount Pleasant, PA, Brockton, MA, Sherrill, NY, and Jefferson, NH occurring in just the last two weeks.

Heating oil theft is a relatively new crime, according to most law enforcement officials, but one that will most likely to be seen more and more often as heating oil prices stay high.  “We’ve seen cases of firewood being stolen, but this is the first theft from a fuel tank,” said State Police Trooper Matthew Favreau, referring to the case in Jefferson, NH, and quoted in the Union-Leader.  “Given the fuel crisis and the economy, this probably won’t be the last one we see,” he added.  Heating oil theft is a crime that is difficult to pull off.  Thieves have to accomplish the long and possibly loud feat of siphoning or pumping the oil out of storage tanks without being noticed by residents or neighbors.  It appears likely that the need to operate without being seen or heard is the reason most of the thefts occur in rural and/or sparsely populated areas.  Homes and other buildings with above-ground tanks located outside and/or easily-located oil valves are particularly vulnerable.

To prevent heating oil theft, authorities have recommended heightened vigilance around tanks and valves, valve locks, and surveillance cameras.  Although the thefts are quite rare, heating oil consumers should be aware that they are occurring, and should be on the lookout for any suspicious vehicles near oil tanks in their neighborhood.

After a record breaking one-day gain on Monday, a big drop-off on Tuesday, and a small loss on Wednesday, Crude oil prices rose modestly on Thursday, ending just shy of  $108 a barrel, as reported by CNNmoney and wsj.com.  Stocks rose and the dollar strengthened as traders showed optimism that the $700 billion government bailout of the financial market was close to completion.  Declining demand, supply interruptions and lower-than-expected stockpiles of crude and gasoline were all overshadowed by the question: how and when will the government remedy the current economic crisis?  Heating oil also rose slightly, up 2 cents to $3.05 per gallon.