Should you lock down fuel oil price?

August 12, 2008 2:13:55 PM PDT
Q: With the volatility of heating oil prices, should I lock into a fixed price for this winter to save money?

A: August may seem like an odd time to think about heating your home, but it's an ideal time. With fuel oil close to $2 more per gallon than in the fall of 2007, many people who rely on it to stay warm in the cold months can avoid a sudden price spike by locking in a fixed price with their dealer or settling on a price cap.

These payment deals first caught on about a decade ago in the two dozen states -- mostly in the Northeast -- where heating oil is widely used. They became even more popular in 2002 amid big oil price swings. Of course, today's market remains highly volatile, with the per-gallon price in Maine running around $4.40 early this month -- compared with $2.69 in October 2007, a 64 percent increase since the beginning of last year's heating season.

In eight of the last 10 years, customers who locked into these kinds of deals made out better than if they had stuck with prevailing prices, says Jamie Py of the Maine Oil Dealers Association. Deals aimed at stabilizing consumer prices come in all shapes and sizes.

With fixed-price deals, consumers and dealers agree on a set price for the season, and the price cannot go up or down. Some dealers require customers to pay up front for their oil, and some will agree to a budget system (a schedule of fixed payments).

Dealers offer these arrangements once they have secured heating oil contracts for their customers on the wholesale market for a specific price, according to the National Oilheat Research Alliance, an industry group based in Alexandria, Va.

Of course, there's always a possibility that the price of oil could decline. This week the U.S. Energy Information Administration lowered its December price forecast for heating oil from $4.66 per gallon to $4.31 per gallon. But a possible price decline is part of the trade-off for the security that comes with locking in a price.

Cap deals work differently. The consumer agrees with the dealer to pay no more than a maximum price. If and when the price hits that level, the customer pays no more, and if the price falls below that level the customer follows the price down. And prices sometimes drop sharply, even in the middle of heating season.

(Dealers can only offer the cap option if they go into the futures market and buy options. By buying futures, dealers are simply purchasing shipments to be delivered months in advance at a price set today.)

These kinds of arrangements require oil dealers to sign contracts with their suppliers months before the heating season. The dealer will likely have to pay for insurance, often called "downside protection," and the cost of that insurance is usually passed on to customers, which can quickly add up. Remember, in the end the oil dealers are just as worried about volatile prices.

Before signing anything, it's a good idea to check with your state attorney general's office or consumer protection agency. For example, Maine requires contracts offering guaranteed prices to be in writing and in plain language. Maine's rules closely follow laws in the other New England states.


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