U.S. Energy Information Administration logo

Today in Energy

October 25, 2011

High heating oil prices discourage heating oil supply contracts for the upcoming winter

graph of high heating oil prices discourage heating oil supply contracts for the upcoming winter, as described in the article text
Source: U.S. Energy Information Administration, Short-Term Energy and Winter Fuels Outlook, U.S. Energy Prices.

Fewer Northeast homeowners are choosing to lock in their heating oil prices this winter compared to previous years. About one-third of Northeast homeowners had heating oil supply contracts during the few years before the run-up in oil prices in 2008. Nearly half of homeowners then sought supply contracts during 2008 to protect against high fuel prices feared at the time. After petroleum prices collapsed during the second half of 2008, so did the percentage of homeowners with supply contracts the following two winters, with estimated participation sinking to about 25% in both 2009 and 2010. For this winter the number is expected to be even lower.

About 80% of U.S. households that use heating oil are located in the Northeast. The retail price for home heating oil in that area averaged $3.82 per gallon by the middle of October (the month that marks the start of the U.S. winter heating season in many areas where heating oil is used). This is up 27% from $3.00 per gallon a year earlier, according to EIA. EIA's Short-Term Energy and Winter Fuels Outlook expects the U.S. home heating oil price will average $3.71 per gallon for the season, up from $3.38 per gallon last winter.

Consumers can enter into a fixed-price or a price-cap contract with marketers and suppliers (dealers) to protect their budgets from being hit with high heating oil bills. A fixed-price contract allows a homeowner to pay the same price for heating oil throughout the winter, which is helpful when heating fuel costs rise, but a money-losing deal when prices fall below the locked-in price. With a price-cap contract, a limit is set on the maximum amount consumers will pay for heating oil no matter how high the price goes, but they will pay less when the price falls. Consumers have to pay an extra fee of 25 to 40 cents for each gallon of heating fuel to get flexible prices with a price-cap contract.

The number of homeowners who have entered into supply contracts is smaller than normal and may be at the lowest level in at least five years, according to heating oil associations representing dealers in several Northeast states.