Domestic Heating Oil Prices
What consumers should know
Introduction
Heating oil is a petroleum product used by many U.K. residents to heat their
homes. Historically, heating oil prices have fluctuated from year to year and
month to month, generally being higher during the winter months when demand is
higher. To understand the reasons for these price variations, consumers need to
understand how heating oil is used and how and where it is produced.
Who uses heating oil?
Of the households in the United Kingdom, approximately 3.5 million use heating
oil (of which 28 sec kerosene forms the largest proportion, with a minority
using 35 sec gas oil). Residential space heating is the primary use for heating
oil, making the demand highly seasonal. Most of the heating oil use occurs
during October through March. Some customers try to beat rising winter prices by
filling their storage tanks in the summer or early Autumn when the prices can be
lower. However, most homeowners do not have large enough storage tanks to store
the full amount needed to meet winter demands. Because homeowners may have to
refill their tanks as often as 4 or 5 times during the heating season, rising or
spiking prices are a concern.
Where does heating oil come from?
The United Kingdom has two sources of heating oil: domestic refineries and
imports from foreign countries. Refineries produce heating oil as a part of the
“distillate fuel oil” product family, which includes heating oils and diesel
fuel. Distillate products are shipped throughout the United Kingdom by
pipelines, barges, road tankers, and rail cars. Most imports of distillate come
via the Amsterdam/ Rotterdam area, and other imports from Scandinavia, France,
the Mediterranean and Baltic ports.
Refiners are limited in the amount of heating oil they can make to meet the demands of the winter heating season. Some winter heating oil is produced by refineries in the summer and autumn months and stored for winter use. During the coldest winter months, the inventories that are built in summer and autumn are used to help meet the high demand. Refiners can increase heating oil production in the winter to a modest degree, but they quickly reach a point where, to produce more heating oil, they would also have to produce more of other petroleum products which could not be sold in sufficient quantities during the winter months. On the other hand, if consumer demand is high for a seasonal product, such as gasoline, refiners may delay producing heating oil for the winter, which may lower inventories at the start of the heating season.
Heating oil is brought into oil storage terminals in an area by refiners and
other suppliers. For example, heating oil may be delivered to a central
distribution area, such as the Thames. From there, it is delivered in large
articulated tankers to local distribution depots in the consuming area. It is
then redistributed by truck directly to residential customers.
How much does a litre of heating oil cost?
Heating oil prices paid by consumers are determined by the cost of crude oil,
the cost to produce the product, the cost to market and distribute the product,
as well as the profits (sometimes losses) of refiners, wholesalers and dealers.
In 1999, crude oil accounted for approximately 48 percent of the cost of a litre
of heating oil. The next largest component of heating oil price (45 percent)
included the cost of distribution and marketing. Lastly, refinery processing
costs accounted for another 7 percent.
Why do heating oil prices fluctuate?
Heating oil prices paid by consumers can vary over time and by where a consumer
lives. Prices can change for a variety of reasons. These include:
Seasonality in the demand for heating oil - When crude oil prices are
stable, home heating oil prices tend to gradually rise in the winter months when
demand is highest. However, at times, prices can surge quickly to very high
levels, as occurred in January/February 2000. A homeowner might use 2,500 to
4,000 litres of heating oil during a typical winter, while consuming very little
during the rest of the year.
Changes in the cost of crude oil - Since crude oil is a major price
component of heating oil, changes in the price of crude oil will generally
affect the price of heating oil. Crude oil prices are determined by worldwide
supply and demand. Demand can vary worldwide with the economy and with weather.
Supply can be influenced by the Organization of Petroleum Exporting Countries
(OPEC) and other factors, particularly political events in the Middle East.
Exchange rates - Oil is traded internationally in US dollars. The value
of the UK pound sterling against the US dollar can significantly affect oil
prices – in simple terms, the more dollars there are to the pound, the lower oil
prices will be. As a rough rule of thumb, each 8 cents change in the exchange
rate is equivalent to a penny per litre.
Competition in local markets - Competitive differences can be substantial
between a locality with only one or a few suppliers versus an area with a large
number of competitors. Consumers in remote or rural locations may face higher
prices because there are fewer competitors.
Alternative uses - The main domestic heating oil - 28 sec kerosene - is
similar in specification to aviation kerosene (Jet A1). Prices can be counter
cyclical if - in the summer months - airline travel increases Jet A1 demand.
Similarly, military conflict (and preparation for it ) can cause prices to rise
when stockpiling takes place.
Regional operating costs - Prices also are impacted by higher costs of
transporting the product to remote locations. In addition, the cost of doing
business by dealers can vary substantially depending on the area of the country
in which the dealer is located. Costs of doing business include wages and
salaries, benefits, equipment, lease/rent, insurance, overhead, and local
authority taxes.
What Causes a Surge in Heating Oil Prices?
Home heating oil prices sometimes can change dramatically in a short period of
time. Why does this happen? If refiners, wholesalers, distributors and consumers
have enough heating oil in storage and temperatures do not drop rapidly, prices
hold fairly steady (assuming crude oil prices are also not changing much).
However, a rapid change to colder weather can impact both supply and demand;
people want more fuel at the same time that harbours and rivers are frozen or
delivery systems are interrupted. During this time, the available heating oil in
storage is used much faster than it can be replenished. Refineries normally
cannot keep up with demand during these cold periods. Wholesale buyers become
concerned that supplies are not adequate to cover short-term customer demand and
bid up prices for available product. Additional supplies may have to come from
some distance away such as the Gulf Coast or the Mediterranean. It costs more to
transport heating oil from these sources and it also can take two to three weeks
to arrive. During the time that re-supply from distant markets is occurring, the
supply of heating oil that sellers in the region have in storage drops further,
buyers’ anxiety about finding heating oil in the short term rises, and so do
prices – sometimes sharply – until new supplies arrive.
Additionally, during very cold periods, prices of other heating fuels (such
as natural gas or electricity) may increase even more than heating oil. In this
case, some industrial consumers may switch from using their normal heating fuel
to using heating oil, thereby increasing the demand for heating oil.
What can you do to lower your heating oil bill?
You can arrange to have your tank filled in late summer or early autumn when
prices are generally lower. Since September 11 2001 world political events have
had significant impact on crude oil prices, distorting the historic
summer/winter pricing relationship. Try to avoid leaving your tank fill to
December – demand for oil is high, and delivery schedules are longer. Talk to us
about participating in a budget plan to help stabilize your monthly bill. You
can also talk to us about “cap” or fixed price protection programmes, which can
help keep costs down. You can ensure that your boiler and appliances are running
efficiently before the season begins. You can achieve conservation gains by
weatherizing your home, i.e., installing proper insulation in your house and
around your hot water cylinder. Quick and easy fixes such as weather stripping
windows and doors to seal out cold air also help save energy. Installing a
programmable timeclock and reducing temperature settings on your thermostat,
especially when you are not at home, together with fitting individual
thermostatic valves to your radiators, are other ways to reduce your heating
fuel costs.
Heating Cost Comparison
What can you do to lower your heating oil bill?
Call Southern Counties Fuels on 0845 600 4006 – we’ll
be pleased to help you
