Heating oil help offered

September 03, 1991|By Kim Clark

Fed up with angering customers when bad weather or strife in oil-producing countries drive petroleum prices up, a growing number of Maryland heating oil dealers are offering customers protection against dramatic price increases.

By playing the futures markets and, essentially, buying price insurance, some oil dealers are able to guarantee that they won't charge more than, say, $1.05 a gallon during the upcoming winter.

The companies that offer the guarantees, however, may end up charging slightly more than those that don't, since the price insurance can cost the companies about 5 cents a gallon.

Though oil prices jumped briefly during the attempted Soviet coup, heating oil was selling recently at anywhere from 80 cents to $1 a gallon, area dealers said.

Last winter, as U.S. troops massed in Saudi Arabia, home heating oil prices reached $1.30 a gallon, but they fell more than a dime after the fighting started, according to the U.S. Department of Energy.

The year before that, Maryland heating oil prices peaked at $1.20 a gallon after a record-breaking cold spell in December 1989. Prices fell about 20 cents a gallon after temperatures warmed up in February 1990.

Les Hubbard, general manager of Southern Maryland Oil, said that his company and a sister company, Delmarva Oil, will promise customers on automatic delivery plans that they won't be charged more than $1.049 per gallon this winter.

If prices fall, the two oil companies will pass through the savings, Mr. Hubbard said. The only catch is that customers have to agree to take delivery on his company's schedule.

Mr. Hubbard said that the two oil companies, which are owned by a La Plata-based company called the Wills Group, decided to offer the guarantees this year after trying to calm customers who were upset last fall when home heating oil prices rocketed because of Iraq's invasion of Kuwait.

"We got customers calling, screaming at us over the prices . . . ," Mr. Hubbard recalled. "This gives customers peace of mind."

He said that the companies are able to offer the guarantees by buying futures contracts guaranteeing delivery of oil at set prices. The companies won't lose money unless the bottom falls out of the market and prices drop to about half their current $22-a-barrel level, he said.

Mr. Hubbard said that he thinks oil customers are tired of price fluctuations and that such price guarantees "are the future."

Mark Londer, a manager for Wilhelm Oil in Randallstown, said that his company has offered such guarantees for more than five years. Recently, he has noticed competitors starting to offer similar programs.

Mr. Londer said that his company is guaranteeing its customers that its price won't go above 99 cents a gallon this winter. His company, too, promises to pass through savings if prices fall.

Alan Kaufman, president of a firm that sells price insurance policies, said that he charges dealers about 5 cents a gallon to guarantee that they will be able to keep their prices about $1 a gallon this winter.

He says his company, Mount Lucas Associates of Princeton, N.J., is able to sell the insurance policies by buying and selling contracts for future oil deliveries at different prices. Winter delivery oil is now selling for about 65 cents a gallon on the wholesale markets.

Mr. Kaufman said that when he first started offering price insurance to oil dealers, "people were skeptical" and thought the nickel-a-gallon charge was too high. But after the wild price fluctuations of the past two winters, "business has grown dramatically," he said.

Not all local dealers like the idea, though.

Rick Phelps, president of Carroll Independent Fuel Co. of Baltimore, said that he has considered buying price insurance, especially after last year's Persian Gulf crisis, but "didn't like the risk" associated with hedging through futures contracts.

Though it is painful, customers who do have to order oil during high price periods usually end up paying only about $30 more for the entire heating season, Mr. Phelps said.

"To be honest, I haven't heard a big clamor from people wanting fixed prices," he said.

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