Oil prices betray thrifty residents

Falling cost shocks those who locked in higher rate for heat

September 29, 2006|By Arin Gencer | Arin Gencer,Sun reporter

The very plans Jim Schwartz had thought would save him money have ended up costing him more.

Last month, the Sykesville resident, fearing further rises in heating oil prices, decided to lock in his price by signing on to a "fixed-price" plan with his oil provider. He'll pay $2.79 per gallon to heat his home this winter.

"I saw nothing to tell me that current oil prices would drop," Schwartz said. "Better the known devil of $2.79."

But oil prices have dropped, and that means Schwartz and others who have chosen similar plans will have to either pay above-market rates or pay their oil companies a cancellation fee. For Schwartz, the fee would be $99.

As the price per barrel of crude oil dropped steadily in recent weeks, heating oil prices decreased, too. On Sept. 22, the wholesale price in New York had fallen to $1.58 a gallon, according to the Energy Information Administration - down about 33 percent from the same time last year.

The retail price that homeowners pay is typically more than that. This week, Pug's Fuel Oil Service in Baltimore was selling heating oil for $2.12 a gallon, said Casey Sandridge, the company's president.

Most heating oil companies offer their customers ways to try to save money. Plans include budget billing, which distributes heating oil costs evenly throughout the year; cap programs, which set a maximum rate that consumers will pay; and fixed-price plans, which freeze the rate for a given number of months.

"Oil dealers ... have basically been struggling with how to sort of give their customers some sort of security that things won't go crazy, and one of the ways they do that is to offer these kinds of plans," said Ronald Gold, vice president of the Petroleum Industry Research Foundation. "It of course leaves the risk that things could go the other way."

Charlie Harak, a staff attorney for Boston's National Consumer Law Center, said that even when the fixed-price risk weighs in a customer's favor, problems can arise.

"Most oil dealers are really good at collecting the locked-in price when the market falls, but not so good at delivering when the prices rise," Harak said.

For every dollar drop on a barrel of crude oil, the price of crude-oil products falls about 2.4 cents a gallon, said Jonathan Cogan, energy information specialist for the Energy Information Administration.

For Schwartz, the fixed price seemed a logical option, especially after having a good run with the same program the year before, when oil prices skyrocketed after Hurricanes Katrina and Rita. Shortly before he locked in his rate last month, he said, the price of oil per barrel had risen by another two dollars.

Gold, with the Petroleum Industry Research Foundation, said the fees to get out of fixed-price plans are often necessary to cover the costs oil companies incur when they sign the deals with customers. The companies might, for example, strike a fixed-price deal with a supplier, or purchase "price insurance" to guarantee the option of buying oil at a set price in the future.

"Just like I'm locked in with our supplier, I can't say never mind," said Alan Sonnenleiter, chief financial officer for Tevis Oil and Propane.

Consumers shouldn't be called on to make oil-price predictions, said Tyson Slocum, director of Washington-based Public Citizen's energy program.

"Asking individuals to basically do what people on Wall Street are paid tens of millions of dollars a year to do ... is always going to be a losing proposition," Slocum said. "If the experts can't get it right, how on earth are we expecting households [to]?

Michael Burdette, a senior analyst for the Energy Information Administration, said the price drop did, in fact, catch experts by surprise. The administration's latest outlook for crude oil spot prices predicted the average cost per barrel for 2006 and 2007 would stay about $70.

"Now here we are at roughly $10 below that," Burdette said.

A number of factors played into the surprise dip. This year's hurricane season has lacked the devastation of last year's. Certain geopolitical threats - the Israel-Hezbollah conflict and the Iranian nuclear weapons situation - also seem to have quieted.

"These were things that were pushing prices upward," Burdette said. "As all of those upward influences have come out of the market, that has taken the top off of prices."

Yet the Energy Information Administration has also forecast that the cost of heating oil will increase as demand for it grows, as usually happens in cooler months.

"We don't see a lot of reason for prices to go lower," Burdette said, adding that the cost of crude oil would most likely stabilize, if not rise.

Some heating oil companies delayed offering fixed-price plans - if they're offering them at all this year - because it was too early in the game to tell how prices might change.

"I knew it couldn't keep going like this because people wouldn't be able to afford buying it," Sandridge said, explaining why Pug's held off suggesting that customers lock in their rates. "This stuff is the bottom of the barrel. It shouldn't be this high."

More customers prefer a cap to a fixed-price program, Sonnenleiter said. Less than 10 percent of Tevis customers chose a fixed-price plan last year - and a smaller number signed up this season, Sonnenleiter said.

When Schwartz considered the several hundred dollars he might have saved by not locking in when he did, he said, "We're really not speaking about a whole lot of money here." He'll wait things out to see where prices go next.

After all, winter is around the corner.


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