Introduction
Heating oil is a petroleum product used by
many Americans 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 107 million households in the United
States, approximately 8.1 million use heating oil as their
main heating fuel. Residential space heating is the primaryuse
for heating oil, making the demand highly seasonal. Most of
the heating oil use occurs during October through March. The
area of the country most reliant on heating oil is the Northeast
(see box).
Some customers try to beat rising winter prices
by filling their storage tanks in the summer or early fall
when the prices are likely to 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 5times during the heating
season, possible rising or spiking prices are a concern.
Where does heating oil come from?
The United States 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 States by pipelines, barges, tankers, trucks, and rail
cars. Most imports of distillate come from Canada, the Virgin
Islands, and Venezuela. 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 fall months and stored for winter use. During
the coldest winter months, the inventories that are built
in summer and fall 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 insufficient
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.
Such was the case in the summer of 2002, when refiners produced
more gasoline to supply high gasoline demand. As a result,
the 2002-2003 heating oil season started with low inventories.
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 NewYork
Harbor, where it is then redistributed by barge to other consuming
areas, such as New England. Once heating oil is in the consuming
area, it is redistributed by truck to smaller storage tanks
closer to a retail dealer’s customers, or directly to residential
customers.
How much does a gallon of heating oil cost?
Heating oil prices paid by consumers are determined
by thecost of crude oil, the cost to produce the product,
the costto market and distribute the product, as well as the
profits(sometimes losses) of refiners, wholesalers and dealers.
In 2003, crude oil accounted for 50 percent of the cost of
a gallon of heating oil. The next largest component, distribution
and marketing costs, accounted for approximately 39 percent
of the cost of a gallon of heating oil. Lastly, refinery processing
costs accounted for another 11 percent. (See Figure 1.)
Figure 1. Heating Oil
Price Components, 2002
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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(see box
on “What Causes a Surge in Heating Oil Prices”). A homeowner
in the Northeast might use 650-1000 gallons 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. (See Figure 2.) 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.
Competition in local markets
Competitive differences can be substantial between a locality
with only one or a few suppliers or dealers versus an area
with a large number of competitors. Consumers in remote or
rural locations may face higher prices because there are fewer
competitors.
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 state and local fees.
Figure 2. Heating Oil
Prices Follow Crude Oil
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What can you do to lower your heating oil bill?
You can arrange to have your tank filled in
late summer or early fall when prices are generally lower.
Talk to your heating oil dealer about participating in a budget
plan to help stabilize your monthly bill. You can also talk
to your heating oil dealer about “cap” or fixed price protection
programs, which can help keep costs down. You can obtain a
home energy audit to ensure that your furnace and appliances
are running efficiently before the season begins. You can
achieve conservation gains by weatherizing your home, i.e.,
installing the proper insulation in your house and around
your hot water heater. Quick and easy fixes such as caulking
and weather stripping windows and doors to seal out cold air
also help save energy. Installing a programmable thermostat
and reducing temperature settings on your thermostat, especially
when you are not at home, are other ways to reduce your heating
fuel costs. Lastly, both Federal and State energy assistance
programs are available to heating oil customers who have a
limited budget. For example, the Low Income Home Energy Assistance
Program (LIHEAP) is a Federal program that distributes funds
to States to help low-income households pay heating bills.
Additional State energy assistance and fuel fund programs
may be available to help households during a winter emergency.
To find out if you qualify for assistance in your State, see:
http://www.acf.dhhs.gov/programs/liheap/states.htm
or contact your local heating oil dealer.
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Heating Oil Is Important to
Consumers in the Northeast
Of the 8.1 million households in the United States that
use heating oil to heat their homes, 6.3 million households
or roughly 78 percent are located in the Northeast region
of the country. The Northeast region (which includes
the New England and Central Atlantic States) remains
the area with an appreciable share of oil-heated single
family homes. In other regions, older homes have been
converted from oil heat to gas heat, and oil no longer
has a noticeable share of the new home construction
market. Thus, the seasonal increase in inventories and
demand(sales of heating oil) is largely confined to
the Northeast. In 2002, 5.2 billion gallons of heating
oil were sold to residential consumers in the Northeast;
this is 82 percent of total residential fuel oil sales.
(See Figure 3.)
Figure 3. Residential Heating Oil Sales
By Region
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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, dealers 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
harbors 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. In the
Northeast, for example, additional supplies may have
to come from some distance away, such as the Gulf Coast
or Europe. It costs more to trans-port heating oil from
these sources to the Northeast, and it also can take
two to three weeks to arrive. During the time that resupply
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 a new supply arrives.
Additionally, during very cold periods,
prices of other heating fuels (such as natural gas or
kerosene) may increase even more than heating oil prices.
In this case, some con-sumers may switch from using
their normal heating fuel to using heating oil, thereby
increasing the demand for heating oil.
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| Information about heating oil prices...
For the latest update on heating oil demand, prices,
and in- ventories, see our "Heating Oil and Propane
Update" section of the Energy Information Administration's
(EIA)Web site at: http://tonto.eia.doe.gov/oog/info/hopu/hopu.asp
In addition, EIA's weekly feature This Week in Petroleum
contains the most current information on demand, prices,
and inventories of crude oil, gasoline, distillate,
and propane. See:
http://tonto.eia.doe.gov/oog/info/twip/twip.asp
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The Energy Information Administration (EIA)
is an independent statistical agency within the U.S. Department
of Energy whose sole purpose is to provide reliable and unbiased
energy information.
EIA Web Site:
