The Perils of Locking in Your Heating Oil Price

Heating oil customers know that the price of heating oil changes every day, even every hour.  With so many different forces influencing the price of heating oil–the price of crude, weather, location, and others–the price per gallon of heating oil can go up or down by a full fifteen or twenty cents in one day.  Market price for heating oil is currently 75 cents higher per gallon than one year ago, but a full dollar lower than two months ago.  This price volatility has become a reality of the modern heating oil business, and is the main reason that locked-in pricing is a risky choice.

The basic danger of locking in your heating oil price for any amount of time is that if the price of oil goes down, you are stuck paying a higher price.  Obviously, the inverse situation (being lucky enough to lock in a low price before prices take off on a long-term rise) is also possible, but there are other factors to consider.  In addition to tying you to a price, locked-in pricing agreements tie you to a contract–an agreement that, as soon as you sign on the dotted line, reduces your leverage in dealing directly with your heating oil dealer.  The price-lock contract guarantees you as a customer to the heating oil dealer for a certain amount of time (usually one year).  The contract eliminates your option of “voting with your feet”–seeking out a new dealer –if you are dissatisfied for any reason.  Of course you can get out of your fixed-price contract, but it will cost you a cancellation fee of several hundred dollars.  Furthermore, if your dealer has you on contract, he will be less concerned about losing you as a customer, which makes you a lower priority than non-contract customers when it comes to service and deliveries.  If a dealer is late for a service appointment with a non-contract customer, he risks that customer ordering from a different dealer for her next delivery.  If a dealer is late for a service appointment with a contract customer, he essentially risks nothing.

An article in today’s Ridgefield Press (Ridgefield, CT) shows an example of bad buying practices resulting in unnecessarily higher costs.  The Ridgefield school board made some unfortunate buying decisions that led to their paying an extra $250,000 to heat Ridgefield schools this winter.  Their loss was a direct result of this summer’s price spike–although the board had laid out a plan for regular buys dictated by time and not price-per-gallon, the record-high prices caused great concern that prices would continue to go up.  Shaken by this concern, the board abandoned their buying plan and made a large purchase at the near-peak price in late May.

Mark Kohan, a pricing expert and Membership Services Director at HEAT USA knows of a few HEAT members who made the very same mistake:  “When prices were so high earlier this year, we had a couple members leave the co-op to sign contracts that locked them in at $4.699 and $4.899 per gallon, plus the cost of service.  They were afraid that prices would keep going up.”  Now that prices have come down by about 70 cents per gallon, he says, “those same members are choosing to pay the $300 or $400 cancellation fees to re-join HEAT USA.  They looked at paying $4.89 per gallon all season and realized that, even after paying the cancellation fees, they would save money with the co-op.”

The best option for heating oil consumers is to rely on the assistance of pricing experts and consumer advocates provided by buying co-operatives like HEAT USA.  Membership in a large buying organization means professionals empowered with unique market information are watching prices on your behalf every day.  In addition, membership puts the full influence of tens of thousands of other consumers behind you, making you a high-value customer that dealers want to keep happy.