Locked-in heating oil rates prove no bargain

HAGERSTOWN, Md. – When James Schwartz signed a contract last summer locking in home heating oil for the winter at $2.79 a gallon, it seemed like a safe bet. Crude oil prices had surged and gasoline was above three bucks a gallon. Could $3 fuel oil be far behind?

But crude has dropped nearly 25 percent from its mid-July peak of $78.40 a barrel. And other heating-oil customers in the Baltimore area are paying as little $2.12 a gallon to heat their homes – 24 percent less than Schwartz is paying.

Nationally, retail home-heating oil prices averaged $2.39 for the week ending Oct. 2, compared with $2.69 a year earlier, according to the federal Energy Information Administration.

Schwartz, a 61-year-old social worker and retired Navy officer, learned a lesson about speculating on commodities, which is what he did by locking in a future price.

“I looked at my scratched crystal ball and the only place I saw the price going was up,” said Schwartz, of Sykesville, Md. “It seemed like the best bet – but then again, I’m not a financial analyst.”

A forecast released Tuesday by the Department of Energy said natural gas customers should expect to pay an average of $119 less this winter compared to last year, a decrease of 13 percent, while fuel oil users will pay $91 more, an increase of 6 percent. The National Oceanic Atmospheric Administration also projected Tuesday that most of the country will see above-normal winter temperatures.

Price volatility catches even professional speculators off guard, which is why consumer advocates advise homeowners and small businesses not to bite on long-term, fixed-price fuel deals.

“Wall Street hedge funds and investment banks have energy traders that are paid tens of millions of dollars to manage risks and to try to predict energy prices, and lots of times they get it wrong,” said Tyson Slocum, research director for the energy program at Public Citizen, Ralph Nader’s Washington-based watchdog group.

Energy analyst James L. Williams of WTRG Economics in London, Ark., said fixed-price contracts don’t make sense for most people.

“If you are a person on a fixed income and you know you can afford the heating oil at the locked-in price, and you know you can’t afford it at 20 cents higher, you might consider locking it in just to keep you from freezing in the dark,” he said. “Myself, I wouldn’t do it. I’d just go ahead and ride it out.”

Neither the Energy Information Administration nor the industry-funded Petroleum Industry Research Foundation track the number of heating-oil customers who lock in prices each year. The nation’s 10 million oil-heated households are concentrated in the Northeast, where many suppliers began offering fixed-price plans in the late 1990s, said foundation President Larry Goldstein.

“It was the volatility of the market that really kind of forced everyone’s hand,” he said. “The world had gotten very volatile and a number of customers wanted the certainty of knowing what their budgeted cost was going to be for the wintertime.”

Goldstein likened the contracts to insurance policies. He said providing the insurance is costly to fuel-oil dealers, who typically buy futures contracts to ensure a deliverable supply.

Jack Sullivan, chief executive officer of the New England Fuel Institute, a trade group in Watertown, Mass., for about 1,000 heating-oil dealers in six states, said customers have demanded fixed-price plans and shunned dealers who don’t offer them.

“For the most part, it originates with customers who absolutely want to be locked in,” Sullivan said.

Customers often pay a premium- about $40 a year in Schwartz’s case – to lock in a price. The contracts typically have cancellation clauses requiring customers to pay a penalty – about $100 in Schwartz’s case – to void the deal.

Some dealers also offer price caps, guaranteeing that a customer won’t pay more than a set amount for fuel oil. Price caps are generally cheaper than fixed-price deals, according to the Pennsylvania Attorney General’s Office, but they can get complicated under rules that differ from dealer to dealer.

Price guarantees are less common for natural gas, but they are increasingly being offered as utility deregulation removes constraints on companies and enables customers to choose their supplier. According to the Department of Energy, more than half of the country’s 62 million residential natural gas customers have access to so-called customer choice programs.

Natural gas prices have declined more sharply than heating oil. On Oct. 5, natural gas futures settled at $6.30 per 1,000 cubic feet on the New York Mercantile Exchange, less than half of what gas was selling for at the same time last year. Schwartz, who lives with his wife and their cat in a three-bedroom, 2,400-square-foot home about 15 miles west of Baltimore, said he decided after some calculations to stick with his fixed-price contract rather than pay the cancellation fee.

“If I buy out of it, I’m going to end up paying $140” in contract fees he said. “It would take 2 1/2 to three deliveries of oil for me to make up the difference.”