Since just the beginning of October, home heating oil prices in Pennsylvania have increased by over a dollar per gallon. Whether consumers are seeing prices online, hearing them over the phone, or coming home to see their ticket after an automatic delivery, everyone shares the same feelings: shock, stress, and confusion. While many may think that oil delivery companies are setting these high prices, they really only have a small say in the grand scheme of things.
Factors Behind Heating Oil Price Increases
There are many reasons why heating oil prices are through the roof. On one hand, the Administration's fight against fossil fuels and the resulting shutdown of pipeline projects and cancellation of drilling leases have decreased local supply. There's also the war in Ukraine, plus cutbacks by OPEC, all of which have lowered our nation's inventories.
At the same time, consumer behavior has also affected prices. While consumers hoarded everything from toilet paper to hand sanitizer to heating oil at the beginning of the pandemic, most homeowners with oil heat decided to hold off this year in the hopes that prices would drop. Plus, with prices already being so high, many families had to start choosing between heating their homes or putting food on the table, lowering demand further. To understand how this all ties together, though, we must first have a basic understanding of how prices are set.
Oil distributors across the state have terminals where delivery companies go to get their supply. These distributors are the ones who set wholesale prices (called the rack price) that delivery companies pay. For example, Buckeye Partners, L.P., owns the Duck Island terminal in Hamilton Township, New Jersey. This terminal supplies wholesale fuel to surrounding areas in NewJersey and Pennsylvania.
An article from Centralmaine.com stated that "according to several distributors and industry professionals, fuel oil prices are determined primarily by the New York Harbor Spot Fuel Market, which sets pricing for gasoline, diesel and jet fuel for the Northeast. Once the oil arrives, pricing adjusts further by how much additional processing takes place." In summary, the New York Harbor sets the original price, then pricing adjusts again after the terminals process the oil. Local delivery companies might then make their own adjustments to the final price.
For terminal distributors, the underlying cause behind recent price increases is that consumers across the Northeast have been waiting all summer in the hopes that heating oil prices would come back down before having to top off their tanks. Unfortunately, prices have continued to spike -- and now everyone needs oil at the same time.
At the same time, refineries never increased production over the summer to replace depleted stocks, as they only produce at the rate of demand to avoid backwardation. In other words, delay by consumers over the summer disrupted what should have been a typical October distribution cycle. This, in turn, forces prices even higher since distributors have to meet the higher-than-normal demand.
All in all, low supply due to many factors paired with high demand following a slow summer have caused a spike in fuel prices.
For assistance with heating bills, you can apply for grants through LIHEAP. ECI Comfort accepts LIHEAP grants.
