How Does Severe Weather Affect Heating Oil Prices?
An old Minnesotan once said he loves winter, because he’s a great …indoors-man. He likes nothing more than sitting in front of a roaring fire, sipping on a glass of whiskey, and reading a good book. Cozy, right? Not so much though, if he runs out of heating oil. And if he runs out in the midst of an especially storm-filled winter, he may find that oil prices have risen.
Really? Having the price of heating oil rise when it’s really needed just seems harsh. Why is it that the weather outside can affect the price of heating oil inside? Interestingly, there’s more than just one factor playing a role here.
What makes heating oil prices go up and down
Before we jump into it, here’s a brief list of factors that affect the price of heating oil.
Cause oil prices to increase
Price of crude oil
Growth of world economy (causing need for more oil)
Reduction of world supply
Local supply disruptions
Really cold weather
Cause oil prices to decrease
Price of crude oil
Decrease of world economy
Increase of world supply
Smooth-running supply chain
As crude oil goes, so goes heating oil
OK. Let’s get to it. Over the long term, heating oil prices follow crude oil (unrefined petroleum) prices. Because the price of crude oil accounts for the majority (58%) of the cost of heating oil, the price of crude oil drives the price of heating oil. And because crude oil is a commodity (simply a raw material that can be bought or sold), its own price is driven by the law of supply and demand… which in turn is driven by the global economy. Say what?
In a nutshell, when the global economy is doing well, the demand for crude oil increases, and because more people are consuming crude oil, the supply of it diminishes, which in turn increases the price of the crude oil. Because the price of crude oil drives the price of heating oil, when the price of crude increases, so does the price of heating oil.
Got it? Okay, that’s the first factor. Now here’s the part where weather comes in, because during severe weather, heating oil prices can temporarily go higher. Here’s why.
Weather is a factor in heating oil pricing
Believe it or not, weather plays a role in the supply and demand equation – no matter if that weather is harsh or mild. Think about it: what do you do when a winter storm rages outside your home? Like most people, you probably turn up the heat a notch. When you do that, you’ve increased demand. And by increasing demand, by using more oil, you’ve reduced the supply. When there is high demand and lower supply, prices increase.
The converse is true during warmer months. What do you do when it’s warmer out? Hint: you don’t turn up the thermostat. Like most people, you no doubt turn off the heat, and when you do that, you decrease demand. Decreased demand means more supply means lower prices.
(Bet you didn’t know you were going to learn some economics when you searched on why severe weather affects heating oil prices!)
Disruptions to heating oil supply and delivery
Wintery conditions can also affect oil production (supply) by interfering with refining and delivering.
If the temperature drops low enough, refineries cannot produce at full capacity – once again affecting the available supply of heating oil. Why can’t refineries function as well as they can in warmer temperatures? Because crude oil has a freezing point of between -40- and -60-degrees Fahrenheit. When temperatures drop in this range, operations slow. This is exactly what happened in North Dakota in 2013.
Areas that do not have local oil refineries are especially vulnerable to glitches in distribution. Since home heating oil is not refined in New England, it has to be transported here from refineries located in other parts of the country.
When the unexpected happens – say a hurricane destroys a refinery in the Gulf of Mexico or a blizzard shuts down roads and railways along the east coast – a short-term break in the supply chain can occur, which can lead to higher than normal heating oil prices for a short period of time.
In addition, the larger, regional suppliers can only safely store a limited amount of fuel due to a limited amount of storage capacity available. For the vast majority of time, these local oil ‘reserves’ help to balance the availability of heating oil so that people feel secure in knowing that there will always be enough heating oil to refill their tanks whenever they may need to. However, when weather causes demand to increase, these reserves are tapped and with little supply available, people begin to worry, and prices increase.
The heating oil supply chain blues
While it’s true that severe weather-related events can cause a momentary breakdown in the supply of heating oil – causing prices to rise – the specific timing of these breakdowns (during winter) is what can be challenging for homeowners and businesses.
The best way to protect yourself and ensure that you have a steady supply of oil through any New England winter, is to plan ahead and follow these two simple suggestions:
Keep your oil tank at least a quarter full at all times.
Become a weather geek and get to know the long-range weather forecast for your area. If it looks like a big storm is on the horizon, order more heating oil before the storm arrives. Don’t wait to fill your tank until the day before the storm is set to hit.
These two practices will ensure you won’t run out of heating oil should you forget to immediately check your tank’s gauge. They will also provide you a heating oil buffer during severe weather situations. Should supply be disrupted, you’ll be able to wait the weather out and order more heating oil once things settle down.
You’ll also feel in control, more than a little smart, and snug in your warm home.
Stay cozy out there, people!