Should you prepay for your home heating oil this year?
Pre-buying home heating oil (pre-paid or pre-purchase contracts) can be a great way to save money on energy costs during the cold winter heating season. However, if you’re not fully aware of the risks, you can also end up paying way too much money for heating oil as many consumers found out in 2008. In extreme cases, you can even lose your entire upfront payment as residents of Mid-Coast Maine found out when the local heating oil delivery company filed for bankruptcy.
Predicting home heating oil prices for the upcoming heating has become one of the most popular series of articles each year on my personal finance blog Trees Full of Money.
While I provide this service for entertainment purposes, I am proud to say that I have developed an exceptional track record over the last 4 years in recommending the most beneficial payment option provided by most major heating oil delivery companies in the northern regions of the United States.
Before I provide this year’s recommendation on rather or not you should lock in today’s home heating oil prices, here is a quick review of some of the more common payment options offered by many local heating oil delivery companies.
The Spot Delivery or “Pay As You Go” Plan:
This plan means that you pay whatever the current cash price is for heating oil for the day it was delivered. This plan is excellent is you know for sure the price of oil will remain unchanged or even drop over the course of the heating season. Unfortunately, the price of oil has been so volatile over the last few years that making this prediction with any level of confidence is nearly impossible.
The “Budget” or Price Protection Plan:
This plan has been my favorite over the last few years. You sign a contract for the delivery company to deliver oil to your home for the entire heating season. The best part about most budget plans is they offer a “cap” or “price ceiling” on the price you pay per gallon, but unlike “pre-buying” contracts, if the price of a gallon of oil goes below the price per gallon you budget for you get the advantage of paying the lower price. As an added advantage, your payments are spread out evenly over a 10-12 month period so that you are not faced with gigantic heating bills during the coldest months of January and February.
The Pre-Buy or Pre-Pay Plan:
When you pre-buy or pre-pay your home heating oil, you pay for your home’s total estimated oil usage for the entire winter season upfront. The price you pay is usually competitive with the current spot delivery prices on the day you sign your contract. Pre-buy plans are excellent if you have the funds available, and expect the price of oil to rise over the winter season.
Should You Prebuy your home heating oil for the 2011-2012 winter heating season?
My prediction this year comes with several cautions.
First, after observing what my father-in-law experienced last year when the oil delivery company he prepaid filed for bankruptcy and he lost the balance in his account, I have come to appreciate the value of being able to “hang on to your money”. Before I would consider prepaying for my home heating oil in the future, I would absolutely want to make sure that the company I was dealing with had a solid track record and was well grounded in the local community.
Second, the price of a gallon of oil is trading approximately in the middle of the range it has fluctuated in over the last few years which means that in a “perfect market” the price of oil has just about as good a chance of going up as it does of going down.
When oil prices are historically low (as they were in 2009), you can safely bet that prebuying your heating oil (at a slight discount under current cash prices) will offer you the best price protection. However, when prices are historically high (as they were in 2008 at over $4.50 per gallon) I tend to shy away from prebuying contracts as there is very little upside in price but plenty of room (historically) for the prices to go back down.
With prices in the “middle” of the two extremes I have less confidence in making an accurate prediction of whether or not you should prebuy this year. With that said, with my local oil delivery company offering a pre-purchase price of $3.89 per gallon of heating oil this summer, I will NOT be prebuying my home heating oil in 2011/2012 winter season.
I believe the price of a barrel of oil will decline back down to a more “natural” price range of $80-85 over the next 8 months and we’ll see home heating oil prices drop slightly to between $3.35 to $3.65 per gallon here in Maine(based on my best educated guess on the factors that affect the price of oil).
If given the opportunity, I would consider pre-buying heating oil if I was offered a price of $3.50 per gallon or less, but at $3.89 per gallon, I’m going to pass this year and simply “pay as I go”.
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