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I “pre-bought” my home heating oil for the 2009/2010 winter season and this is why:
One year ago today I wrote about the different heating oil payment options available by oil delivery companies across the country. At that time, heating oil was approaching $5.00 a gallon and many people were worried oil prices would continue to rise.
I explained the difference between “pre-buying“, “budget plans“, and “spot delivery prices” and what I thought was the best option given the current economic situation. Many people were pre-buying their heating oil at this point to lock in heating oil at the cheapest prices possible but I warned about the consequences:
“In my opinion, its just not worth the risk of being locked in if oil prices subside even a little bit. I like having the price protection that the “Budget Plan” provides”.
–Easing the Pain of Home Heating Costs, June 27th, 2008
I argued that the flexibility offered by a “budget plan” was a much better option for consumers especially given the historically high price of oil.
Before I go any further, here’s an explanation of the three basic payment options available by my local oil delivery company. Your company should have something similar:
Spot Delivery 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.
Budget 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.
Pre-Buy Plan: When you pre-buy your 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.
Last week I received a letter from my local oil delivery company with the payment plans available for the 2009/2010 heating season. After successfully picking the most advantageous plan last year I was pretty sure that I was going to go with the budget option again but then I had second thoughts.
These were my options:
Spot Price: The spot price for oil delivery was currently $2.39/gal. If I agreed to this plan there would be no contract, but I wouldn’t have any protection if the price of oil were to suddenly (or gradually) rise.
Budget Price: The 10 payment budget plan was $2.64/gal if I wanted protection from the spot price of oil rising higher than $2.64/gal.
Pre-Buy Plan: Finally I had the option of pre-buying my oil for $2.29/gal if I paid with cash or check (credit card payments were slightly higher due to ridiculous credit card interchange fees).
Alternatively I could pay $2.59/gal if I wanted insurance from the price of oil dropping below $2.29/gal (essentially you are paying an extra 30 cents per gallon for “downside price protection”). In other words, the price of oil would actually need to drop below $1.99/gal before I would see any benefit of paying the extrac 30 cents per gallon for the price protection.
In the end I decided that the price of oil was unlikely to dip below $1.99 per gallon for the 2009/2010 heating season so I opted to pre-buy my oil for $2.29/gal.
I cannot guarantee this is the best option for you, but I am comfortable with the decision we have made for our home. With oil price rising back above $70 per gallon, the sooner you act, the better pricing options you will have!
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