Comfort Line - Price Protection

This quarter our question and answer segment discusses energy costs and price protection.

Why are energy prices so high and what can be done about it?

Basic economics tells us that prices are determined by supply and demand. The U.S. represents only 6% of the world’s population, yet we use 25% of the world’s energy. Energy demand is increasing in highly populated developing countries like India and China.

Additional sources of supply have not been found to compensate for this increase in demand. Since demand is increasing and supply is relatively stable, prices have been driven up. In order to reduce energy prices, we need to tap new energy sources to increase supply and/or reduce demand.

Does Hart & Iliff offer programs to protect its customers against price spikes?

Hart & Iliff has offered two price protection programs for many years (see related article). Our Guaranteed Price Program allows you to pre-buy heating oil and lock in your price during the summer. With our Capped Price Program, your price fluctuates with market conditions but never exceeds a preset maximum price. For the 2004-2005 heating season, the prices for these programs were as follows:
Guaranteed Price Program - $1.579
Capped Price Program - $1.719

With fuel prices having been over $2.00 per gallon for much of the winter, customers who participated in these programs saved themselves hundreds of dollars.

How can Hart & Iliff afford to offer these programs?

Heating oil futures and many other commodities, including crude oil, gasoline, natural gas and propane, are traded at the New York Mercantile Exchange (see related article). Contracts are sold for each winter month in 42,000 gallon increments. Price protection contracts, known as options, are also sold against these futures contracts. Option contracts offering upside protection are known as “calls” and option contracts offering downside protection are known as “puts.” Futures contracts, calls and puts are the price protection tools that allow us to offer our Guaranteed and Capped Price Programs.

Have prices for the Guaranteed Price Program and the Capped Price Program been determined for the 2005-2006 heating season?

These prices were not yet determined at press time, but they should be available by the time this newsletter is distributed in June. At this time, however, one thing is clear—prices will be significantly higher than last year.

Why will prices be up and by how much?

When we purchased our futures contracts and options for 2004-2005, crude oil was selling at approximately $28 per barrel. As we go to press, crude oil is trading at approximately $55 a barrel. Wholesale heating oil prices are up, on a year-to-year basis, approximately 75˘ per gallon. In addition, option premiums for both puts and calls have increased dramatically. Several years ago, these premiums were about four cents per gallon; today they are approximately 14 cents per gallon. In short, prices have increased dramatically, and for the foreseeable future we are all going to have to get used to paying higher prices for our energy needs.

Where will energy prices be next winter?

Unless you have a crystal ball, it’s impossible to know whether energy prices will continue to move up or return to more “normal” levels. Even professionals who make a living trading energy futures are unsure which way prices will go. One recent study concluded that the top energy analyst last year was correct in predicting the direction of the market only 57% of the time. Hart & Iliff ’s price protection programs are like an insurance policy. They will protect you from unforeseen price spikes. For more information, call us at 973-383-1421.