With the price of heating oil at record levels this winter, some may assume that oil dealers are making a killing. But in fact, the skyrocketing price of oil is killing the dealers as well.
It’s never been harder for independent heating oil dealers to make a living, fuel dealers say.
“It’s a lot tougher to make things work when you’re dealing with near $100 crude and your retail price has to be near $3 a gallon than when it’s half that price,” said Shane Sweet, chief executive of the New England Fuel Institute, an industry association in Watertown, Mass.
On Nov. 13, the average cost of a gallon of heating oil in Rhode Island was a record $3.19, according to the R.I. Office of Energy Resources – up significantly from an average of $2.62 in early September and almost a dollar higher than the average $2.37 a gallon one year earlier.
But because oil dealers make their living on the margin between the price they pay for oil on the wholesale market and the price they charge their customers, dealers are making more or less the same profit now on each gallon of oil they sell as they did when the price of oil was half what it is today, Sweet said.
At the same time, the cost of running a business has gone up in almost every respect for oil dealers, just as it has in every other industry, he said.
“The reality is that as retail prices go up, the costs to the dealer across the board goes through the roof,” Sweet said.
In particular, the high price of oil is causing cash-flow problems for many heating oil dealers, because most dealers extend credit to their customers during the heating season and then borrow money from banks and the terminal operators who they buy oil from.
With the price of heating oil above $3 a gallon, fuel dealers are carrying three times the debt that they did when oil sold for $1 a gallon. In recent years, some oil dealers are maxing out their lines of credit during the winter and being forced to start collecting cash from their customers just to buy their next wholesale oil delivery at the rack, said Michael Januario, owner of Sunshine Oil Company Inc. in Bristol and vice president of the Oil Heat Institute of Rhode Island.
“Trying to make sure that everybody has heat, and at the same time collecting what we need to collect to stay in business – that’s the toughest part,” he said. “Most of our supplies draft from our checking accounts within 10 days, so at these prices you look at the size of the drafts and it’s incredible. And now we’ve got to make sure that we go out and collect the money that’s owed us so we can pay those bills.”
Some fuel dealers have stopped extending credit to their customers at all this winter in an effort to control ballooning receivables, Januario said – a Faustian bargain, because fewer consumers can afford to pay up front to heat their homes when heating oil costs more than $3 a gallon.
Another factor that fuel dealers are contending with this winter is the decreasing value of U.S. currency, which stands at a record low against the Euro, Januario said. As a result, American consumers are essentially paying almost 50 percent more for a gallon of heating oil than their counterparts in Europe, because the price of crude oil on the global market is pegged to the U.S. dollar.
At the same time, independent oil dealers are spending more on their own fuel costs and contending with rising health insurance costs, Januario said. The various financial pressures are particularly hard to bear for small, independent heating oil dealers, and the industry has become increasingly consolidated in recent years.
This year, at least two local, family-owned fuel dealerships that operated for decades in Rhode Island were sold to large companies that operate in several regions of the United States.
East Providence-based Wood’s Heating & Oil, which was formed in 1923, was sold in June to Star Gas Partners, a publicly traded company that owns Petro Heating and Air Conditioning Services, the largest heating oil dealer in the country.
Providence-based White Fuel Co., which was founded in 1864 and was one of the largest coal distributors in the state at the turn of the 20th century, is now a division of Griffith Energy Services Inc., a Columbia, Maryland-based company that does business in eight states.
Speculation fuels price of oil
The sharp rise in heating oil is closely linked to rise in price of crude oil, which accounts for more than half the cost of heating oil. Crude has surged to repeated record highs getting closer and closer to the psychologically significant mark of $100 a barrel in recent weeks, spurred by increasing demand in China, India and other developing nations and by political instability in many oil-producing nations, analysts say.
But the demand for oil is also being falsely inflated by hedge funds and other market speculators that are not end-users of the commodity, according to many in the oil industry.
The forces of supply and demand currently justify a price for a barrel of crude of about $60, and the difference in the daily trading price is being driven largely by speculation in “dark markets” that are unregulated by the Federal Trade Commission, according to a recent CNN report.
Before hedge funds poured into energy markets in the past couple of years, oil prices could be reasonably forecast based on the forces of supply, demand and weather, Sweet said.
On Sept. 17, U.S. Sen. Carl Levin, D-Mich., introduced legislation to help prevent price manipulation and excessive speculation in energy commodity markets by closing the “Enron loophole,” a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000.
A similar bill is currently being considered in the U.S. House of Representatives.
“When you look at the price of heating oil today, there’s a lot of speculation, from what we’re hearing, going on in the market,” Januario said. “A lot of the big-dollar hedge funds, and there are a couple of bills right now … that we’re hoping get passed to start regulating this.” •
