2008-2009 oil contracts

[fraxinus]

I'm not at all sure if this is the corrcect forum to ask about this, but here goes.

A number of people I know are just coming to the realization that the heating oil contracts they signed last year with some dealers obligate them to purchase the gallons they signed up for at the contract price whether they actually used them or not. For example, if someone signed up for 1000 gallons at $4 per gallon but used - through conservation, lowering the thermostat or whatever - only 800 gallons, they are still obligated to pay $800 for the unused gallons. People assumed that the 08-09 contracts were the same as they had been in the past. That is, that any remaining credit balance could be carried forward to the next year at the new price. Not so. The dealers involved claim they had to purchase the oil last year at the agreed upon price and can't afford to eat the difference between last year's price and the current one.

Certainly dealers do have a legitimate concern about people who signed contracts and then contrary to the contract bought oil from another dealer when the price dropped. The new type of contract has, however, two glaring flaws. It prevents people from allowing for a consumption cushion in case of a particularly bad winter and is a disincentive for conservation.

I'd really like to know if this is happening in other places.

 

[Como]

It is a bit like fixed rate mortgages, it is a not a one way bet.

If you put $10 on the Kentucky Derby and the odds went long, would you expect the bookmaker to give you the better odds?

 

[stee6043]

It is a bit like fixed rate mortgages, it is a not a one way bet.

If you put $10 on the Kentucky Derby and the odds went long, would you expect the bookmaker to give you the better odds?

Excellent anology. Fixed pricing has risks, no way around it. You can't expect one party to accept all of the risk. How many people locked pricing for propane at $2 a gallon in late 2007 for twelve months and then went running to their dealers begging to pay MORE when prices hit $4 the next summer? Probabaly not a whole lot....

 

[heaterman]

A contract is a contract. I was just talking with a dairyman who owns a large operation just down the road from me. He signed a contract to sell his milk at a bit over $14/cwt a couple years ago. Milk price last year went up to near $20 for most of the summer but do you think he got paid any more. Nyet!
Now the price per 100# is scraping $11.00 but the contract still pays $14.
Locking in a price is a gamble any time you do it. I guess my best advice would be to look at the long term average of what you are buying and make a judgment based on that. Fuel prices got scary last year and I think a lot of people, both buyers and sellers panicked. It was truly uncharted territory. I'm basing my fuel budget for the second half of the year on $3.00/gallon. We'll see..........

 

[fraxinus]

My original post was intended to find out if this practice was occurring throughout the country.

I have no quarrel with the legitimate recovery of money oil dealers had to spend in order to buy the oil for last winter. If, however, many of them were able to hedge their purchase price in various ways and included the cost of that hedging in their per gallon price, then I think there are some real questions. I have no particular reason to believe it's true, but isn't it possible that some dealers are charging consumers, say, $4.50 per gallon for oil that actually cost them less than $3 per gallon because of their hedges?

As for the "a contract is a contract" concept ask a UAW person, the staff of any newspaper in the country, or any worker who has seen a reduction in wages, hours, benefits, etc. in the last year.

 

[heaterman]

My original post was intended to find out if this practice was occurring throughout the country.

I have no quarrel with the legitimate recovery of money oil dealers had to spend in order to buy the oil for last winter. If, however, many of them were able to hedge their purchase price in various ways and included the cost of that hedging in their per gallon price, then I think there are some real questions. I have no particular reason to believe it's true, but isn't it possible that some dealers are charging consumers, say, $4.50 per gallon for oil that actually cost them less than $3 per gallon because of their hedges?

As for the "a contract is a contract" concept ask a UAW person, the staff of any newspaper in the country, or any worker who has seen a reduction in wages, hours, benefits, etc. in the last year.

It's standard practice. I know several businesses and individulas who went the contract routes with both oil and LP and they in some cases are still paying the loooooong dollar for their fuel. The fuel supplier buys or locks in whatever number of gallons the customer buys at the time of the contract so it's not like they are selling oil for $4.00 that only costs them $1.85 now. They paid top dollar too if they actually fulfilled their end of the bargain.

 

[daveswoodhauler]

[I have no particular reason to believe it's true, but isn't it possible that some dealers are charging consumers, say, $4.50 per gallon for oil that actually cost them less than $3 per gallon because of their hedges?[/quote]

I think that what you say is occuring, but also think that some dealers bought oil very high and perhaps people didn't want to lock in....so price drops, and folks pay $.50-$1.00 less than dealer paid...especially last summer.
I think its a risk either way....last year my neighbor locked in at $4.05/gallon, but paid extra $$ for the downward price protection....so he bought at the lower price, but think he paid like $180 for the insurance protection....basically another 100 gallon at todays prices.

 

[Como]

As for the "a contract is a contract" concept ask a UAW person, the staff of any newspaper in the country, or any worker who has seen a reduction in wages, hours, benefits, etc. in the last year.

I doubt if any of them had a year notice period, in Colorado it is 'at will', unless there is an agreement otherwise. But even then it seems normal for it to be 2 weeks.