I often get asked how Oil Delivery Contracts work. Here's an overview, for those who have oil heat homes for the first time.
Oil Heat is Different than Gas
When you have municipal Gas heating your home, it's easy - you use the gas, it never runs out, and you just have the pay the bill every month. Oil has evolved to be not much more of a headache, but the fundamental difference is that the oil must come to your house via a truck, and it needs to be pumped into the tank where it is stored as it is consumed. Tanks are typically 275 Gallons, but there are smaller tanks, and some homes have multiple tanks. Tanks are typically designed to last for 40 years, so if you suspect your tank is older, you might want to get it checked - no one wants a leaky oil tank in their basement!
Heating Oil Companies offer choices
With Gas, you pay the bill as it comes in. There's not a lot of choices with the price - it is what it is. Not so with Oil. Most years, Heating Oil Companies will offer several different options for homeowners. All options are generally designed for "Automatic Delivery" which means that the heating oil company will track your usage and anticipate when you need more oil - no need to go checking that gauge every day! It's based on temperature, and the colder it gets, the busier the heating oil companies get delivering oil (and they are usually kind enough to tramp through snow, ice, and lots of other fun stuff to get to the fill valves!). Not every heating oil company offers the same choices when it comes to pricing and payment, but these are some of the more common.
Choice #1 Pre-Paid Heating Oil
The easiest to understand is pre-paid oil. The oil company picks a price per gallon, and based on last years consumption, an amount of oil for the season. You pay the company the full expected of oil in advance. The advantage with this program is cost certainty - you know how much your oil will cost per gallon. The disadvantage is that you have to pay all the money in advance, which is certainly a bummer.
Choice #2 Floating Price with a Maximum Price Cap
A common choice for many homeowners is the Fixed price with a Cap programs. These programs typically look at today's oil prices (lets say $3 per gallon), add a bit to that ($3.25 /gallon) and that becomes the cap - they promise you won't pay any more than that, no matter how much it goes up. Often, these programs will allow you to pay less if the price of oil is less at the time they deliver the oil, but not always. Usually, these programs require an additional fee based on your usage (in gallons) to secure the cap. The tricky part to note about this is they'll tell you the fixed price is $3.25 / gallon, but with the additional fee it works out to a higher price - 3.45 or more. This is important because if you're going to compare oil contracts, you need to remember to add both the promised price and the fee together to understand what the oil will cost you per gallon next year. The advantage with these programs is you can calculate the maximum you'll likely need to pay next year. The disadvantage can be paying more than you'd need to if the cost of oil goes down.
Choice #3 Floating Price
Many homeowners don't like choice #3 - the floating price. It's risky - you're going to pay whatever the price of oil is whenever you need it - and the price of oil can go up or down quickly (as it did this winter!). But if you think oil prices are headed down, it can be a good way to get the cheapest oil. There's no fee as there is with cap programs, and you don't have to pre-pay as with the pre-pay programs.
So what's an Oil Customer to Do?
Well, there is no right answer. If you think Oil is going to go up, Cap programs are going to save you money if you're right. If you think they're going to go down, you'll want to float. Guessing right - and you will be guessing - could save you hundreds or even thousands if you have a large heat bill. Guessing wrong could cost you the same. I generally recommend that if you are going to get a cap program, to shop around - just be careful to read the fine print so you are comparing apples to apples. Also, some companies do offer free or discounted services with auto delivery contracts, and they have value too.
Do Good Things Today!
*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.