Yes, Oil Heat is More Expensive. But How Much Will It Really Cost a Homeowner?

In the past couple of years, my home buyers have been looking for natural gas heat homes, almost without exception. Suddenly, everyone wants Nat gas! I spent some time today gathering significant information to help home buyers understand the differences - practically speaking - about the two most common fuel sources: Natural gas and Heating Oil. Nationally, Heating oil is only about 7% of all homes, but here in the Northeast, that's not the case - in Metrowest, it's probably as high as 50%. Most home buyers are going to be looking at homes that have oil, and since many have never had it, we'll talk about it a bit.

 

A look Back at Fuel Prices for Homes

Here's a frightening chart:

Heating Oil Costs Have Moved Up Sharply

This, in a nutshell, sums up all the fuss. The price of heating oil has increased almost 4x in about 15 years. That's not good for heating oil users. But just how bad is it? That is what this post is about.  Spoiler: Keep reading!  This post doesn't end the way you think it will  :-)

 

 

What Heating Oil Costs vs. Natural Gas Looks Like

 

OK, I had to cruch a lot of numbers for this chart. Here we go:

 

 

Homeowners with Oil Are paying a lot more to heat

their houses than Nat Gas homeowners

This chart says it all. (Want to know where I got the data? Wasn't easy. See my notes Below).

Back in 2000, heating your house with oil cost more than heating it with gas. But not much more. So for the most part, buyers and sellers didn't care too much about what heat source a home had. Mostly, people were looking for gas so they could cook with it - a problem easily solved with a propane tank if necessary. However, heating oil has climbed pretty steadily since, and has risen to where it is now 3 times as much to heat your house with oil. Now home buyers are very motivated to find those natural gas houses, and I've had some buyers tell me that they won't even look at houses heated with heating oil. Obviously, buying a natural gas house will save you thousands of dollars every year!  That's so easy to see!

 

What?  What do you mean hold on?  There's a problem?  What Problem?.

 

Fantastic, Now I'll Just Buy a Home that Uses Nat Gas

Easy right? The only problem is everyone is buying Nat Gas houses, which creates a demand imbalance. I took a quick look at sales in Hopkinton, which has a mix of oil and nat gas. I only looked at houses built after 1985 (to keep the product relatively simple). There were 45 heating oil houses and 55 Natural Gas heat houses. The average price of a Natural Gas house was $208/ sq foot, while oil houses were $193/ sq foot. I'll be the first to admit that 50 houses is not enough data on the subject, but that is about what I expected to find - a 7% price increase for homes heated by Natural Gas. How much is 7%? Well in Hopkinton 7% will cost you about $45,000 for the houses built after 1985. That's not a typo. 45 THOUSAND DOLLARS. Per house. On a mortgage that's about $225/month, or $2700/year. If I combine Southborough, Northborough and Westborough with Hopkinton (all four towns had roughly 50/50 mixes of oil and gas) the numbers stay about the same (114 oil houses, 135 nat gas houses, almost large enough for me to have some confidence around it) around 6.5% more for a Nat Gas House.

 

You've read this far, and now it hits you. "Matt, did you just say I might pay $2,700 a year for a Nat Gas house in order to save $2100 in extra heating costs when using heating oil? That's insane! It's costing me money to buy a home with Natural Gas and that defeats the whole point!"

 

Yup. That's what the data says. Markets are awfully efficient that way. Surprise!

 

Now, just to be clear, the average size of the home in my data set was about 3000+ sq feet, so the heating costs are going to be above the average. So it's probably about the same in cost, no matter what type of house you buy.  All that money you were saving?  It just went to the bank to pay your mortgage - not to your wallet.

 

Heating Oil: Why the good news could get better.

Alright, so now we've thrown conventional wisdom on it's head. Buying a home with Nat Gas isn't likely to save you money because those homes are more expensive. But what if heating oil costs keep going up? Eventually, it'll be a huge money saver! Right?

 

Well, that depends. Right now, the price of oil in the states is at the "world market" price. That's largely because we get our oil from the "World", i.e., outside the U.S. But with advances in oil fracking, we're finding LOTS of Natural Gas and LOTS of Oil right here in the good old USA. How much? So much that the oil companies are worried about a glut of oil, to the point where they want to remove a 40 year old ban on exporting the stuff. If the ban doesn't get removed, then we are going to have too much oil (OK, too much for the oil companies!) in the states, which will likely push down gasoline and heating oil prices. I expect though, that the ban will be lifted - partially anyway - and prices will probably stabilize after retreating a bit. The politicians are smart enough to know that lower gas prices here keeps people happy, so they will want lower prices locally than the "world".

 

Natural Gas, however, is a different story. Natural gas supplies are already in a glut, and that is why the prices of Nat Gas reached near record lows last year. But at the prices that they were at, Natural Gas suppliers can't make any money, so they stopped buying it, to reduce the supply. That in turn, lead to a significant (30%) rise in prices this year on Nat Gas, and that is likely where the suppliers will try to keep them. They can't get much higher - or the suppliers will supply more - but they can't get much lower either.

 

Combine the two forecasts and I think what is likely to happen is the difference between heating your home with oil and Natural gas is likely to narrow significantly - perhaps by as much as 50% - over the coming years. If that happens, than the price of heating oil homes may close the gap, adding to the gains that you might see along with the regular market appreciation.

 

Nat Gas VS. Oil: How was the data collected and changed?

 

I'm sure I'll get comments that either my methodology or conclusion must be wrong.  So, I can at least address the methodology here.

 

First off, I relied on pricing data from the US Energy Administration. They provided the historical cost to residential users for both natural gas and heating oil:

 

Natural Gas

 

Heating Oil

 

There were issues with both data sets; For Natural Gas, there are huge price swings month to month (it is ironically typically more expensive in the summer, when people are not using it, and cheaper in the winter). To smooth out the price volatility, I calculated a seasonal average of the price over 7 months for each year. For the heating oil, they don't even bother tracking the price in the summer, so I averaged the prices to fill the data gaps. Similar to Nat Gas, I used a seasonal average of price for each year.

 

That still didn't help me with how one price related to the other. Fortunately, I googled this article:

NYTIMES Heating OIL

The article is overly, uh, pessimistic about oil, but it provided the key data relationship I was looking for: Average heating oil costs vs. Natural Gas. Their source is the energy department, so it should be close. I found lots of "anecdotal" evidence that supported the relationship.

 

Once I knew what the cost was in year 2011, (The article used 2011 data), I could back into the consumption for each fuel and then adjust it for each of the historical average price of each year. (Did you get that? It's quite sneaky).

 

Obvious problems with the data:

Although for what I was trying to calculate it's pretty accurate, there are problems. In no particular order:

1) How accurate is this for Massachusetts? Well, it's hard to know. The fuel prices are probably pretty accurate, although Nat Gas costs more in the North East than other parts of the country. So for that reason, I would expect Northeast heating bills to be more.

2) What about consumption issues? The very crux of the matter, sir or madam, is the problem of consumption across the country. Heating oil is relatively confined geographically to the north east - where it is cold and consumption is high, but Nat Gas is everywhere. It doesn't take a genius to realize that if they are counting Florida's "heat bills" in the average for all Nat Gas users than the data is going to be misleading. That is to say, that Nat Gas consumption in the North East could be far more - and the gap between gas and oil much closer - than it is as calculated here.

3) What about any one particular house: This really isn't useful for that. Bigger houses use more, Newer houses use less, and there are lots of variables in between. (Windows, insulation, temperature settings, hot water usage, etc).

4) Will I really pay so much more money for a Nat Gas House?  Not as much for a small Nat Gas house, but that is because your heat bill is much less of a concern.  I would have liked to have used a larger data set (a couple of thousand houses) but it's not easy to do without introducing a lot of variables that could muck up the data.  Any (decent) real estate agent will tell you that nat gas houses are selling faster and for more money, even if they don't know exactly how much.  This gives you a benchmark though: It's not cheap, and may not save you any money at all.