As of March 28, 2022, the national average price for a gallon of home heating oil was $4.00. However, according to the U.S. Energy Information Administration, that price is forecasted to increase by 47 cents by the end of the year.
So, why is home heating oil so expensive? When are they expected to go down? Keep reading to find out!
WHAT AFFECTS THE PRICE OF HOME HEATING OIL?
The price of home heating oil is affected by global and local forces.
For instance, the price of crude oil accounts for 58% of the cost of home heating oil and therefore has the most significant impact on its price. When there are issues with the supply and/or demand of crude oil, that’s when you see the most change in its price.
SUPPLY AND DEMAND
Let’s go back to your high school economics class quickly. When a commodity has more demand than supply, its price increases. However, if there is more supply than demand, then the commodity’s price goes down.
That was an elementary explanation of how the global crude oil market affects the price of home heating oil, but it’s a great place to start, as it helps to understand when adding other factors.
THE U.S. DITCHES RUSSIA’S OIL
Although we are amid a recession, global oil demand is unlikely to fall enough to dent home heating oil prices.
When speaking with CNN, Matt Smith, the lead oil analyst for the Americas at Kpler, said, “It’s a supply issue—even if we were to head into a recession, we might not see prices come off at the pump substantially.” In fact, triple-digit oil prices are likely to stick around.
Since Russia invaded Ukraine, according to Kpler data, crude imports from Angola have tripled, while Brazilian volumes and Iraqi volumes have risen by 50% and 40%, respectively.
If we keep sourcing oil from more far-flung locations, prices will continue to stay high. This is because of high freight costs.
INSUFFICIENT OIL-PRODUCING ALTERNATIVES
According to the IEA, Russia shut off about one million barrels per day of oil output in April. This could reach nearly three million per day during the second half of 2022.
However, the IEA does predict that the global oil output, excluding Russia, should rise by more than three million barrels a day for the rest of the year, effectively balancing out the impact of the sanctions. Unfortunately, this could be difficult to achieve.
Even before Russia’s war with Ukraine, oil producers were winding down investment in production as they pivoted towards renewable energy, and OPEC has its limits.
OPEC+ is already struggling to keep pace with the current deal. Even core OPEC members exported considerably less oil in May than in April. Many OPEC+ member states have already hit their capacity limits, meaning effective production increases will likely be about half of the target increase.
INCREASING GLOBAL DEMAND
Remember our lesson earlier? When demand goes up for a commodity, so does its price!
One place we see a spike in demand is China, the world’s primary oil importer. After months of stringent lockdowns in Shanghai, Beijing, and other major Chinese cities, life is finally starting to return to “normal.” However, with more Chinese citizens going back to work and daily life, the pent-up demand for oil could push the price up.
China could further ramp up oil imports from Russia, whose benchmark Urals crude grade is trading at a discounted price of $34 per barrel to Brent.
According to the General Administration of Customs People’s Republic of China, imports of Russian oil totaled about 1.98 million barrels per day in May.
THE U.S. REFINERIES
Refining capacity in the United States is about one million barrels a day below what it was before the pandemic, which leaves us unable to meet our fuel needs.
When the pandemic hit, the oil demand evaporated. Refineries took a significant financial hit as the price of gasoline plummeted. Some refiners even threw in the towel because they were spending more money trying to refine oil than selling it.
At the same time as the pandemic, the oil industry was plagued by two other disasters. A Philadelphia refinery, one of the largest in the nation, was rocked by explosions just a few months before the pandemic started. In Louisiana, another refinery was wiped out by Hurricane Ida. Both refineries are still shut down.
THE FUTURE OF ENERGY
By now, we’re sure you’ve heard of the U.S. plan to transition from fossil fuels to renewables. Some refiners have even repurposed their facilities to produce renewable diesel and sustainable aviation fuel.
Yet, the President has urged oil executives to increase the supply of gasoline and other refined products and to drill for more oil in the hopes that it will bring prices down. Oil executives are hesitant to listen because this Administration pledges to transition from fossil fuels. They don’t want to invest money into a product that is going to obsolete in five years.
Ultimately, most oil executives do not predict any more refineries to be opened in the U.S.
WHAT CAN YOU DO ABOUT INCREASED OIL PRICES?
Please don’t wait to get new heating oil until it’s freezing outside. The demand for it will increase, so naturally, so will the price.
It’s best always to keep your tank at least a quarter full. Once you’re down to a quarter of a tank, it’s best to replace your heating oil.
HEATING OIL DELIVERY NEAR ME
Home Service Oil is your premier supplier of heating oil, diesel fuels, and gasoline. We only use professional, trained personnel to deliver to your home, farm, construction site, or commercial account.
For more information about what we do, please contact us today!