The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
Issue link: https://read.dmtmag.com/i/591447
www.fueloilnews.com | FUEL OIL NEWS | NOVEMBER 2015 27 BUSINESS OPERATIONS continue its ascension into the 1960 when it would begin facing some stiff competition of its own. As with World War I, the Second World War saw a dramatic increase in production, refining and distribution. This expansion in refined product production piggy-backed with the tremendous residential and automotive boom of the 1950s and 1960s. While oil heating was ramping up, new competitors were coming on the scene as well. Although they would have a tremendous impact on the market, fuel oil would not go completely the way of coal. Welding and metallurgy advances made during the war made pipelines more practical. The 1950s and 1960s saw an explosion in the number of pipelines that would benefit oil distribution, but also the distribution of natural gas. The access to electricity also moved forward making electric coil heating an option anywhere there was power service. Propane has also come on the scene as an alternative. Gas and electric brought with them several advantages over oil in the maintenance department. There was no need for a regular delivery and less appliance maintenance. But there were disadvantages as well. Both, and particularly electric heating, were typically more expensive. Gas also presented added safety issues. And gas was limited to where the pipelines ran, and even with the post-war expansion there was hardly universal coverage. Even so, today slightly more than half of the homes in the United States use natural gas as their main heating fuel. Propane is more of a direct competitor in areas not served by gas, and broadens fuel use to cooking appliances. Many of today's oil marketers have taken on propane as an additional fuel offering. While there are many similarities between the two fuels, there are notable differences as well such as the capital costs involved to get up and running, particularly with the customer tanks. By comparison, approximately 6.2 million U.S. homes rely on heating oil to keep the house warm in the winter. This is an impressive figure given the extreme fuel prices and price volatility the industry faced between 2004 and 2014. Oil is still a dominant heating fuel in the Northeast and mid-Atlantic. Heating oil had not only been price competitive with natural gas throughout most of its history, but it offered a superior price point to the consumer. Starting in 2004 heating oil prices began an ever-increasing march upward. In the run-up to the great recession of 2008, EIA heating season data shows that retail heating fuel prices reached $3.85 in mid-March of 2008. The collapse brought prices down to $2.16 at the same point in 2009. But then prices began moving ever upward again reaching $4.24 in early February 2014. Then prices dropped and are currently in the $2.25 range with a great deal of expectation that such low prices are going to be around at least for a few more years. Several things can likely be linked to both the upward move- ment in oil prices and the eventual decline. First, the industry, led by the New England Fuel Institute and the Petroleum Marketers Association of America began taking a long hard look at the com- modity deregulation that occurred at the end of the Clinton administration. They, along with a range of traditional commercial hedgers, saw no rational market driven reason for such significant price increases. A range of noncommercial players had rapidly increased the volume of trades in the futures market. And dark markets, such as the Intercontinental Exchange headquartered in Europe, offered little transparency. The physical oil markets are tied to the futures markets though common pricing mechanisms. The associations worked to get market reforms in place, with significant additional effort being provided by Sean Cota, who at the time was an oil marketer as the co-owner and president of Cota & Cota, Inc. The market collapse in 2008 finally provided an opportunity to get some of these reforms passed in the Dodd– Frank Wall Street Reform and Consumer Protection Act. While Wall Street has worked aggressively to water down these regula- tions in the rule-making process, there has been an exodus of the major commercial banking players from the field. Likely more influential, though difficult to quantify relative to the market reforms, has been the success of the shale fracking pro- cess in developing new domestic oil reserves in addition to natural gas. The technology has become more efficient, almost by the month, particularly under the pressure provided by Saudi Arabia's attempt to drop prices and drive these new oil producers out of the market. There is some question today as to just how low the profit- able price point is on a barrel of oil from the fracking process, but some estimates currently see profitability at $40-$50 per barrel. The good news for the industry is that while fracking-gen- erated low natural gas prices are likely here to stay, the same can likely now be said for low oil prices as well. Gas may still be cheaper (at least in the short-term), but even so they are suf- ficiently close that the pressure for conversion has certainly been reduced significantly. It's an overused cliché that will be overused here one more time because it does have a core of truth: That which does not kill us make us stronger—Friedrich Nietzsche. With that in mind the oil industry has become very strong indeed. The pressures since the 1950s, and most particularly the last few years, have been exceptional. And some operations have died, or in most cases been absorbed by larger players. For those companies that have fought through the challenges, operations are efficient. Companies are, by and large, no longer strictly focused on driving an oil truck, but on HVAC service, propane sales and the myriad of profitable ancillary profit oppor- tunities. Companies are exploring profit opportunities in areas from bulk wood pellets to security services, and bulk diesel and motor fuel sales. This flexibility should not be surprising. As noted earlier in the article, the path to fuel oil involved moving from wood to coal, and then from coal to oil. A great many of today's heating oil companies once sold coal before that switch occurred, or even ice in the days before electrical refrigeration. The industry has long been flexible, adaptable and effective at providing its customers with a tremendous degree of service for whatever in-home need they might have relative to warmth and comfort. And that is why my bet is that this industry will be around 80 years from now, selling whatever heating fuels that cannot be provided by a utility to their loyal customers. l F O N