The Heating Oil price hike – “Because they can”

You know that slightly vulgar Q&A ?

Question: “Why do dogs lick their balls?”

Answer: “Because they can”.

Its pretty much a metaphor for the corporate world for much of the  time:

Q:  “Why do bankers pay themselves large bonuses?”

A: “Because they can.”

– and so on.

It is the “Because they can” imperative which helps us understand why heating oil costs have gone up by 50%  or more in recent times (see graph):

 

Oil is often the only choice for many in rural areas without connections to the Natural Gas grid. It is usually Kerosene and sometimes Gas Oil – both middle distillates from the refining process. Because the rates of duty applicable to heating oil (as compared to road fuel) are minor there should usually be a close correlation between the ex-refinery cost of the oil and the crude oil price. In August (the low point on the graph) heating oil cost  domestic customers 40p a litre. Today it is as much as 70p a litre - a rise of up to 75% . Over that same period the price of crude oil  has gone from $76 a barrel to $86 a barrel - a rise of only 13%. British consumers pay for their heating oil in Sterling so we have to allow for the change in the £/$ exchange rate when making comparisons. In Sterling terms the price of crude oil per barrel has gone from £48.5 to £54.8 – still only a rise of 13%.

So what is going on? The body which represents the industry is the Federation of Petroleum Suppliers and they have issued a statement here:

STATEMENT REGARDING THE SUPPLY AND PRICING OF HEATING OIL DECEMBER 2010

Cutting through the obfuscation in this statement to the truth there is not one iota of doubt that heating oil suppliers are profiteering massively from the present situation. It is true that there will have been some minor extra costs associated with sourcing some supplies from less than optimal sources – in some cases. But in the main a Heating Oil supplier will source his products at Spot product prices on world oil market prices – and these prices are substantially driven by the Crude Oil price. His other costs (primarily distribution) are a much more modest part of the final customer price.

In contrast to the regulated prices of the gas and electricity industries there is no regulation on the price of heating oil. This price is determined then, apart from by changes in supply and distribution costs as above, by consumer supply and demand. If it is a sellers’ market (which it is at the moment) then the price goes up – and up! Heating Oil contractors are taking advantage of the cold weather and customers’ urgent need for oil by hiking the price as far as it will go – the law of the jungle. There is no competition so the market has no effect – they are all laughing all the way to the bank!

Who should step in? Well Government of course. But there is also a case for Refiners to pay a more active role. There is no reason why Shell, Esso and the other refinery operators should not take a position and encourage their distributor customers, in the public interest,  to accept reasonable margins rather than the windfall returns that they are presently enjoying.