2008-10-24 01:25:07 EDT

Oil Price Information Service

FIXED PRICED HEATING OIL CUSTOMERS GET NO BREAK FROM PRICE PLUNGE

With heating oil prices, along with crude and gasoline, falling off the cliff in the past few weeks, heating oil customers with fixed price supply contracts are now paying more than the market rates and will continue to do so.

This is a 180 degree flip from last year when heating oil prices assumed a steady climb into the winter season, causing retailers to continue to supply fuel to customers even though their costs were higher than the fixed retail prices, said John Maniscalco, executive vice-president of New York Oil Heat Association, on Friday.

This is similar to gasoline retailers who make their profits in a price fall, and possibly incur losses in a price uptick.

Maniscalco was addressing the heated up discussions about fixed-priced fuel supply contracts as retail prices continue head south.

"The bottom line is that a contract is a contract, and retailers entered into contracts with their suppliers based on contracts signed by fixed-price customers," he said.

When customers make the choice to purchase a fixed-price heating oil contract, home heating oil retailers enter into lock-in contracts with their wholesaler suppliers to make sure that they have the fuel on hand to fulfill their end of the contract at the agreed upon price.

Retailers make price guarantee contracts available to consumers when the retailers themselves have entered into guaranteed price and supply contracts with their upstream, wholesale suppliers.

"Retailers do not get a lower price from their suppliers on their fixed-price contracts when the price drops," Maniscalco said.

"That retailer is not given a break by his or her wholesaler on a pre-purchased contract," he added.

The retailer is locked in, and is obligated to purchase the higher priced wholesale supply contracts in order to meet their contractual obligations to their fixed-price customers.

Last year, the price of heating oil rose dramatically.

Retailers were able to provide fuel to their fixed-price customers at the lower price only because they had secured the fuel at that price with their suppliers when the fixed-price contract was executed with the customer.

Retailers would not have been allowed to leave their obligations to consumers simply because prices rose beyond the contract price - anymore than consumers can leave their retailers now that prices may have fallen below the contract price.

A fixed-price contract is not a guarantee that the fuel will be provided at the lowest price. It is a guarantee that the fuel will be provided at the mutually agreed upon fixed price.

Government may have bailed out all manner of investment firms, mortgage companies and banks across the country, but government hasn't bailed local heating oil retailers out of their expensive supply agreements, Maniscalco said.

"We are stuck with what Wall Street gave us, and we have no way to get out of the supply agreements," he said. "If government gets us out of our supply agreements - we could help consumers."

Edgar Ang, eang@opisnet.com

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