Meltdown 101: Home heating costs this winter

MARK WILLIAMS
The Associated Press

Heating costs this winter figure to be cheaper for much of the country than they were a year ago, thanks to a glut of natural gas and fuel oil and a recession that's pushing down demand.

Does this mean you should lock in a rate now , or wait for prices to keep dropping?

Here are some questions and answers about heating costs for this winter.

Q: Where are prices compared with a year ago?

A: Natural gas prices are down about 80 percent and heating oil prices are half what they were a year ago, both on the New York Mercantile Exchange.

Q: So exactly how much will I save?

A: There are plenty of factors that go into figuring how much it will cost to heat your home this winter. The actual cost of natural gas and heating oil typically make up about two-thirds to three-quarters of the total bill. Consumption, of course, also is driven by how cold it gets this winter, how big your house is and how comfy you want the place to be when grandma comes for Christmas.

Of the 111 million households in the U.S., about 8.5 million use heating oil as their main heating fuel, and most live in the Northeast.

The current average price for heating oil in New York, for example, is $2.60 a gallon, nearly 40 percent lower than the year-ago price of $4.20. In Vermont, customers of Owner Services Inc. are paying about $2.35 a gallon, down about $2 a gallon from a year ago.

A consumer using 1,000 gallons of fuel during winter figures to save $1,600 this winter in New York compared with a year ago, based on current spot prices.

But there are some caveats. Most people fill their tanks three or four times during the winter. You are vulnerable to changes in spot prices if you do not lock in to a fixed contract that guarantees a price for a specific period.

As far as gas prices go, how much you will pay depends on the strategies used by the distributor that provides gas for the home.

Many use a portfolio approach where gas is bought under a mix of short- and long-term contracts, said Chris McGill of the American Gas Association. Many companies also use financial tools such as hedges to help keep prices under control.

"There is always a rolling price, and that's what helps mitigate peaks and valley on the pricing side," he said.

That means you probably will not get the full benefit of the low prices that exist on the markets now, but, on the other hand, you did not pay the highest price when prices peaked last summer.

Columbia Gas of Ohio, which adjusts its prices monthly, has said its prices for September will be half of what they were in September 2008.

Q: Given that prices are so low right now, does it make sense to lock in a price if I can?

A: It depends. If you like the security of knowing how much you will pay for a fixed period, go for it. If you think prices have further to fall, don't.

Chris Keyser, president of Owner Services, said more customers want a fixed oil contract when prices are going up than when prices fall.

And historically that makes sense, he said. When a recession follows a big price spike , as has happened recently , prices are usually flat or slightly down for 18 months or so, so people might not be as concerned about locking during that stretch.

About 40 percent of his 5,500 customers in Vermont have locked into oil prices for this year, down from 60 percent last year when customers feared that prices were headed much higher.

About 35 million of the 60 million homes that heat with gas have access to customer choice programs that could give them a chance to lock in a price for a set period such as a year or two, but only about 13 percent of those homes use them, according to the Energy Information Administration.

Otherwise, prices those customers pay will adjust at some fixed interval, such as monthly or quarterly.

Q: Maybe the better question to ask then is how long will prices stay low?

A: For the foreseeable future. Supplies of heating oil are at their highest level since the start of President Ronald Reagan's second term and the heating season does not really start for another two months, according to oil analyst and trader Stephen Schork.

There is so much natural gas in storage already that producers are starting to have a hard time finding places to store it.

Q: Could that change?

A: Sure. A strong hurricane could devastate the natural gas producing region in the Gulf of Mexico or a severely cold and early winter could lead to a big draw on supplies.

But either scenario is unlikely, and even if it happens, it may not matter anyway. Natural gas production is not so dependent on the Gulf anymore and the early forecasts are calling for a moderate winter.

And again, supplies remain more than ample , even if the recession is over, as many economists suspect, demand remains weak.

Q: What if do not heat my home with gas or oil?

A: Heating costs may come down if you warm your home with electricity, but there are a bunch of variables, such as whether you have a choice as to where you get your electricity and how much your utility relies on gas. At the same time, electric utilities have been raising rates to cover costs for new power plants and pollution controls.