A price cap protects you from both rising and falling prices. If you are on our price cap program, no matter how high world oil prices go, your price won’t skyrocket. And if market prices fall, your price comes down too.
There is, however, a fee associated with this protection because it has become very expensive to offer this type of insurance. The following graph illustrates why this is so.
These graphs represent typical two-week periods in 1995 and in 2008.. As you can see, the price of oil is much more volatile today, on a day-to-day basis, than it was in the past.
This helps explain why the fee we have to charge for our price cap option is higher today than in earlier years. Traditionally, we would buy oil to cover the needs of our customers, and then buy a financial “hedge,” or insurance policy, to protect ourselves if market prices fell below our purchase price. If prices did fall, we would sell back our original supply of oil to our supplier and purchase new oil at the lower price.
In recent years, however, the market has been so volatile—and the risks associated with hedge insurance so great—that the price of this insurance has increased dramatically. (See chart.) Therefore, in order to continue to offer our price cap option, we must pass along the increased cost of the insurance to you in the form of a fee.
An analogy can be made with flood insurance. If you live in a flood-prone area, the premiums are a lot more than if you lived on high ground far from rivers and streams. Right now, the energy markets are “flooded” with volatility; securing price cap protection in the current market costs us a premium because chances are good that we’re going to use the price cap insurance we purchased.
Do I have to be on a budget plan to get your price cap protection?
NO! But you may want to consider the benefits of a Budget Plan. Instead of paying giant heating bills in the winter, you can spread out these costs over the year.
Can I call for my oil and still enroll in your program?
Unfortunately no. Because we contract for the oil ahead of time, we need to be able to predict when we’ll make deliveries, and we can’t do that when people call haphazardly..
Is price cap protection always the best option?
Not necessarily. We make the price cap program available to our customers, but by no means do we think that everyone should be on it and we do not make money on the fee. We have no way of knowing whether this “insurance” will pay off, or whether prices will go down and never hit the cap level.
So, if you choose to pay our market rate instead of choosing our price cap protection, and the price of oil drops during the heating season, you would save money by buying at the daily rate. You would also save money by not having to pay a price cap fee, which we are forced to charge due to the ever-increasing volatility in the oil market. On the other hand, if you pay the market rate and the price of oil rises, you would pay the higher price because you don’t have a cap.
Whatever you decide, know that our commitment is to take the best care of your family we possibly can—especially in these uncertain times.
How do you determine what the price cap will be?
Planning for price protection the right way is a year-round effort. We analyze pricing trends, study the commodities market daily and do a lot of research so we can decide when the time is right to make our bulk fuel purchases. Only in this way can we structure a reliable workable program, one you can count on for protection from unpredictable spikes in the price of fuel. It takes time and money to structure a price cap program correctly and not all heating fuel dealers have the resources to do it, especially in the current market. The price itself of the cap depends on the wholesale price we pay, plus an allowance to cover our costs, such as insurance, vehicle maintenance and employee wages.
Why do I have to pay a fee for your price cap?
As you might expect, our suppliers charge us a premium for offering the “insurance” that allows us to keep your price from skyrocketing while at the same time gives us the flexibility of lowering your price should market prices fall. Unfortunately, that cost has increased eightfold in the past few years as fuel prices have become more volatile. CLICK HERE for a more detailed explanation of the relationship between volatility in the oil markets and fees for price protection.
I’ve seen other companies that aren’t charging for a cap. Why is that?
That might be. But we know that many companies don’t actually buy the options they need to really lower their rate. They say they’ll drop it, but it’s really fixed. Some of them don’t even really buy the oil to protect you from price increases. They just hope for the best. And that’s why over the past few years, there have been companies that defaulted on their price protection programs.
We have never defaulted on our programs. We do it the right way so you can have the peace of mind you wanted in the first place.
What is downside protection?
Since a price cap program protects you from falling prices, we have to purchase options that allow us to “sell back” fuel to the supplier at the higher rate, and then buy more fuel at the new, lower rate. This downside protection allows us to lower our prices when market rates fall.
Why is it so expensive to provide a price cap now?
In the past, there was much less volatility in the oil markets and the cost of a price cap program was quite low. That’s why we offered it to our customers at no cost. Now that the energy markets have become so unpredictable and the likelihood of falling prices has become so much greater, the cost of price cap “insurance” has become much greater. It’s similar to flood insurance. If you live in a flood-prone area, your insurance premiums are a lot more than if you lived on high ground far from rivers and streams. Right now, we live in a time with a very volatile energy market.
When do I need to sign up for a price cap?
There is no deadline. The program is available as long as it remains open. First come first serve policy.
If I call you this winter, will your customer service representative know the price for the day and tell me where prices are going?
If you want to know the price for that day, please feel free to call our office. We cannot make any predictions on where prices are going, however. The daily price could change from day to day, depending on the weather, inventory and a host of other factors. No one can predict the oil market. It would be like calling us and asking for stock market tips.
How do you figure my budget payments?
To calculate your monthly budget payments, we use your fuel delivery record from last year to estimate the number of gallons you will use during the next heating season. We multiply the number of gallons by an estimated price per gallon. This amount is then spread out into equal monthly payments.
I’ve seen prices that are lower than yours. Why is that?
There are always going to be companies that charge more or less than we do (We tend to be right in the middle.). It’s important to compare apples to apples. First, are they a full service dealer, or just one that makes deliveries, leaving you to fend for yourself if your equipment breaks down or they can’t secure product? Second, are they telling you their regular price, or a special come-on rate? This is a game many oil companies around here play—especially the huge ones. You think you are going to lower your bills permanently, only to discover that your price is jacked up really high as soon as the offer ends.
In the meantime, when it’s cold and the company is busy, who are they likely to serve first? Customers who are paying the regular rate, or a new one who’s paying a lot less? And how flexible do you think they’d be if you needed more time to pay your bills because of a temporary problem?
Often, these same companies find other ways to skimp that can cost you big time—like not doing the annual tune-up included in their service plan; not offering true night and weekend service; and not keeping enough service technicians to get to you quickly if you have no heat.
Our customers tell us that our superior service saves them money, reduces their aggravation and gives them real peace of mind.