Bracing for Winter

Five tips for holding down heating costs

If winter hits hard in northeastern Iowa, Jake Schmitt knows that his heating-oil customers aren't going to be happy.

Schmitt, an energy specialist with fuel provider New Century FS Inc. in Traer, Iowa, has already heard consumers griping about the cost of residential heating oil, which is projected to rise about 25% nationwide from last year.

"Some of them don't know how they're going to be able to pay for it," he said.

Iowans are not alone.

The average U.S. household can expect fuel expenditures to increase $585 over the October 2007-March 2008 season, according to the Energy Information Administration.

And if, as the National Oceanic and Atmospheric Association predicts, this winter is colder than last, then the 8 million households that use oil to heat their homes might have to compensate.

EIA expert Jonathan Gupton predicts that higher costs could cause people to heat their homes only during the coldest hours of the day or heat their homes normally and have less disposable income to spend on other things.

"I don't foresee a situation where there are shortages or people are cold in their homes," Gupton said. "In a price-spike set of circumstances, I would foresee a winter where tough household consumption decisions have to be made in order to meet the basic needs of heating the home."

In the event of a fierce winter, John Huber, president of the National Oilheat Research Alliance, has several recommendations for consumers hoping to keep energy costs down.

Although spending $5,000 for a new boiler seems pricey, Huber estimates that new equipment could save $1,000 to $2,000 on energy costs per year.

If new hardware is not an option, consumers can make improvements and modifications to their current equipment and save 8% to 15% over the course of a year. Turning down thermostats and insulating windows are also easy solutions.

As for market prices, the EIA forecasts that heating oil will average $3.90 per gallon this season. Heating oil, most commonly used by U.S. energy consumers in the Northeast, is a product refined from crude oil, which means heating oil prices are directly tied to oil prices. Huber estimates that for every $2-per-barrel increase in oil prices, heating oil prices jump a nickel.

Inventory Adjustments

The exact degree to which prices rise this year will depend on a variety of factors.

Unlike in previous years, when commercial heating oil inventories began building in September, the uncertainty of American oil demand has caused inventories to remain low, Gupton explained.

The idea behind inventories is that, when prices are low in the prewinter months, it's a good time to stock up because, eventually, prices will jump when the weather turns and demand spikes. But with oil demand in the U.S. lower than it was a year ago, and the country's economic future uncertain, no one is sure whether demand will rise. As a result, the typical prewinter stock-up hasn't kicked into gear.

If the nation experiences a cold winter in regions that rely heavily on heating oil, and there is not a big build in inventories between now and then, the price of for-immediate-delivery oil could rise, Gupton said. But, Gupton added, the probability of inventories not growing is "a big if."

"People who rely on heating oil will likely have it, but they will pay a premium price for it in the spot market," he said.

Huber, an oil market veteran who does not "obsess over inventories," is not worried.

"What's critical is: Do you have product when you need it and it gets cold?" Huber said. "This industry has always gotten product to market. It's too big an industry not to do it and everyone knows they have to do it."

What Can I Do to Lower My Heating Oil Bill?

1. Discuss options for participating in a budget plan with your energy supplier. This will help stabilize your monthly payments.

2. Before the weather turns cold, get a home energy audit to make sure your furnace and appliances are running as efficiently as possible.

3. Weatherize your home: install the proper insulation in your house and around your hot water heater. Caulking and weather stripping windows and doors will seal out cold air to help save energy, too.

4. Get a programmable thermostat and reduce temperature settings, especially when you're not at home.

5. Invest in a new boiler. It might cost $5,000 or $6,000, but with the money you'll save on energy costs, it will pay for itself in three years.