Domestic Heating Oil – what is it, where does it come from and what causes the price to fluctuate?

21 Jan 2009

Kerosene is a clean burn fuel giving high heat output making it an ideal fuel for home heating. Kerosene is a low sulphur fuel and is used as domestic heating oil. It is also known as 28-Second heating oil, Burning Oil, Standard Kero, and C2 Kero. It is suitable for use in all types of domestic pressure jet boilers and most vaporised burners such as AGA.

Blue paraffin is a cleaner form of kerosene and is used where emissions are not vented outside.

Crude oil is extracted from countries all around the world and then refined into kerosene 28 for delivery to your oil tanks, so to understand a bit about what affects the price of the oil delivered to our door we have to first look at where it comes from and the multitude of complex issues surrounding it.

Where does heating oil come from?

There are about 161 different internationally traded crude oils and the difference is largely related to quality. Some of the more common names you may recognize are West Texas Immediate (WTI), Brent, NYMEX and OPEC basket price.

Crude oil is separated and refined to make a multitude of products. There are around twelve refineries in the UK which produce millions of tons of refined oil every month.

Distillation of the crude oil at different boiling points, along with a combination of separation and chemical processes produces products such as petrol, diesel, kerosene, jet fuel, bottled gas, lubricating oil, fuel oil, tar and bitumen for roads.

So, heating oil is just one of the products involved and its price is affected not just by the need to heat our homes but also by the demand for such items as fuel for our cars, delivery vehicles and air flights.

Changes in the cost of crude oil

But first let's look at what causes changes in the cost of crude oil. There are a number of factors that make oil prices much more volatile than the average products you will buy down your high street. The price of crude oil is particularly sensitive to the laws of supply and demand which can vary worldwide with events such as fluctuations in the economy, political unrest and extreme weather events. For example, demand for crude oil has grown with China increasing its imports by over 35% in 2008 and this has impacted on the price of oil worldwide. But at the same time the downturn in western economies, particularly the USA and Europe reduces demand so to some extent the two balance each other out. Also during last year the unsettled situation in the Middle East created anxiety in the markets.

Even the prediction of hurricanes can affect prices. For example, in 2008 the cost of crude oil rose ahead of the tropical storm Gustav as it moved towards the Gulf of Mexico and staff were evacuated from oil rigs.

Demand has been hit hard more recently due to the slowdown in the global economy and with credit drying up. Less of us are spending money on cars, petrol and holidays so there is reduced demand for fuel. Supply can be influenced by the Organisation of Petroleum Exporting Countries (OPEC) who will cut output in order to strengthen prices by reducing supply.

But it is not just a reduction in activities dependent on oil that move the price up and down. Trading oil as a commodity will also cause prices to drop and then rise again as investors look for alternatives on the stock market to invest their money. Investors will affect the price of oil as they try to predict the way it will go.

Another reason that prices have not fallen in reaction to supply and demand is the falling value of the pound against the dollar. Oil is traded in dollars so we are buying less oil for our money.

As consumers of domestic heating oil, the price of crude oil has an obvious impact on the price we pay. But there are a number of other factors that contribute to the cost of your heating oil.

Other factors affecting the cost of domestic heating oil

Before it reaches your oil tank crude oil has gone through the refiners, the wholesalers and the distributors. The costs of all these stages have to be taken into account, but more significantly each element of this process moves the relationship between the cost of crude oil and heating oil further apart.

The price you pay is not just the cost of the refined oil. Your distributor also has to pay for its delivery to your home, the cost of drivers, office staff and other operating overheads and they do have to make a profit. And then Gordon Brown has to take his share.

The time of year you buy your oil, as well as the weather conditions, will impact on the price. In the summer, refiners, wholesalers and distributors will have enough oil in storage to cope with the predictably low demand so prices will remain lower, assuming no dramatic change in the price of crude oil.

But as winter arrives, a rapid drop in temperature or forecasts of severe weather will lead to an increase in demand. Distributors will start to run low and will place new orders from refineries that also have to keep up with the increased demand. This will result in an increase in prices all along the line as demand exceeds supply.

Where you live will also have an impact on the price you pay. If you live in a remote, rural area for example, not only will transport costs be higher but there will be fewer suppliers, meaning less competition and usually higher prices.

So, what can you do to keep the price you pay down?

The larger your tank, the better chance you have of planning when you buy your oil. Stock up in the summer months and then top up when prices dip. Don't wait until you are about to run out just before Christmas when you can guarantee paying a higher price because suppliers will be running low on stock as well as time to deliver.

Take advantage of the government grants for loft and cavity wall insulation. This is free to the over 70s and some people on low income and benefits but there is some grant available for everybody. The more heat your house retains the better you are utilising your fuel.

And finally, let BoilerJuice save you time and money on phone calls to find you the best heating oil price in your area.