Heating Oil Contracts - The Pros And Cons Of Price Protection Plans

The Popular Plans

Oil heat customers are offered heating oil contracts which are created to protect them against rising fuel oil prices.  What plans are available?  There are several price protection programs offered such as:

  • Cap Plans
  • Pre-payment Plans 
  • Fixed Price Plans

Price Cap Programs and Pre-payment Plan Overview

There are so many ways fuel oil companies can devise these heating oil contracts for their programs, so you should shop around. Their purpose is to help limit your oil heat costs, when oil prices rise. When utilized correctly, you can save on your fuel costs. But just like everything else, there are some pros and cons to each program.

Prepayment plans have in recent years become problematic.  Some customers have lost the money they paid into the program.

Heating Oil Contracts For Pre-payment Plans

A Pre-payment program is when the cost of oil is figured up according to your projected use for the next season. In this heating oil price protection program, you are charged based on what the oil price is during pre-season, which is a lower price per gallon than you will pay during the heating season. You pre-pay for your oil in one lump sum for the whole season; this will lock in your price for the heating season.

But there have been some big problems that come up with pre-purchase heating oil contracts.

Heating Oil Contracts For Price Protection Cap Plans

Cap Plans are designed to give a customer peace of mind knowing that the price of oil will not go over a specific amount per gallon. But in exchange for this service, you usually pay a higher price per gallon and you have to sign a contract.

So, under the best of circumstances in a cap plan heating oil contract, if prices rise above the cap price, you don’t have to worry about paying the higher prices.  But if prices drop significantly, what happens?

  • In some cases, some contracts will go down to whatever the current prices are.
  • In others... you have to pay the minimum price, even if the price of oil drops below the minimum.

In the last instance, a cap plan will not be the best choice for saving money.

It has been found by some that over the long run... a person on a cap plan doesn’t necessarily save more money than someone who just pays for oil at the current market price (COD) even though oil prices fluctuate up and down.

And because of the above risks mentioned, customers are rejecting cap plans and pre-payment plans and are not signing contracts.

Fixed Price Contracts For Heating Oil

This is where the oil heat dealer enters a contract to purchase heating oil wholesale for a specific price for its customers. After adding on overhead and a profit margin, the dealer then offers you a fixed price for a given period time. During this time you don't have to worry about the costs going up or down, even though the price during the season will be changing.

This may be a good choice for you if...

  • You want to know exactly what you will be paying for heating costs.
  • You need to plan your costs to not upset your budget.
  • When prices trend up you don't want to have to worry.

But what happens when prices trend down? You could lose badly.

This happened in the years 2008 - 09 and in during the 2014 -15 winter season. Fixed price heating oil contract customers paid much more than those who bought at market price.

These contracts cannot be broken, so you are stuck paying more when you sign these in seasons where the prices go down. This is especially bad when prices trend way down. You lose big time when that happens. But in years where prices trend up... then you are the winner if you are under a contract.

It's a risk you have to decide whether over the long run it's worth it.

Tips To Consider Before Signing The Dotted Line...

So when it comes to signing any heating oil contracts...

  1. Read the fine print. Read everything carefully before you sign. Don’t feel pressured to sign on the spot.
  2. Only sign a contract based on a year at a time. That way if things aren’t going to work out, you can get out of it at the end of the season or year.
  3. Find out what it will cost to break the contract early. You will pay something if you break the contract before the agreed upon date, which can be as much as several hundred dollars.
  4. Have a trusted relative or friend look over it with you. Or, you can take the heating oil contract to a lawyer to review for you.

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