Experts Hansen and Cota Talk Heating Oil Prices on Vermont Public Radio

Posted by Gregg Gethard on September 22, 2009 at 3:31 pm

Robert Hansen, professor at Dartmouth University (left), and Matt Cota, president of Vermont Fuel Dealers Association (right). (images: dartmouth.edu and vermontbiz.com)

Will heating oil prices go up or down? And how do we come to those prices? Those questions, among others, were the subject of a discussion on a recent edition of “Vermont Edition,” a news show broadcast on Vermont Public Radio.

Interviewed on the show were Matt Cota, the president of the Vermont Fuel Dealers Association, and Robert Hansen, a professor at the Tuck School of Business at Dartmouth University. Both chimed in on the way they thought heating oil prices would move leading up to winter as well as the way speculators affect those prices.

While Cota made clear that he cannot say for sure which way heating prices will move this heating season, he said that evidence suggests that prices should remain stable, and could possibly fall, this winter. This is because of the vast amount of heating oil being held in inventory, at levels that have not been seen since 1983, according to Cota. Cota said that Vermont fuel dealers are selling heating oil at around $2.38 per gallon, about 44 percent less than this time last year. This number is of great importance to residents of Vermont, as 60 percent of the state’s households use heating oil.

Over the past two years, the price of crude oil has been extremely volatile, reaching close to $150 a barrel last summer and plummeting to $32 just a few months later. This also caused the price of heating oil to rise and fall dramatically, which hurt more than just a few of Vermont’s homeowners, Cota said. While a majority of heating oil consumers purchase their oil in the traditional way, a decent amount “pre-buy” in order to lock in the price for a longer period of time. Last summer, many heating oil customers were worried that prices would skyrocket to record highs; as a result, they signed contracts that obligated them pay almost $5 per gallon for the rest of the year. But the oil bubble popped, and prices dropped dramatically. This meant that many heating oil customers lost large sums of money by making the wrong bet with their price-lock contracts.

Cota said that the Vermont Fuel Dealers Association supports efforts to bring stability and transparency to oil trading. He said that he would like to see an end to the “dark market” exchanges that allow for crude oil to be traded out of view of the watchful eye of regulation. He also said that speculators play an unfair role in determining the price of heating oil, as large institutional investors like hedge funds can move prices in ways that run contrary to what supply and demand would indicate.

Hansen said that the price of oil over the past few years has largely been shaped by supply and demand as opposed to any nefarious moves made by speculators manipulating the market. Hansen argued that the current price of oil, despite current high supply and low demand, reflects expectations of a future in which world demand for oil increases while supplies decrease (the peak oil scenario). The demand for oil, Hansen said, also closely follows the path of the world’s economy as measured by GDP. And as the world’s GDP shrank over the last year or two to levels not seen since the Great Depression, demand for oil collapsed, which led to record low prices.

Hansen also said that speculators play an important, and needed, role in determining the price of oil. Speculators, he said, bring a large amount of analysis and information to the oil market that helps to predict the trends of supply and demand for the long term, as opposed to just immediately.

Hansen ended his segment on the show by saying that he felt incredibly bad for heating oil customers struggling to pay an inordinate amount of their budget towards keeping their homes warm. But, he said, excessive regulations on speculation could just make the market even more volatile.

While having information specific to Vermont, this 30 minute program is well worth listening to for anyone interested in issues related to heating oil.