When it comes to buying your community association's fuel and heating oil, if your goal is to pay rock-bottom prices well below what everyone else is shelling out, forget it. Everyone knows today's prices are high—and while we can all hope for a decrease, the smarter approach is to prepare for another season of high fuel costs.
But you do have options. Of course you can shop around and find the best deal, but you can also choose a delivery and payment system that best suits your needs.
Fixed vs. Floating
There are two basic options a building or association can choose from when deciding how to be billed for oil: fixed rates and floating rates. A fixed rate means the building will buy its oil at specified price that will not change over the length of the contract. Buildings that choose this method may have to commit to buying a certain amount of oil over the course of the contract.
Floating rates mean that the price paid for oil will be based on the market rate at the time the oil is purchased and delivered. That means the price paid can go up or down with every delivery.
"They can get a delivery on August 2nd, and if they get another delivery on August 19th, they can be paying a different price," says Rodger Loughlin, an owner of Ferrantino Fuel in Brooklyn, New York. "It can go up, and sometimes it can go down."
Both methods have their pros and cons. The advantage to fixed pricing is that you'll know how much you'll pay for your oil over the length of the contract, and no matter how high oil prices skyrocket, you're locked into your price. The disadvantage is that it prices go down, you'll be stuck paying a price higher than the current going rate.
"By locking in their prices now, customers can [assure] they'll have that price for the entire winter," says John Vrabel, chief operating officer of PriceEnergy.com, a Rockaway, New Jersey-based fuel-purchasing firm. "So whether prices go up or go down, they'll pay the price they're fixed into."
There's no magic answer as to which method works best, some people in the business recommend fixed pricing, some floating. Vrabel prefers fixed rates because of the security they provide.
Know Your Options
But even if you choose to go with a fixed rate, there are additional options available that may suit your HOA's needs. Vrabel says an association can choose to pre-purchase the fuel it will use over the entire season. This generally offers the best available rate, but may not suit a building that doesn't want to commit to a specific amount (maybe the amount of oil the HOA uses varies from year to year, making that an unattractive option). The other option is to arrange a fixed price, but to pay for each delivery when it's received. This allows each building's board and management to know how much will be paid for each delivery, but doesn't require them to commit to an amount of oil that the property may not use.
A floating rate allows HOAs to pay the current market rate, so you'll always pay a price that is competitive at that moment. Of course, the downside comes if prices rise significantly, resulting in the HOA having to pay a higher price than they would have with a fixed rate.
"Sometimes, if customers think the prices are high now and they figure maybe they'll go down in the winter, they might select that option," Vrabel says.
Some buildings (and individual homeowners) also try to play the market during the course of a season, something Vrabel says can be risky.
"There's kind of an urban legend out there that customers can in fact shop around to companies during the course of the season and see what company is offering the lowest price at the time," he says, adding that in most instances, customers who shop around for the lowest price of each individual delivery end up paying more than customers who lock into a price during a season. There are exceptions, he says, most notably in 2001 when customers could do well shopping around, but Vrabel says "this doesn't work 90 percent of the time."
According to Carla Romita of Castle Oil Corp. in Harrison, New York, co-ops and condos shouldn't try to beat the system by switching back and forth between fixed and floating rates in an attempt to get the best deal.
"Some customers switch back and forth each year hoping to win," she says. "You can't play it to win like that.
"Winning can't be the goal, because if anybody could pick it every time, you wouldn't have to work for a living—you'd be on your computer making trades all day. Nobody knows for certain. Everyone makes predictions, and the reason there's a market is because for everyone who makes a prediction going one way, there's someone making the opposite prediction."
After getting a price from a supply company, a board or property manager should also make sure that the company can guarantee that price. Vrabel says there are companies out there that will quote a fixed price without a futures contract of their own.
"One of the things I advise any customers, no matter who they're relying on when to arrange a fixed price, is to make sure that company is in fact backing up that offer with a futures contract," says Vrabel. "In this kind of market, there are companies out there that wing it and don't have a supply secured and are offering customers a price hoping that they'll be able to deliver on it."
A Little Knowledge Helps
What makes the fuel-buying process tricky is that the cost of oil fluctuates unlike any other resource. Before last summer, gas prices were well below two dollars a gallon, now they're above three dollars a gallon in many areas. Romita says that while prices are influenced by supply and demand and transportation costs, factors that have nothing to do with supply and demand can also have an influence. Sometimes a piece of news that is interesting to people in the business can affect the cost of oil, even for a very short amount of time.
"The day Musab al-Zarqawi was killed, the market went down precipitously the next morning around the world," Romita says. "By the end of that same trading day, prices were up where they had been the day before. So it wasn't really news that affected oil supply, but it was news, and there were enough people in the market buying and selling based on that news that it influenced the market that day."
Regardless of what's going on in the news, there are ways to learn more about the market and fuel prices. By spending some time on the Internet, you can also get an idea of prices and payment options various companies offer.
There's [a lot of] information available online today," Vrabel says. "If people do research on-line by searching 'heating oil' or 'fuel prices' there's a variety of information out there and [there's new information available] every day. Education in terms of the alternatives always works and finding someone who has experience and is qualified is important as well."
Anthony Stoeckert is a freelance writer and a frequent contributor to The New Jersey Cooperator.