Oil prices have surged to more than $70 and where they will go next is anyone’s wild guess, with the outward edge of predictions as high as $250, tearing a seam of worry in the heart of every homeowner who uses heating oil.
Is it time to lock-in what you pay now, a season before the cold settles in? Or should you hold tight, hoping prices will come back down? Either way, financial planners say, you are placing a bet.
There are generally two ways to lock in oil prices: One, a customer can opt for a fixed rate, which locks you in at a particular price or, two, one can opt to cap prices, which allows people to benefit from lower prices if the price dips below the capped rate.
Each carries slightly different costs, benefits and risks, but in general your oil distributor buys your heating oil ahead of time on the New York Mercantile Exchange, for later delivery. Call your individual distributor for details and shop around. Small local distributors might not offer caps, because they don’t hedge.Price caps are always suddenly popular in times of rising prices, as this New York Times article shows.
But that doesn’t mean that they are necessarily the right course. More recently, the New York Public Interest Group, a nonprofit that negotiates with oil companies on behalf of consumers, said that nearly half their 20,000 members locked in prices last summer. That was a mistake that cost them money. They locked in prices just as they were about to drop.
Individual homeowners are not the only ones who struggle with hedging decisions. Southwest Airlines (Stock Quote: LUV), for example, has within the space of a few years, helped and hurt themselves tremendously by hedging against rising oil prices.
Rebecca Walsh, a certified financial planner from Essex, Vt., a place that knows something about blustery winters, says that the decision is hard, especially with prices so volatile.
“It’s not clear cut,” she says. “No way.”