Supply and Demand for Heating Oil

Heating oil is one of the numerous petroleum products produced at refineries and used by millions in the United States as an energy source. Its primary use being home heating, the demand for heating oil is affected by seasonal temperature changes with the highest demand taking place during the months of October through March. Heating oil consumption is concentrated mostly in the northeastern part of the United States.

Like other petroleum products, heating oil is refined from crude oil that has been extracted from deep within the earth by companies such as Western Pipeline Corporation. Once crude oil reaches a refinery, it is separated into a variety of products on which much of the United States depends for energy. When heating oil is produced through the separation of crude oil, other petroleum products are produced in the process. The process of separating crude oil into different components such as natural gas, gasoline and heating oil is called distillation. Since multiple products are produced through the distillation process, responding to sharp increases in the demand for heating oil during cold weather can become challenging. Heating oil that is produced by refineries in the warmer months can be stored to meet demand during the cold winter months.

Heating oil prices are determined by several factors, with distribution, marketing, refining and the value of crude oil accounting for a bulk of the cost. The seasonal nature of demand for heating oil is in part responsible for its tendency to fluctuate in price. Demand may rise sharply as temperatures become drastically colder, prompting a higher price for heating oil. The fluctuant nature of crude oil prices also affects sometimes unpredictable rises and drops in the price consumers pay for heating oil. Additionally, geographic location can affect the price consumers pay for heating oil. Increased distribution cost of delivering heating oil to remote areas, for instance, will result in higher prices being paid by consumers in those areas. Other factors, such as the level of competition present, can also affect differences in heating oil prices among different geographical areas.

To accommodate the fluctuating demand for heating oil and reduce the probability supply interruption, home heating oil reserves have been added as a part of America’s Strategic Petroleum Reserve in recent years. The quantity stored in such reserves is intended to provide heating oil during a shortage yet supply only enough to meet demand for a number of days, with the aim of encouraging companies to respond effectively to the need for additional heating oil supply.