May 11, 2022
Many of our customers have contacted us with questions about the current energy situation, and our recommendations for the future. We would like to first start off by explaining the current energy market condition, and what we may expect in the near future. The first product we would like to address is heating oil. Heating oil and diesel fuel (used for trucking and construction) are essentially very similar products and are traded on the commodities exchange as ULSD (ultra-low sulfur diesel). These products are categorized as middle distillate fuels, which also include kerosene, and jet fuel. Because these fuels are used globally, the price and demand are set on a global level and not a local level. Several factors have led to dramatic increases in these fuel costs over the last 18 months.
There are a number of factors that have affected energy prices, but here are the primary drivers of diesel fuel/heating fuel.
- Demand recovery post pandemic
- Seasonally low ULSD inventory levels
- Price Backwardation
- US energy policy
- Ukraine/Russia war
While post pandemic demand has increased somewhat, we believe that was not a primary driver of the rapid price escalation we have experienced, but a contributing force compounded by US gas and oil policy decisions that have reduced US supply. This reduction in supply has also been compounded by supply chain disruptions, inflation and backwardation. Backwardation is a market condition resulting in high prices in the current or nearby months, with declining prices in future months. This condition discourages oil and gas companies from stockpiling any inventory in the nearby months, further compounding an already low inventory condition. The Ukraine/Russia war has also resulted in sharp increases in prices, but as you can see from the crude oil chart above that energy prices were dramatically rising long before that conflict began.
So where are we now, and where can we expect to be in the near future?
The United States (which was energy independent and a net exporter of gas and oil 18 months ago) is now in a position of seeking gas and oil supplies from outside of the US. The Russia/Ukraine war has also disrupted the normal supply and demand picture, especially in Europe, as many European countries have recently committed to reducing or discontinuing purchases of gas and oil from Russia. This has resulted in increases globally for these products. Here is a brief rundown of the effects of US energy products:
- Heating oil:
- Heating oil and diesel fuel are in short supply and are being bid up aggressively in the global cash markets. This has resulted in a tripling of cost for those products.
- Natural gas:
- Natural gas has also experienced a tripling of cost due to a shortage of supply, and global demand for LNG (liquefied natural gas), due to the Russia/Ukraine war.
- Propane (LP):
- Propane has experienced relatively minor price increases and is by far the most stable fuel in terms of cost and supply in the United States. This is largely due to the fact that propane is not exported as extensively as other energy products.
There is nobody who can forecast these markets with any certainty, as we are in uncharted waters. However, the global demand and supply picture for the three primary fuels mentioned above will probably remain in a volatile state for at least the next 12 months. Unfortunately, the only likely remedy for a reduction in these prices would be a dramatic shift in US policy for gas and oil production (which is highly unlikely), or recession (likely).
As every consumer has realized, high energy prices are the root cause of inflation since every product and service in the world relies upon gas and oil cost, directly or indirectly, and until gas and oil prices are dramatically lowered, we will continue to see dramatic rises in inflation.
How does this affect Sippin Energy Products?
We have had a few customers ask or insinuate that we (including all retail energy retailers), are excessively profiting or gouging during these times of high prices. That couldn’t be further from the truth. The reality is that the gross margins for every energy retailer have declined dramatically. This has been compounded by inflation in credit default. The cost of operating our fleet has increased dramatically, especially considering our cost of diesel fuel has more than doubled. In addition to that the cost of repairing and maintaining our fleet has gone up dramatically as well. As you might imagine, we have some customers that are having difficulty paying these high prices, especially those on fixed incomes. We are doing everything in our power to work with our customers to get them through these difficult times. All in all, energy retailers are quite high in the food chain as far as energy is concerned, and essentially bear the burden along with our customers of the impacts of high energy prices.
What can a homeowner do?
As difficult as the situation is, there are number things you can do to help manage energy costs moving forward.
- Enroll in our budget plan program (if you have currently not taken advantage of this). The budget plan will balance your annual cost evenly over the next 12-month period.
- Take advantage of our SmartCap program. This program will provide a capped price for your heating fuel or propane, to protect you from increasing prices, and the provide lower prices when the market corrects in the future. Because this program is based on commodities futures, which are currently in a declining state (referred to as backward dated), the capped price will generally be substantially lower than the current retail rate.
- If your heating system and oil tank are over 20 years old, you may want to consider converting your heating system to propane, which is currently running approximately 40% less in cost than heating oil. As mentioned previously, because this is generally a domestically produced and consumed fuel, it is remained stable and abundant, and can be used for many other purposes other than heating and hot water.
- Lastly, everyone can take advantage of energy conservation measures. There are some easy ones such as setback/programmable thermostats which can easily save a homeowner 10% or more. Home upgrades such as insulation in window/door upgrades are also a long-term wise decision. Weatherproofing such as door seals are also very helpful.
- Space heating is also a sensible choice for some homeowners, this simply means that if you occupy one portion of your home such as a living room or family room most of the time, you can heat that zone normally, and reduce the heating and all other zones of your home. This can also be accomplished with a ductless mini split/heat pump, or a propane room heater.
Above all, Sippin energy is committed to the security of your home heating needs, and will make sure that our products and services remain uninterrupted in the future.
If you have any questions whatsoever, please feel free to email our customer service staff at csr@sippin.com
Thank you for your understanding and continued support.
Gary L. Sippin, President, COO