Could heating oil prices be frozen?

With energy prices becoming a major point of political debate in 2013, below Dr Craig Lowrey, consultant at UX Energy Services looks back over a year that has brought energy’s impact on the cost of living very sharply into focus

Economic and geopolitical factors have interacted with supply and demand issues in the global oil market generating the movement and volatility which is generally seen as synonymous with oil. The future of Iran’s nuclear programme with the possibility of sanctions easing, civil unrest in Libya affecting its crude exports, and the pace of global economic growth have all served to provide sentiment and direction. For the most part, the price of crude oil has remained persistently above $100 per barrel – falling briefly below this important psychological benchmark in April 2013 after disappointing economic news from the US and China, as well as concerns over Europe’s financial stability, given developments in Cyprus.

The UK Continental Shelf continues to be a key contributor to both the nation’s supply-demand balance and also the economy. There were some particularly positive supply developments with the start up of production at the Jasmine and Breagh fields; the former being the largest field to commence commercial operation in the North Sea since Buzzard six years ago. (Disappointingly, the Breagh field ceased operation only a few weeks after it came online, with developers citing technical problems and Buzzard experienced production problems for the second year in a row.)

THE UK DEPENDS ON IMPORTS FOR 44% OF ITS HEATING OIL REQUIREMENTS

The industrial dispute at the Grangemouth facility illustrated the potential vulnerability of the UK market to disruptions, coming as it did in the wake of a report from the House of Commons Energy and Climate Change Select Committee warning that domestic production could not keep up with rising demand for refined oil products. Indeed, the same report pointed out that the UK depends on imports for 44% of its heating oil requirements. A fact that vividly illustrates the key role that imports and international factors play in determining domestic prices.

An affordable and secure supply
When a fuel customer’s primary concern is an affordable and secure supply, the aforementioned global developments may seem literally and figuratively half a world away. So how do these international issues translate into domestic matters? And, how does the growing criticism of gas and electricity suppliers, and the possibility of changing policies, relate to off-grid energy sources such as heating oil?

As the Big Six started to announce the latest round of domestic gas and electricity tariffs, the Labour Party declared a 20-month freeze on energy bills from May 2015 – should it win the next general election. Throughout the ensuing debate, very little mention was made of other fuels such as heating oil.

The possibility of a heating oil price freeze
Citing international factors, gas and electricity suppliers plus a number of independent commentators have questioned whether such a prize freeze policy is practical.

Could such a freeze work in the heating oil market? At first glance the answer would appear to be no – given the market’s highly regionalised nature and the fact that international oil prices ultimately dictate price. Despite this, there could be options for something akin to a price freeze.

According to the 2011 Office of Fair Trading report into the off-grid energy market, over 90% of the fluctuation in the price of heating oil is based upon the price of crude oil; any policy would therefore have to focus on this. One possible approach would be a measure similar to the Fair Fuel Stabiliser that operates in the petrol market. While this is based upon amendments to the prevailing rate of duty to compensate for variations in the crude oil price, a similar pricing approach could in theory be employed to insulate the rates paid by customers from international oil market volatility.

Were such a policy to be implemented, fiscal and legislative implications would have to be carefully considered alongside the sharp differences in structure between the heating oil market and its gas and electricity counterparts, not to mention issues relating to changes in foreign currency exchange rates and other variables.

Given regional variations in price and the site specific nature of delivery charges and volumes, the enforcement of such a policy would represent a major challenge and could ultimately preclude its introduction. Not all heating oil retailers are of a size and scale that would allow them to manage any additional regulatory or compliance obligations in a cost effective manner.

A greater focus on off-grid customers
With energy prices receiving an increasing amount of media coverage, it is important to ensure that off-grid fuel customers are seen as being of no less importance in terms of policy and bills. Given that off-grid energy is often more expensive there is an argument that they should receive a greater focus. Whether this is borne out by political developments in 2014 and the run-up to the 2015 general election remains to be seen.

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