Fight to keep fuel prices low

Real Estate Weekly, Dec 8, 2004 by Gerald Pindus

A small but growing number of owners and managers have found an innovative way to offset the increase in the price of fuel oil that occurs during the heating season.

The approach is based on an understanding of the terminology used by fuel marketers to describe their pricing structure:

Spot Price (Harbor)--the price that distributor-wholesalers pay for fuel oil when they purchase it from the barges that deliver it to New York Harbor. The spot price changes every day. Information on the spot price is published daily by the Platt's industry trade resource.

Rack Price--the price that distributor--wholesalers charge their customers, plus the cost they incur for transporting the oil from New York Harbor to their storage facilities and from their storage facilities to the customers, as well as the distributor-wholesalers' markup. Traditionally, the rack prices charged by different distributors vary by only a penny or two. During the winter months, the rack prices rise because the distributors increase their markups, but the rack prices charged by different distributors still vary by only a penny or two.

Understanding the components that make up the rack price can help property owners avoid making costly mistakes. The writer has heard owners expressing satisfaction at paying a couple of pennies per gallon above the rack price, not realizing that they were paying an extra markup over and above the markup already incorporated into the rack price.

There will be a substantial rise in spot prices at New York Harbor due to a world-wide imbalance in supply and demand. Compounding the problem, rack prices will rise disproportionately due to distributors' tradition of increasing their markups during the heating season. It is likely that the distributors will hear protests from shocked consumers.

These protests may actually work to the benefit of consumers, as well as the distributors who recognize the situation as a marketing opportunity. Property owners who understand that winter rack prices rise disproportionately can comparison shop and try to negotiate lower markups.

Distributors can compete for new customers by reducing their mark-ups. In view of the size of winter markups, there is room for a substantial reduction, while still leaving a good profit for distributors. The reduction in profits can be offset by increased volume of sales. For owners who negotiate lower markups the savings can be significant--as much as $5,000 to heat a 60-unit apartment building during a single heating season.

A new web-based service available from U.S. Unergy Controls can assist property owners in dealing with high fuel oil prices. The company is now supplying its clients with fuel oil at low markup over Harbor prices and will continue to due so during the heating season. Each client is also provided with on-demand information about oil deliveries and prices, as well as a report that checks the Harbor price for the day with the amount billed to the client to ensure that the oil supplier's invoice is correct. Also included is a new aid to fuel conservation--a report that reveals to building owners and managers a comparison of the fuel consumption of individual buildings based on gallons of oil per s/f, unit, room or apartment.