While the oil spill off the Louisiana coast has been a news staple the past few weeks and a popular conversation topic at the water cooler, it has had little effect on home heating oil prices in Maine, according to industry officials.
But Franklin Delano Roosevelt’s Great Depression era quote, “The only thing we have to fear is fear itself,” could apply now to anxiety over the price of oil.
While prices have fluctuated wildly during the last two weeks, Maine oil dealers, large and small, say the cause has more to do with speculation and regulation than supply and demand.
“I can’t see all that much difference between the price now and what it was last summer at this time,” said Jim Robinson, owner of A.E. Robinson Oil Co. in Dover-Foxcroft for 36 years. “The price is pretty low, so all we have to have is the least bit of speculation, and it shoots up. I think a lot of people worry more about it than is necessary.”
Shaun Drinkwater, owner of Drinkwater’s Cash Fuel in Lincoln, said oil prices had been declining for much of the spring, but shot up 17 cents per gallon over the past two weeks from $2.29 to $2.46.
“We’re not 100 percent sure, but two weeks ago, our price was dropping pretty good, and now it’s going up every day. In all honesty, my opinion is it will because [the spill is] an excuse to jack the price up,” he said Friday just before the price took a nosedive to $2.37 a gallon over the weekend. “It’s good for me, but I’m afraid speculation will push it up more.”
Business has been so good for Drinkwater, who started his company with one truck a year ago, that he is adding a second truck.
“We’ve doubled our customer base in a year and have [more than] 1,000 already,” he said.
Oil price factors
Supply and demand used to be the primary influence on the cost of oil. That consumer law is just one of several cost factors now.
“Since it’s really more about perception, it’s a real guessing game,” said Josh Wheeler, retail sales manager for C.N. Brown Heating Oil. “It’s just like the stock market. The biggest factor to me is what the economy is doing and the strength of the dollar. When the dollar goes down, the price of oil goes up.”
While the leak in the Gulf of Mexico is affecting oil supply, it’s a negligible effect overall.
“As much as it is, that amount is still a fairly small amount in terms of affecting the actual supply on the market,” Wheeler said. “It’s all driven by supply and demand.”
But more and more, futures traders’ and even customers’ speculation affects demand.
Maine Oil Dealers Association president Jamie Py noted that in July 2008 the oil market spiked to $147 a barrel and then plunged to $37.
“Nobody looks at Goldman Sachs and Merrill Lynch, but Lynch was the biggest oil dealer in the country — not in terms of dealing, but speculating on it,” Wheeler said. “Futures prices are all over the place. They’re lower than they were a month ago, but they’re pretty reasonable right now.”
“Usually this time of year, [homeowners] are not ordering much,” said Drinkwater. “I’m usually doing one or two days of delivery a week in the summer, and I’m going four days a week right now because people are filling up now in case it goes any higher.”
While some oil dealers have mailed customers budget plans with prices to lock into for the winter season, others are still determining their rates.
Karen Rodgerson, office manager for Bates Fuel Co. in Houlton, said consumers aren’t the only ones keeping an eye on the market.
“It’s crazy. The owner of our company watches the market constantly to see if it’s going up, and we try to get the best price before it shoots up,” she said. “And if you buy at the wrong time, you pay for it.
It’s not the little guy who’s making all that profit.”
Deanna Sherman, vice president of Dead River Co., said the introduction of new factors such as market speculation has made the oil market very volatile.
“I have no idea how prices are going,” Sherman said. “The speculation in the futures market does have an impact on the market, but that speculation can cut both ways and make oil much cheaper or much more expensive.
“Nothing’s typical anymore. The price of oil doesn’t have to do just with supply and demand anymore. There are so many factors influencing it.”
Legislating the flow
One of the biggest factors influencing oil cost, according to many local dealers, is governmental influence in the forms of taxation, restrictions, rules and regulations.
“I just worry about regulation and how government reacts to this spill because regulations can put a wicked premium cost on the product,” said Robinson. “The oil companies and dealers get blamed for the price of oil when it goes up, but what should be blamed are the regulations and the people putting those regulations in place who don’t have much knowledge about the business in the first place.”
For example, no new oil refineries have been built in the United States since the 1970s, in part because they are regulated by the Clean Air Act, which includes stipulations that affect fuel specifications and refinery operations.
According to an article published by the Heritage Foundation in 2006 that referenced a Federal Trade Commission report from 2005, “New environmental regulations have required substantial investments in refineries, and a gallon of environmentally mandated gasoline costs more to produce than a gallon of regular gasoline. Since the Clean Air Act’s massive 1990 rewrite, the refining sector has had to spend as much as $4 billion each year on regulatory compliance at existing refineries.” On the rare occasion expansions do occur, the regulations make them more expensive.
Federal and state excise taxes, state sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other environmental fees can average around 27 cents per barrel.
The Maine Oil Dealers Association, a trade association and advocacy organization representing 450 oil dealers, oil companies and businesses that provide services or goods to oil companies, keeps an eye on legislative activity that could affect the oil industry in particular.
“I haven’t read anywhere where this [spill in the gulf] is a serious factor on pricing. This could change in the future,” Py said. “I don’t know if it’s a factor or not. The bigger factors are the market and regulation, long-term ramifications like whether there’s an offshore drilling ban.”
Py referred to another legislative development resulting from the spill.
“In response to the gulf oil spill, there’s a bill in the United States House that includes language that will more than quadruple a current tax on a barrel of oil,” he said. “The tax proceeds would go to the Oil Spill Liability Trust Fund administered by the U.S. Coast Guard.”
Py said House bill HR 4213 would raise the tax from 8 to 34 cents per barrel.
“If there’s any kind of backlash to the spill, it won’t be supply-oriented, it’ll be regulation-oriented,” said Wheeler. “They [politicians] could make it too onerous or cost-prohibitive to continue oil drilling and exploration.”
That’s not to say oil dealers aren’t sympathetic to the plights of anyone affected by the gulf spill.
“It’s too bad it happened, but it did, and it’s just like spilling a glass of milk on the kitchen table. You have to clean it up,” Robinson said.
Dealers such as Robinson are concerned, however, that overreaction to the spill could make things worse rather than better for dealers and consumers alike.
“Nobody thinks this, but oil companies actually like lower prices because it’s easier to sell our product when it’s cheaper, and we sell more of it,” said Wheeler.