Price Relationship - Crude Oil Versus Home Heating Oil

In July this year when the price of crude oil hit $148 per barrel, I filled the oil tank with kerosene 28 at 57p ($0.98) per litre.

On Friday, when crude dropped to $78 per barrel during the current downward price trend, I checked local distributors for the price of kerosene 28 and found rates varying from 49p to 57p per litre.

In October 2007, when crude traded at $84 per barrel, kerosene 28 was generally available at 35p per litre.

I called the distributor asking for 49p per litre on Friday and asked why, relative to the October 2007 price, kerosene 28 was so expensive given the drop in the price of crude. He quoted two additional factors affecting the current situation. The first was the reduction in output by the Middle East. The second was the strength of the dollar against the pound.

Whereas the latter reason would account for a marginal increase, I can’t comment on the first reason. Was the distributor correct in his explanation to me or, as I fear, is the oil industry taking a massive financial advantage of customers for home heating oil by keeping the price artificially high and feeding them bullshit if they query the cost?

Many thanks.

A point of clarification for Americans. I think “kerosene 28” might be confusing on this side of the pond. I think you mean the same fraction we refer to as simply “home heating oil”, similar to diesel or number 2 fuel oil. Over here, “kerosene” is the stuff commonly used in space heaters, similar to jet fuel. I believe you call it “paraffin” or “paraffin oil”, which confuses us no end, since that means “paraffin wax” to us.

I think that one reason is that places charge what they have to when prices rise, but charge what they can when prices drop. They need to sell it at their purchase price plus an acceptable profit margin. Once they realize that purchasers are willing to buy it at that price, many are reluctant to drop the price because they can increase profits, perhaps justifying the measure because they lost some money when the price increased quickly.

Another possible reason is available supply. There is some limited flexibility in what oil refineries can produce. If local producers are making less kerosene 28 and more of some other petroleum products, that keeps upward pressure on the price of the kerosene 28.