Heating Oil Prediction

We finally got a nice day in central Virginia. Sunny, and the temperature reached 72°F.

I mowed the grass for the first time this year. Exactly a week ago it was snowing. In fact, if you scroll down this blog to the post titled Spring Snow you can see a photo I took from a front window. You can also see that the date on that post is March 25. Today is April 1. Today is Monday, and the weather people are saying that by Friday the high temperature may not get out of the 40s. The temperature has been up and down, which is not unusual for central Virginia in February. But this is early April. The weather should be settling down.

For Richmond, the usual March average high is 60°F and the average low is 37°F. But this year the March high averaged 53°F and the low averaged 33°F. March was cold. My boiler burned a lot of heating oil. When the boiler is running it burns a gallon of oil per hour. The last time I bought heating oil, the price was $3.90 per gallon. When the boiler runs I’m burning money – like a lot of people. Ten years ago, heating oil cost me about $1.85 (in 2012 dollars), which means the price increased 110% between then and now. So, naturally, I wondered what the price will be in another ten years. If the price of a gallon increases by another 110% over the next ten years, the price will be $8.19 per gallon (in 2012 dollars).

That’s an average annual increase of 7.75% due only to supply and demand – or manipulation by OPEC, or by oil companies, or by futures traders, or by whatever your favorite conspiracy group happens to be. But suppose the price of oil is not driven higher or lower but stays constant at today’s price, except for inflation. And suppose we have the same amount of inflation over the next ten years as we had over the last ten years. Then in ten years, heating oil will cost $4.94 per gallon. That’s a 27% increase in price due only to inflation (2.4% annually).

So if heating oil increases in price over the next ten years by the same inflation-adjusted percentage as it did over the last ten years, and if inflation stays the same, then heating oil will cost just over $10 a gallon by 2022. Of course, the future isn’t predictable and the price of $10 per gallon is just a middle-of-the-road, “if-things-keep-going-as-they’ve-been-going” prediction.

Just saying: heads up.