Why is Heating Oil Valuable?
Heating oil is a low-viscosity refined fuel product derived from crude oil. Its principle use is in furnaces and boilers that heat residences and businesses.
As an alternative fuel source, heating oil is popular in areas where natural gas and propane are either too costly or unobtainable, such as the northeastern United States and parts of the United Kingdom.
Heating oil is second only to gasoline in terms of products derived from crude oil. Its crucial role as a source of heat in the winter months makes heating oil an important commodity in the global economy.
How is Heating Oil Made?
Heating oil production takes place in oil refineries. These industrial facilities separate crude oil, which consists of different hydrocarbons, into smaller component hydrocarbons known as fractions.
Refineries heat the crude oil at temperatures of several hundred degrees and put the boiling liquid into distillation columns called stills. The boiling process produces heating oil as well as other fractions such as kerosene, gasoline and butane. Each of these products is recovered at different temperature points in the boiling process. Distillates, including heating oil and diesel, are generally recovered at temperatures between 450 to 650 degrees Fahrenheit.
The industry measures oil refiners in terms of their capacity, which is the maximum amount of crude oil that can flow into distillation units.
Top 10 Countries Ranked by Refining Capacity
|Rank||Flag||Country||Capacity (Thousand Barrels per Day)|
Global production of distillate fuel oils has grown steadily over the years to keep pace with demand.
Which Countries Produce the Most Heating Oil?
Top 10 Heating Oil Producing Countries
|Rank||Flag||Country||Production (Thousand Barrels per Day)|
Where’s the Biggest Demand for Heating Oil?
The main global demand for heating oil is in the following countries and regions:
About 84% of the demand for heating oil in the United States comes from the Northeast region where consumers use it to heat homes and small businesses.
Top 5 States by Heating Oil Usage
The South accounts for the next largest demand component for heating oil at about 9%, while the Midwest and West absorb the remaining demand. About six million US households use heating oil as their primary space heating fuel.
Republic of Ireland and Northern Ireland
The relatively immature natural gas network creates high heating oil demand in this region.
About 1.5 million people use heating oil for home heating. Most demand comes from areas that lack access to main gas lines.
The majority of heating oil demand in Canada comes from the Yukon, NWT and Nunavut territories. These regions have sparse populations, largely undeveloped energy and transportation infrastructures and extremely cold temperatures. Heating oil provides most of the energy used in these regions.
What Drives the Price of Heating Oil?
Heating oil prices can fluctuate for many reasons, but the 6 most common ones include:
- Seasonal demand
- Price of crude oil
- Local market competition
- Regional transportation costs
- Alternative heating fuels
- Improvements in energy efficiency and insulation
Heating oil mostly serves as a space heating fuel for homes and businesses. Therefore, demand for it increases in the cold winter months and declines in warmer months.
US homeowners in the Northeast, for example, often consume around 1,000 gallons of heating oil in the winter months and very little over the remainder of the year.
Unexpected events such as massive winter storms can cause huge price spikes in heating oil. High demand periods often require the Northeast to import heating oil from Europe or the US Gulf Coast. Transporting heating oil is expensive and can take weeks, which could lead to price spikes.
Price of crude oil
Heating oil is derived from crude oil, so the price of crude oil has a major effect on the price of heating oil. Several factors dictate the global supply and demand for crude oil:
- The economy: Strong economic conditions increase demand for crude oil, while weak conditions depress demand.
- Strength of the US dollar: Crude prices generally move in an opposite direction to the dollar.
- Political events: Decisions by the Organization of the Petroleum Exporting Countries (OPEC) to raise or curtail production can impact oil prices.
- Weather conditions
- Competition: Competing energy sources such as solar or wind power can affect crude oil prices.
Local market competition
Heating oil is expensive and time-consuming to transport, so the number of businesses supplying it in local markets can have a big effect on prices.In rural areas with few suppliers, prices are generally higher than in suburban or urban areas. In the territories of Canada, for example, the population is sparse and there are limited options for obtaining heating oil. These regions have the highest heating costs in the country.
Regional transportation costs
The cost of delivering heating oil to a region can greatly affect its pricing. In rural areas with undeveloped transportation infrastructure, costs are often considerably higher than in more developed regions.
Alternative heating fuels
The cost and availability of alternative heating fuels affect heating oil prices. Natural gas, for example, competes with heating oil as a source of fuel and is generally cheaper. When natural gas becomes available in areas that use heating oil, prices for heating oil usually suffer.
Improvements in energy efficiency and insulation
Advances in technologies that keep buildings warmer could negatively impact heating oil demand. Insulated building materials and paints are examples of such technologies.