The Rise & Fall of Heating Oil Costs:

Exploring the Factors that Shape Market Prices

By Hannah Walters

The weather may be warm right now but as we begin to move towards the colder months, many of us are feeling anxious about the looming costs of keeping our homes sufficiently warm. Energy prices always seem to spike at times when we desperately need to keep warm. Adding to our frustration is the news that energy giants like BP have reported unprecedented profits, with over £4 billion earned in just the first quarter of 2023. It hardly seems fair that they can reap such considerable gains while we are left to grapple with extortionate energy bills.

Domestic heating oil prices

As most of us know, domestic heating oil prices have always been subject to fluctuations. Nevertheless, over recent years, instability has increased making it harder to predict cost trends. The latest twist to this tale came in early 2020 when the Covid-19 pandemic caused a sharp decline in prices. The pandemic forced governments around the world to impose restrictions on movement and business activity, which decreased the demand for oil, resulting in excess crude oil for producers. This led to the task of finding more storage space. As a result of an oversupplied market, oil prices were pushed down, and therefore domestic heating oil also fell.

Since then, oil prices have taken an unprecedented dramatic turn, and we’re experiencing some of the highest prices ever seen, leading to the question: what factors influence the cost of this precious resource to keep our homes warm and comfy? The answer is multifaceted and directly related to our perception of the future. Future expectations, supply, and demand are the core factors influencing heating oil prices.

Weather patterns

The price of heating oil is heavily impacted by weather patterns. A spike in demand during colder seasons leads to an expected increase in cost. Unfortunately, due to the current unpredictable energy market, even during the warmer months when demand traditionally falls, prices still fluctuate erratically. The cost of heating our homes is influenced by various factors, causing homeowners and renters to feel powerless in the face of an unstable market.

Political instability

In recent years, the impact of political instability on global oil prices has become increasingly noticeable. The Russian invasion of Ukraine in February 2022 is a prime example of this, as crude oil prices shot up due to concerns over supply. This was predominantly due to Russia being one of the largest exporters of oil and gas in the world, relying heavily on Ukrainian transit routes for its gas supplies.

Thankfully, the UK's limited reliance on Russian imports can be attributed to our strong relationships with other North Sea oil producers, particularly Norway. This means securing a consistent supply of oil and gas from closer and more stable regions is much easier for us than it was for our European counterparts.

Global influences and exchange rates

It’s concerning how much currency exchange rates affect the cost of heating oil prices in the UK. It’s well-known that countries that trade crude oil, both buyers and producers, use the US dollar as their primary currency. Which results in a weak dollar leading to a surge and vice versa when it strengthens. Illustration of oil drums and an oil well

As the Organisation of Petroleum Exporting Countries (OPEC) dominates a significant portion of the world's oil reserves, its decisions heavily affect the global oil market's supply and demand. A total of 13 countries comprise OPEC, including major oil-producing nations such as Saudi Arabia, Iran, and Iraq. With such a considerable amount of influence on oil production levels, OPEC holds an immense concentration of power capable of manipulating oil prices.

Supply and demand - Supply and demand play a critical role in determining heating oil costs, as fluctuations in either can lead to changes in prices. When the supply of oil is abundant and exceeds the demand, prices tend to decrease, making oil heating affordable for consumers. When demand outpaces supply, such as during periods of strong economic growth or harsh winters, oil prices can rise, leading to higher heating costs for households. Geopolitical events, production disruptions, and market speculations can also influence the balance between supply and demand, causing further fluctuations in costs.

Natural Disasters

Natural disasters are known to have a cascading effect, significantly impacting the heating oil industry. Production, transportation, and supply of this essential commodity are affected by disastrous events like hurricanes, floods, and earthquakes. Oil-producing regions often find themselves defenceless against these catastrophes, as even minor damages to infrastructure can halt production, leading to a sudden decrease in available oil. As a result, heating oil prices can spike due to the imbalance between supply and demand, exerting considerable strain on the budgets of consumers.

A clear instance of heating oil prices surging was witnessed in 2005 when Hurricane Katrina hit the Gulf Coast of the United States. The prices skyrocketed to over $70 per barrel in the aftermath of the calamity. The same scenario can be witnessed during any natural disaster that can threaten the heating oil industry, and this cyclical shock contributes to the precariousness of the energy market.

However, the effects of these disruptions are not exclusive to the oil industry alone, local communities and vulnerable consumers are also significantly impacted. Escalating heating oil prices imply that low-income families, elderly people, and other economically marginalized sections of society face heightened economic hardship during natural disasters.

The effect heating oil fluctuations have on people's lives

Lady sitting in kitchen looking at bills and looking worriedIn today's unpredictable world, these sudden fluctuations can force individuals to make excruciating choices between their basic needs and the comfort of being warm inside their homes. As a result of this struggle, many households are experiencing what is known as fuel poverty, where they are unable to adequately heat their homes and pay for other critical expenses.

This issue is not only a financial one but also presents a severe health risk, especially during harsh winter months. Families are grappling to balance their budgets amidst rising costs, frequently confronted with a heart-wrenching decision between staying warm and having food to eat. These worries can trigger severe anxiety and stress for both homeowners and renters, placing an enormous burden on their mental health and well-being.

What does the future look like for heating oil prices in the UK?

Heating oil prices in the UK remain uncertain as several factors come into play. The future relies on how supply and demand dynamics, geopolitical events, and the transition to renewable energy sources unfold. The UK is actively striving to meet its climate goals, aiming to reduce greenhouse gas emissions. Therefore, we currently see an increasing push towards adopting alternative and sustainable solutions, which could impact the demand for oil-based heating.

Global market fluctuations caused by political unrest, production disruptions, or economic developments will continue to affect the cost of heating oil. While it’s challenging to predict exact price trends, it’s crucial for policymakers, industry experts, and consumers to stay informed and adapt to the evolving energy landscape in order to maintain a secure and affordable system for all.

Written by Hannah Walters - A freelance writer with a true passion for energy and money-saving topics with a commitment to staying on top of new and emerging trends. 

24th August 2023