This article will provide you with 7 effective ways to take back control of fuel oil costs in 2021.
Oil prices were wild in 2020. We understand that fuel oil buyers were presented with volatile and seemingly uncontrollable fuel oil costs. Don’t look back in anger, this article will provide you with 7 effective ways to take back control of fuel costs in 2021.
Please don’t put your life in the hands… of the oil market – 7 effective ways to take back control of fuel costs in 2021.
1# Consider the total cost (not just pence per litre unit costs!)
When considering fuel oil options, buyers often focus on unit cost (pence per litre) but you should consider the total cost.
For a given energy output, you will likely consume more low-quality (and lower cost) fuel, than if you were burning a higher quality fuel (with a higher unit cost).
Why Total Costs?
A lower quality fuel (with a low unit cost) often has a lower energy output. Ask your supplier to provide the calorific value of your fuel – this is how much energy (in the form of heat) the fuel generates during combustion.
Lower quality fuels (with lower unit costs) often contain cheap processed fuel oil (PFO) components. PFO causes fouling of heat transfer surfaces (eg tubes and tubeplates), resulting in increased fuel consumption.
These apparently cheaper fuels are also the leading causes of costly downtime, unforeseen equipment maintenance and replacement and waste losses. Learn more about these issues below:
Low cost fuels usually contain cheaper Bio and processed fuel oil components. These components cause the following issues, leading to costly downtime:
- Filter blockages
- Fuel pump damage
- Fouling of heat transfer surfaces
- Seal damage
- combustion residue (ash) build-up
ii) Equipment maintenance and replacement
In turn, these low quality fuels cause costly equipment maintenance and replacement:
- filter reviews and replacement to prevent blockages
- fuel pump replacement due to unforeseen damage
- heat transfer surfaces maintenance due to fouling – e.g tubes and tubeplates
- replacement of seals
- combustion residue (ash) maintenance.
iii) Waste losses
Waste loss is usually caused by fuels with a low unit cost – containing FAME and processed fuel oils.
- Fuel oils containing Bio (FAME) are susceptible to microbial growth and spoilage.
- Fuel oils containing processed fuel oil (PFO) often contain contaminants causing spoilage.
The underlying causes of these 3 common issues are fuels containing cheaper Bio (FAME) and/or processed fuel oils (PFO) components.
It is difficult to tell whether fuel oils pose these risks from the specification. A supplier may supply fuel oil that does not meet the specification provided. Unless you test it, you will not know.
Good indicators as to whether they do contain these components are; unit cost and colour.
If the unit cost is very low then it is likely to be ‘too good to be true’ and contain these poor quality components.
If it is dark in colour then it is highly likely it will contain processed fuel oil (PFO). Prema Heating Oil only contains traces of Bio (FAME) and no processed fuel oil (PFO); it looks more like a nice pint of Pale Ale than a Stout!
It may be higher in unit cost terms than some alternatives but will provide the lowest total costs.
2# Choose the most suitable fuel oil for your specific application
Choose a fuel oil that is most suitable for your specific application – not a relatively expensive ‘one size fits all’ fuel product.
Refiners and large importers supply ‘one size fits all’ fuels in large volumes. For example, they will supply gas oil that meets both the road Diesel (EN590) and regular gas oil (Class A2) specifications.
For heating applications, you do not need to pay for all the ‘bells and whistles’ of regular gas oil, designed and manufactured for combustion in Diesel engines.
Specialist heating oils will provide you with substantial cost savings without compromise in performance in a heating application – whether this be for small space heaters or large dryers.
Prema Heating Oil, for example, is a gas oil for use in heating applications; meeting the British Standard for heating oil, BS2869 Class D. It provides much lower total costs than the ‘one size fits all product’ without any compromise in performance.
We will present you with the most appropriate fuel oil for your specific application.
3# Ask your supplier what pricing index the fuel oil is priced against
Platts is the leading provider of energy and commodities information. Platts pricing indexes are the most commonly used oil pricing indexes.
Most ‘mineral’ and ‘virgin’ fuel oils are costed and priced against Platts oil pricing indexes.
Mineral oil is a term used in the oil industry to describe a product from refined crude oil differentiating it from vegetable and various other oil products.
Virgin oil is a term used in the oil industry to describe a product straight from the crude oil distillation column differentiating it from processed fuel oils (PFOs). PFOs are processed waste oils, usually processed waste lube oils.
Prema Heating Oil’s price, for example, is linked to the GO 0.1% Platts pricing index.
However, many fuel oils, especially those containing Bio (FAME) and processed fuel oil (PFO), are not linked to these relatively stable pricing indexes.
So, these will present you with a higher degree of cost volatility.
Ask your supplier what pricing index their fuel oil is linked to. If it is not linked to a specific pricing index or they are not prepared to tell you; beware of unpredictable costs!
If it is linked to a pricing index, you could ask for a ‘floating price’ (see below) ensuring they pass on any falls in the wholesale price. They may also be able to offer you fixed-rate pricing (see below).
Our promise is to provide you with transparent pricing at all times.
4# Consider floating index-linked pricing
Floating prices are prices linked to a pricing index. For example, Prema Heating Oil is linked to the Platts GO 0.1% pricing index. So, we could offer you a ‘floating’ price of, say, ‘Platts GO 0.1% + X pence per litre’.
This provides you with transparency, more control and ensures you enjoy falls in the pricing indexes (ie the wholesale prices).
Get in touch to learn more about floating index-linked pricing.
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5# Ensure suppliers pass on falls in wholesale prices to you (not pocket it themselves!)
You may hear it in the news from time-to-time that falls in the wholesale prices (ie the Platts prices) are not being passed on to customers at the pump.
This also happens across the oil market – from heating oil to marine fuel oils. Sellers keep their prices relatively high as their costs drop with the wholesale prices – pocketing the cash themselves!
Ask yourself; did your supplier pass on the massive crash in the wholesale prices in April 2020…?
By asking your supplier to reference the relevant pricing index, buying basis floating prices or buying at a fixed rate; you will prevent this.
6# Consider fixed rate pricing
Consider buying fuel oil at a fixed rate price (ie a fixed pence per litre price).
This is a good option for some organisations but not others.
This depends on the following:
(i) Can your organisation absolutely commit to using a specific amount over a specific period of time?
(ii) Would your organisation like a clear fixed rate price for controlled costs and budgeting? Or would you prefer to ride the ups and downs of the oil price…?
Beware – if you cannot commit to using a specific amount over a specific period of time then fixed-rate pricing is not for you. If you commit to buying volumes of oil that you cannot take then you will have to pay penalties; the devil may be in the detail in the fixed-rate offers you receive and not made apparent by the sales representative. Many salespeople will push you to fix as much volume as possible to increase their sales commission.
Beware – a fixed rate price is not a way to buy oil cheap! The price of oil may go up or down after you agree to buy at a fixed rate. Despite what any salesperson may tell you – no one knows if the oil price will go up or down.
Fixed rate pricing is to be used as an effective method to control costs and budgets – providing a controlled cost to an organisation.
7# Benchmark prices effectively
Oil wholesale prices continuously change from Monday to Friday.
We understand some buyers will compare a price received from a supplier on a Monday to a price received from another supplier on a Wednesday.
In turn, your supplier’s costs and prices are continuously changing day-to-day.
When benchmarking prices, it is important to ask to receive a weekly or daily price over a sufficient period of time (approximately 3 months) to enable you to understand which supplier will provide the lowest cost to your organisation in real terms.