What Affects Fuel Oils Pricing: The Basics of Supply and Demand

Libraries are filled with books about supply and demand, economics professors have practically turned it into an industry itself. The concept, when applied to fuel oil, is no different from other commodities, with the possible exception of politics. Fuel oil suppliers are the face of the industry for most customers, and they are often required to take the lead in explaining the affects of supply and demand on pricing.

It starts quite easy, if oil suppliers have an ample supply and there is little demand, the price goes down. Conversely, with high demand and very limited supply from oil fuel distributors, the price goes up. For fuel oil suppliers, the trick is figuring out what is going to affect these two variables.

Fuel Oil Supply

The supply of fuel oils is impacted by output capacity at every step along the chain. It begins with the amount of available reserves, the equipment to drill wells and the number of producing well heads. Next are the number and size of the tankers or pipelines to deliver crude oil to the refineries. More factors include, refinery capacity, storage, distribution capacity and delivery to the end user.

The competitive demand for refined products may mean that the highest bidder will get the most attention from the refineries, possibly to the detriment of other refined products. An example would be the demand of petrol versus heating oil. All of these links in the chain affect the level of supply at any given moment in time. As a market grows, the least proactive link in the chain will become the limiting factor and bottle neck of supply.

The unique position fuel oil holds in supporting the current standard of living in the world makes it an irresistible tool for leverage in political confrontations. More than one war has been fought over access to oil supplies.

Fuel Oil Demand

As population grows, demand grows and as cost effective energy alternatives grow, demand decreases. The biggest difficulty with this proposition has been making alternatives cost effective. Continued technological developments will further reduce the cost of alternatives and the diminishing supply of oil will increase the cost of retrieving it. Should the price go too high, due to demand, or the economy weaken, people will change their habits and reduce demand until supply can catch up. With fuel oils, it is imperative to have a reliable supply and that requires finding reputable oil fuel distributors anticipating the market and preparing accordingly.