Should I Switch From Oil To Gas For My Heating Needs?

While no one can predict fuel prices in the long term, we can look at current pricing and give an educated guess at what prices will be in the future. As with all predictions, the further the time line the less accurate this guess will be. Guessing on pricing in 2014 is very possible, 2020 a little less so and guessing prices in 2030 will need more then good luck. What we can do is look at the reason to ask the question, and then look at the various different answers. An example, if your home has a heating system that uses hot water (a boiler), your units life expectancy can be as much as 50 years. If we are heating with any kind of furnace (hot air), we can expect a life half as long, making the decision (shorter amortization) on fuels more important.

If you’re thinking of switching from oil to gas and need to replace your current oil burner or oil furnace you can expect to pay between $4,500 and $7,000. Hot air systems (furnaces) representing the lower end and hot water systems (boilers) represent the higher end of this price range. In addition, on top of these prices expect to pay an additional $1,000-$2,000 if you choose any of the highest efficiency (92 percent to 95 percent efficiency) units.

“They (the public) can expect to save in the range of 15 percent to 34 percent. That’s because natural gas is a lot cheaper than oil right now,” says National Grid’s Dennis McCaffery. To calculate the savings you can figure saving between $150-$340 per $1000 of current heating costs. Here's the rub, if you are switching to natural gas it’s clear the switch is worth it but if you are in a rural area where only propane is available you might want to think differently. Currently propane averages 30%-35% more costly than natural gas and with that extra cost, while burning a cleaner burning fuel, it’s price is similar to that of oil.

To add a few more complexities, gas is now being touted as the next big fuel. It is assumed that New York will soon join Pennsylvania and other states as a large producer of hydro-fracked gas. Whether this comes to pass is still in question (and will become a topic of a future post), but there is no question that domestic gas production will increase significantly in the next decade. With natural gas prices at historic lows now one would think that this means that if even more gas comes to market the prices will continue to be low. That’s where the problem lies. If you listen to any of the biggest domestic gas pipeline companies you will discover that their goals and long term plans have nothing to do with domestic sales. In fact most acknowledge that all this exploration and drilling is actually for foreign sales, mostly in Asia.

In China, they are preparing to supplement their coal production with imported gas. Because gas is so much cleaner, China has little choice but to pay a premium for this alternative fuel. The bottom line is that it’s hard to see gas prices doing anything else but rising. The November 12th headline of Money Morning was “ 2013 Natural Gas Price Forecast: Higher Prices Mean an End to the Bear Market.” These are the guys betting on the future prices and they feel very confident in the short term rise in natural gas prices. “In fact, natural gas prices have already rallied to $3.40 per mmbtu, up 79% in just six months, but regardless the day-to-day movements, the long-term outlook for natural gas prices remains bullish, particularly in light of a steady increase in demand,” says Don Miller, Contributing Writer to Money Morning. I’m sure that you could find energy experts who say the opposite, but the real issue is whether these fuel companies make the needed connections to their Asian users. My bet is that they will.

In the relatively small area covered by National Grid (an Albany New York utility) the current conversion rate is 14,000 conversions a year. One can assume that these conversions are taking place all over the country and will continue as long as the gas prices remain low. Interestingly enough, with each conversion demand is increased and supply reduced. Additionally, many, including spokesmen from Southern Company believe "Company officials say they have to think 30 years ahead. There’s a need to develop more natural gas infrastructure in terms of new pipelines and increased storage capacity. We need to determine the pace and degree of natural gas exports. They say once the U.S. begins exporting natural gas, prices will rise domestically."

Lastly I remind my readers that we have seen a similar pricing before. Our current prices are equal to 1976 prices. Do you really believe it is possible for these prices to stay this low for very long? I don’t. If we compare our domestic prices to those of Europe and Japan you can see from the chart below that there is only one direction for gas future pricing.