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Supply, Demand and Price of Residential Heating Oil

Essay by   •  April 19, 2011  •  Essay  •  889 Words (4 Pages)  •  1,756 Views

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Supply, Demand and Price of Residential Heating Oil

As the year goes on and heads into the colder parts of the winter season one concern of many consumers using heating oil to heat their homes this winter is whether there is adequate supply of the low inventories and what will it cost them. Typically heating oil prices fluctuate month to month with a norm of higher prices in the winter due to a higher demand of the supply. Within this paper to be discussed will be the demand, supply and cause of price fluctuation of residential heating oil.

The law of demand states that the price of a particular product is related to the amount of demand for the product. As the demand grows the price may seem to drop while if the demand decreases the price can increase. Changes in demand can be caused by a number of contributing factors. As our book states the events that can bring change to demand include, society's income where a rise in income increases the demand for the goods, the price of goods in relation to the prices of related goods, tastes as a persons taste changes the demand can change without affecting the price, expectations with spending based upon future incomes or loss, taxes levied as an increased cost it thereby reduces demand while subsidies to consumers will show almost an opposite affect. (Colander, 2004)

The law of supply can be a little more involved than the demand process and takes into account the factors of production and resources that are needed to produce the product. While the book explains events that bring change to demand it also explains the events that can change the supply such as, price of input for the firm profit, technology changes that can cause a change in the production process thereby reducing cost and increasing supply, expectations of whether the price of a product will rise in the future, taxes as taxes increase the profits will decline and therefore reduce the supply and subsidies can show the opposite and reduce the cost of production thereby increasing the supply. (Colander, 2004)

Many Americans primarily in the Northeast area of the United States depend on residential heating oil produced from domestic refineries or an import from a foreign country as the main source of heating their homes. This type of heating oil has a high seasonal demand thus a higher need and expectation from consumers in the colder months of October to March. If the supply is not adequate and production is not able to meet the demands of the consumers there could be possible increase of prices. Refiners are aware the winter months will produce the increased demand but also have to keep in mind they are limited to what they can make. Therefore, the refiners will produce a storage and inventory in the summer months where the demand for the oil is low to assist in the winter months when the production cannot keep up with the demand.

Just as the demand, the supply can be affected in many ways for instance the oil refiners can have high demands of producing and fulfilling different areas of service such as the high demands of gasoline therefore causing the season of oil heating to start with low inventories. The low inventory supply thus can cause increased prices due to the demand. The supply can be affected in many ways for instance the price of the crude

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