Propane and Heating Oil Downside Protection: Reasons For and Against

There are many options to consider when signing-up for a price protection program with your heating fuel provider. One of those options is called “downside protection”. Adding downside protection to your fixed price heating oil or propane purchase may be a good investment this year. When you add downside protection to your fixed price option, you pay no more than the fixed price, but if the market price drops, you pay the lower market price. Think back to June 2008, Wall Street was melting down, crude oil was in the stratosphere and everyone was fearful that home heating oil prices were headed to $6.00 per gallon. Some consumers purchased fixed price heating oil contracts that averaged over $4.50 per gallon in the summer of 2008 only to have the market price drop below $3.00 during the winter. Here are two viewpoints to consider:

Reasons to Sign Up for Downside Protection this Year:

We do not know were prices are headed and experts have published forecast that include prices higher, lower, and flat. With all the market uncertainty, prices could just as easily continue to climb as drop. If you want the benefit of ensuring your price will not go higher and benefiting if prices drop, then you can pay an extra fee for downside protection. This way you will know the most you will pay for propane or heating oil and will be able to set aside money ahead of time and not worry about rising prices. You pay for peace of mind, just like when you pay for insurance on a major purchase. Last, if prices drop, then you will have some money left over that you can use on other bills or for something fun.

Reasons Not to Sign Up for Downside Protection this Year:

Downside protection costs more money. It costs more for the heating provider to offer it, because they need to purchase the insurance from another company, it is a real cost and they pass on that cost to the customer. The price will need to fall by more than the cost of the downside protection for the consumer to benefit. If you are not worried about where prices are headed, then it is better to save the money and stay on a variable price plan for your propane or heating oil.

Whether or not you choose to downside protect your price protection plan will come down to what is most important to you. If you feel like you will lose out if prices drop, then downside protection might be something you will seriously consider. If the extra cost of downside protection is not worth the benefit of not feeling like you lost, then you might seriously consider not adding it to your fixed price plan. Either way, make sure you take the time to decide what is most important you.