Resources: Interviews
Shane Sweet , Executive Vice President/Director, Vermont Fuel Dealers Association (Fall 2005)
In many respects, Vermont’s fuel dealers—suppliers of home heating fuel, 24-hour service, and equipment such as boilers and furnaces—are on the frontline of peak oil. With rising home heating costs and winter approaching they frequently bear the brunt of the criticism from the roughly 60% of Vermont households that use oil heat.
VSJF recently spoke with Shane Sweet, Executive Vice President of the Vermont Fuel Dealers Association (VFDA) to discuss the implications of rising fuel costs for fuel dealers and Vermonters. Since 1963, the VFDA has represented the state’s heating oil, propane, gasoline, and diesel fuel dealers. As Sweet explains, with rising fuel costs “It’s a different business than we’ve been in for quite some time. One of the media outlets referred to it as a dark period and I don’t think that’s too far off the mark. There’s no upside to the situation that we’re in right now, as far as being a dealer is concerned. The profitability is down. The expenses are up. The market demands price protection programs and if you’re not offering them you’re going to shed customers. It isn’t any fun right now.”
VSJF: Where does Vermont’s liquid fuel supply come from?
SS: Heating oil comes from the terminals, “the racks”, in Springfield, Massachusetts, Boston, Portsmouth, Portland, Montreal, and Albany, New York. On propane it’s either out of Quebec or Selkirk, New York, just south of Albany. Gasoline basically comes out of the same terminals I mentioned first.
VSJF: Do the fuel dealers have any control over the cost of fuel?
SS: If you mean the cost to the consumer, yes, they do. But only to the extent that they can buy contracts with their suppliers to provide stability to the consumer price.
VSJF: Would you say that Vermont’s fuel dealers are aware of and prepared for peak oil?
SS: I sense that there’s a general awareness that there’s something on the horizon, for lack of a better phrase, but I think if you ask most fuel dealers about that they’d probably tell you that they are primarily trying to get their company and customers in one piece into the spring.
VSJF: How are fuel dealers defining the problem of what’s been happening over the past year?
SS: I’ll try to answer that by what they’re doing about it. They are trying to get their customers into programs so they can go out and buy corresponding contracts at the terminal level to protect the customers. Anecdotally, it’s more about the stability than it is about the price per gallon, typically. Right now they’re just trying to provide stability because wholesale prices are so high. Winter pricing has always provided a problem from a cash flow standpoint, but the problem now is that a year and a half ago the dealer may have been paying HALF for that gallon of heating oil at the terminals. The implications to their bottom line in terms of the cash that they need to run their business has just been astronomical. It’s right off the scale. They buy fuel from the terminals from suppliers like Exxon, and not to pick on Exxon, but a terminal like that doesn’t just raise your credit line because the fuel costs twice as much. You have to go in and prove to them that you’re worthy of having a credit line that’s now twice what it was a year and a half ago. And that’s a process in and of itself, working with your banks and your lenders. So multiply that times a relationship with a half dozen terminals. Then consider you have customers who were used to paying $1.50 a gallon for heating oil and now it’s has pushed $3 in some cases. What’s going to happen? Customers could pay the dealer much more slowly. In some cases the dealer might not get paid at all. Dealers used to go up and buy a 7,500 gallon truckload of heating oil for about $6,500. Today you’re talking about something that is, conservatively, twice that price for each truckload. Especially in the middle of winter, a dealer might be pulling two or three tractor-trailer loads a day into his/her facility. Do the math. It’s really staggering.
VSJF: Does Vermont compete against other states at the racks?
SS: You don’t compete with the States, other than from a fuel tax standpoint, perhaps but you literally get in line. It’s like going to the grocery store. We and everyone else in New England load at the same racks, so when things get really tight (extreme cold, snow, ice), you end up with lines at the terminals because you can only fill up so many trucks at once. During peak cold it is not uncommon to hear of tractor-trailer tankers waiting at the terminals for hours just to load fuel. This is a real problem for the dealers as they cannot have their drivers on the road as long as they want: The Feds regulate when and how much the drivers can be behind the wheel and waiting in line goes against that total hour limit.
VSJF: If fuel dealers aren’t explicitly talking about peak oil or declining supplies of a nonrenewable resource how are they explaining increases in price lately?
SS: I think how they’re explaining it is that “they”, the retailers, have no control over this at all. Particularly if you look at heating oil and gasoline, which is traded on the New York Mercantile Exchange. If you talked to a retailer about it, some would tell you stories where you’ve got 8 billion gallons of heating oil in the United States sold every year and on the New York Merc half of that trades nearly every day of the week. The number I heard a week ago was that less than 1% of those trades in any given day actually get delivered as liquid product. It’s all paper. Right now, unfortunately, it’s just a commodity that has a lot of volatility and the volatility equals profitability if you’re on the right side of the equation (and the dealers are not). Unfortunately, right now, there are a lot of people trading heating oil and gasoline that aren’t in the business.
VSJF: How have the recent hurricanes impacted Vermont’s fuel dealers?
SS: We’ve taken a lot of heat from lawmakers and the media, state officials in some cases, and in some cases it’s people jumping to conclusions. The dealers understand the frustration: they share it. I’ve taken hundreds of calls just since Katrina, but once I lay out the issues most seem to recognize that the local Vermont fuel seller sees little upside to high retail prices.
VSJF: Isn’t this a problem that’s going to get worse over time?
SS: If retail pricing has to stay where it is, people are going to take a look at their consumption, and they’re going to take a look at conservation measures. They’re going to buy cars that get better gas mileage. Maybe they’re going to replace that boiler in their basement that’s 30 years old and 50% efficient with something that’s 90% efficient. There’s some good things there. The downside is that retailers, in general, I think it’s fair to say, are going to see further consolidation of the retail fuel industry. Darwin was right: the fittest survive, but he was not in the fuel business, either. Whether or not you’re fit might not have anything to do with whether or not you’re smarter than the next guy. Maybe you took a risk and it paid off. Maybe you did nothing and it pays off. The problem now is that the numbers are so big at the retail level that if you make a mistake it could be the difference between being here in the spring and not being here in the spring.
VSJF: Is that why you’re nervous about the future of the industry after this winter?
SS: I worry. As we’ve already seen in southern New England in the past couple of winters, where companies that have made commitments in Connecticut and Massachusetts and then couldn’t hold to them for whatever reason. They wake up one day and they realize there’s no cash left and they can’t honor the commitments. What do you do? You dial 1-800-Competitor, you sell the business and you disappear. And in the end it’s one less player in the market.
VSJF: How are fuel dealers coping with or preparing for or adapting to the cost of higher oil prices?
SS: Obviously they’re talking to their banks. They’re trying to get paid on time. Most of the companies have net 10-day or net 30-day terms and, anecdotally, I’ve been hearing that dealers are having to hold their customers right to the letter of the payment terms because they can’t afford not to. They can’t afford to book those receivables as in the past. And depending on your financial situation, if you don’t have the cash you’ve got to have lines of credit. Consider you have to go to the terminals and either pay the terminal in full for that load of fuel or within 24 to 48 hours and certainly within 10 days, under normal market conditions when fuel was near $1.00 a gallon. At that time you may have been holding that sale on the books for your customer for thirty days. All of the sudden the cash requirement is twice or 2 ½ times what it was a year and a half ago. Look at the strain it puts on dealers. Look at the amount of cash you need to run that business. Talk about strain.
VSJF: I know biodiesel is one consideration but are fuel dealers thinking about alternatives or diversifying what they offer to customers?
SS: The issue with biodiesel, generally, for most retailers, is that the source of supply and the infrastructure, primarily the transportation wrinkles, are not yet mature. That is the issue. Most of the dealers that I talk to about biodiesel or bioheat like the idea of it because it’s another tool in their toolbox. At least right now, in some cases, the ability to offer that product differentiates them from their competitors, and that’s desirable. At some level, depending on who the company owner is, they like the idea of the renewable side of it. The practical side of it is that they’re already handling liquids now. Whether it’s propane, heating, diesel, or gasoline, it’s basically the same animal. I don’t see it going away but it may look much differently in a couple years than some may have expected.
VSJF: Are there any other fuels they are considering beyond biodiesel?
SS: You probably hear about ethanol but the problem is that it’s a very volatile product, very high solvency. You just don’t see a great deal ethanol blends in this neck of the woods right now. I suppose if you called the right people you could get a trailer load of ethanol brought to Montpelier but then you need a segregated facility to hold it. And, of course, it’s volatile, so you have to know what you’re doing to handle it. Biodiesel is kind of the product that people are talking about right now. I think biodiesel is the alternative for diesel and heating use right now. I think most people would tell you that B100 is not viable for use in this part of the country year-round, but a blend with traditional product seems more likely to settle out in the markets. I think that most retailers, even if they’re not intimately familiar with biodiesel yet, will tell you that they’re interested in it in terms of complimenting their current product stream with a blend. Dealers can’t gamble with their product integrity at all. One has to be sure.
VSJF: How many Vermont fuel dealers are using or planning to use biodiesel?
SS: I can think of a dozen off the top of my head. I can think of a dozen who told me they’re going to be selling it in the spring. And I can think of half a dozen who told me this spring that they wanted to sell it this year if they could hammer out the supply and delivery logistics.
VSJF: With regards to rising fuel costs what can Vermonters do?
SS: First of all, I think they need to establish a relationship with a fuel dealer now. Don’t wait. Nobody, including the fuel dealer, wants to roll out a driver and a $110,000 oil truck at four in the morning at 30 below zero. I think they’re going to be less inclined to go if it’s somebody they don’t know, even if they charge a delivery fee to roll a truck. That’s the most expensive 100 gallons of fuel that you’ll ever deliver and in my opinion there’s no way that dealer can get made whole for doing it. Customers should establish a relationship with fuel dealers now. Establish your payment method, your delivery method, and do it now. Don’t wait until snow flies.
VSJF: What can the state do?
SS: I think the state and the Feds, the Feds certainly, can certainly put money into LIHEAP [Low Income Home Energy Assistance Program], the fuel assistance program, to at least try to get us back to where our buying power per gallon is where it was a year ago. The state can certainly help us that way. We had a meeting this month with some people from AARP and the Consumer Law Federation about how to leverage deliveries using some sort of state guarantee of repayment. We are reviewing it now.
VSJF: How are you thinking about the future? What’s this industry going to look like five or ten years down the road?
SS: I think you are going to continue to see consolidation. You’re going to continue to see the number of individual companies selling fuels drop but new technologies and fuels are also part of this future.
Photo credit: Wayne Fawbush
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