What do you do when the old rules no longer apply in a market you’ve successfully operated in for 50 years or more? Those are the conditions which Mirabito Fuel Group, Reese-Marshall and Blueox Corporation faced in 2008 when the price of oil went through the roof.
“Volatile with a capital ‘V,’” is how Mirabito Fuel Group President Joe Mirabito describes last year’s energy market.
“2008 was probably the most challenging year our organization ever faced,” said the man whose family has been in the region’s energy business since 1927.
The price of oil had always been based on the basic laws of supply and demand, Mirabito explained. But that changed rapidly when speculators began buying and selling oil futures on the Commodity Futures Exchange.
Within 20 months, the price of a barrel of oil spiked 57 percent, and then dropped 61 percent, he said. And not because of the actual supply of or demand for the commodity itself.
“2008 went against economics 101,” Mirabito said. “There was no transparency in the energy market.” The market’s new-found volatility forced the company president to make tough decisions.
“Our biggest concern was to keep our customers supplied,” he explained. Because high prices in the energy market before had always meant a scarcity of supply, Mirabito made the decision to purchase when oil futures were near their highest.
“We have to balance our supply commitments to our customers with our cost,” he said. While in hindsight this may have meant higher prices for Mirabito customers, he said he is still confident that the choices he made were for the best.
“At the time, we did the right thing,” Mirabito claimed.
The company did what they could to mitigate the effect on its customer base.
“We had to absorb a good share of that,” he said. But they could only absorb so much; the rest fell to consumers.
“We worked really hard to prepare for this winter,” Mirabito said, speaking of the home heating oil portion of the business. The company encouraged its customers to participate in its cap program, which “is supposed to take that volatility out of” the equation, Mirabito explained. According to the CEO, customers who participate in the program are paying only slightly more now than they were at the same time last year.
“We feel good about that,” he said. “You’re always trying to do what is best for your customers.”
The company took a great deal of criticism over gasoline prices at its pumps across the region, which some drivers felt were arbitrarily higher in some areas than others. Mirabito attributed these price differences to a variety of factors including taxes, credit card processing costs and competition.
“It all has to factor into your cost structure,” he explained.
One of the most significant are taxes which make it difficult to compare prices on a county by county basis, let alone state by state.
“Taxes have a significant impact on the energy industry,” he said, one which customers don’t always realize.
Then there are credit card processing fees. In markets where a larger percentage of customers use credit cards, it was sometimes necessary to charge a higher per gallon price for gasoline, he explained, to cover the percentage charged by the card companies for each transaction.
“We’re distributors, and we have to make it on efficiencies,” said Mirabito.
In certain markets, he continued, competitors were selling cheaper ethanol blends which gave them the price advantage. Unfortunately, for drivers, these blends yield lower miles per gallon. Mirabito also faced price wars in some markets, something he said “makes absolutely no economic sense.”
Political figures were opening critical of what some said was “zone pricing,” but according to Mirabito, they may be missing the larger picture.
“Elected officials are always calling foul,” he said. “But they really haven’t done anything about the speculation.”
Diesel fuel has been another concern, but Mirabito cautioned that it is impossible to compare the very low sulfur product on the market today with the diesel of yesterday.
Under the name Mirabito Energy Products, the company has been investing in biodiesel for the last five years. “We’re into the alternative products. We invest in that every day,” Mirabito said.
The company purchases its biodiesel from a Pennsylvania manufacturer and blends it at a facility in Sydney. They currently sell two blends, a B5 (5 percent biodiesel, 95 percent petrodiesel) and B20 (20 percent biodiesel, 80 percent petrodiesel), by delivery as well as from one retail location in Oneonta. Mirabito said they plan to expand that segment of their business over the next few years.
Where will the energy market go in 2009?
“There’s a supply overhang out there,” Mirabito said, “[The price of oil] was too high and now it’s too low.” This shift, he explained, has caused the market to soften and a decrease in production which will no doubt drive the price up once again. He said he doesn’t expect (and doesn’t want to see) the same type of volatility the industry had to contend with in 2008.
Mirabito’s predictions are about on par with those of Doug Cottle, business manager for Reese-Marshall, who agreed that the current price for oil is now “artificially low.”
“I expect that they will go up, but not spike like they did last year,” Cottle said. His company, which supplies both home heating oil and propane, faced similar challenges with market fluctuations in 2008. The year, he said, “started out bad and got worse.”
“Fortunately everything turned around,” Cottle said. “As soon as prices started to come down, we dropped the delivery price.”
Of particular concern for the company, which has a long history in Chenango County, was whether or not their customers would be able to afford to pay their fuel bills.
“We were really concerned about accounts receivable,” he said.
People on the company’s budget plan, which comprise 70 percent of their home heating customers, saw their budget payments increase by 50 to 60 percent this past summer, as the price of oil hit an all time high. Now Reese-Marshall has lowered their ceiling price and those payments have gone down.
The other 30 percent of their home heating customers are a combination of cash on delivery, 30-day terms, will call and some automatic, Cottle reported.
“You always have a certain percent every year that will shop for the lowest price,” he explained. “There was probably more of it this year.”
Those high summer prices caused some customers to shift away from fuel oil in part or entirely as they searched for cheaper ways to heat their homes. Some turned to natural gas and coal, while others switched to wood or pellets.
“We’ve seen about a 15 to 20 percent attrition in our business because of that,” he said, the largest customer loss in the company’s history. Some of those customers he believes they will be able to lure back eventually, but others, particularly those who have converted to natural gas or coal, may be gone for good.
But it’s not all bad news for the local fuel distributor. About 25 percent of Reese-Marshall’s customers use propane for heating purposes, Cottle said, a segment of their business which continues to grow.
“We’ve had an increase in our customer base,” he explained, which he partly attributes to the increased popularity of gas fireplaces and space heaters. More and more mobile homes, modular homes and new construction are making use of propane for heating as well, he added.
Blueox Corporation, headquartered in Oxford, has taken a different approach to keeping their customers using home heating oil.
“We’re a pretty progressive fuel company,” said company representative Jeff Emerson. According to Emerson, Blueox decided their “best chance to retain customers and keep [their] products affordable” was a long term plan to advocate conservation.
“The Home Performance with Energy Star program was a natural fit,” he explained, referring to the New York State Energy Research and Development Agency (NYSERDA) program which provides incentives for homeowners to increase the energy efficiency of their homes.
Blueox is certified by the Building Performance Institute to conduct Comprehensive Home Assessments through the program.
“We’re the only company in our industry that is certified,” Emerson said. “That makes us quite unique.”
The assessment highlights different ways homeowners can reduce the amount of energy they use, as well as calculating potential cost savings for each improvement option.
It’s not about just adding extra insulation, he cautioned. Health and safety factors also come into play in the audit, as even small changes can affect moisture levels and even fumes in a home.
“It’s a very comprehensive audit,” Emerson said.
Blueox’s efforts to encourage energy conservation don’t stop there. This past summer they hosted an Energy Fair at their Oxford headquarters. The company has also added solar domestic hot water heaters as a renewable energy option for customers.
“We do anticipate continuing with that effort,” Emerson said.
Emerson believes their progressive approach to meeting their customers energy needs is what sets them apart from their competitors and is reflected in the number of new customers they’ve gained in the last year.
“The volatility and uncertainty [in the energy market] is probably not going to go away for some time,” Emerson said. “We need to evolve and do better to serve [our customers] interests over the next 50 years.”