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Answering the Payback Question for Oil vs. Natural Gas

3p Contributor | Thursday August 23rd, 2012 | 0 Comments

By Joe Provey

If you’re in the business of making energy-saving improvements for residential and commercial customers, you’re probably accustomed to being asked about “payback” or “return on investment.” As a business person, you’d like to answer something like: “four of five years,” or “15 to 20 percent.”

With the advent of lower gas prices during the past decade and the precipitous drop in recent years, you may be having a more difficult time justifying those types of answers to customers with access to natural gas. In 2011 alone, the price of natural gas dropped 31 percent. Since 2009, the price of a BTU from gas has been cut in half. If you’re selling services intended to conserve electricity such as energy-efficient lighting, heat pumps, and air conditioners, you’re facing a similar challenge. The average price of electricity has also fallen by 20 percent since 2009 – although local and regional variations may change the math. (Source: U.S. Energy Information Administration.)

For customers who rely on oil for heating, you’re likely to have an easier time selling based on payback and return on investment. The price of a gallon of oil has risen from about $2.40 in early 2009 to $4.10 in early 2012, nearly a 71 percent increase. The same goes for users of propane who have seen 30 percent price increases during the same period. (Propane is sourced from both natural gas and crude oil, so it makes sense that its average price increase is not as great as it is for oil.)

Different strokes…

It’s pretty clear from the above information that it makes sense to use a different sales pitch when talking to homeowners who use oil and propane than the one you’d use when selling services to natural gas users. With the former group, speak about rising prices, price volatility, and uncertainties due to our foreign dependence on oil. With gas users, however, it makes more sense to focus on improving comfort (never a bad idea), lower equipment and maintenance costs, and environmental benefits.

If pressed on the issue of payback, be ready to point out that eventually gas prices will rise, too. In recent years, drilling for natural gas has steadily declined in the U.S. while drilling for oil has increased sharply. Drillers follow the profits, and right now they are in oil. Some industry experts point out that the pendulum will reverse its swing in the next year or two, causing gas prices to rise relative to oil prices. The current disconnect in gas and oil prices will then return to a more normal ratio. History says they’re probably right.

So the answer to a potential customer who protests that gas prices will remain low for many years and that investing in energy-saving improvements is unnecessary is: “May I call you next year?” Meanwhile, follow the prices of natural gas, propane, heating oil, electricity, and other energy sources at the U.S. Energy Information Administration (www.eia.gov).

Joe Provey has served as chief editor for The Family Handyman, Mechanix Illustrated, and Practical Homeowner. He lives in Bridgeport and writes for Dr. Energy Saver, a national network of companies that helps homeowners improve comfort and lower energy bills. 

image: Ribbit
via Flickr cc (some rights reserved)


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