(2010 Update: See how we saved on oil consumption year by year.)
Oil or gas heat? That is the question we have been pondering for a while now, especially with oil prices so high. So, when we got a flier recently from PSE&G, our local utility, encouraging us to call them for a free estimate on converting to gas, we decided to take them up on the offer. For us, it doesn't pay to change. Here's why.
I should start by saying that we decided a few years ago to replace our 80-year-old coal-burning furnace, that at some point in the distant past was converted to oil, with a newer, more efficient model. (We affectionately called the old unit Frosty because it was covered with white asbestos and reminded our then 5-year-old daughter of a snowman!) The new furnace, which cost about $6,500 in 2002, cut our oil use by more than half—from about 1,600 gallons a winter to 750. (At the current price of about $2.60 a gallon, that's a seasonal savings of roughly $2,200—not bad!)
It seemed like a really good decision at the time. In retrospect, we should have looked into converting to gas then—the investment might have paid off if we converted in 2002, applied the $6,500 we paid for the new oil furnace to a new gas unit, and then stayed in our house for fifteen more years.
We learned from Scott, PSE&G's very amiable and knowledgeable Replacement Service Representative, that to replace our oil furnace with a completely new gas-fired unit would cost about $12,000. That's $9,000 for the gas burning unit plus $1,500 for a chimney liner and $1,400-$1,500 to remove the 275 gallon oil tank from our basement. I asked if we could just leave the oil tank there since it's not visible from the finished part of the basement, but he said local codes required its removal.
Scott told us that since our current furnace is only six years old and has a life expectancy of 15-20 years, we could replace the oil burner assembly on the furnace with a gas burner for a cost of about $4,000. The boiler unit itself, the metering, and all the safety equipment could stay in place. That beats the $9,000 a completely new gas-burner unit would cost. But we'd still need to pay the $1,400-$1,500 to remove the old oil tank and $1,500 for the chimney liner, bringing the total conversion cost today to around $7,000.
Scott offered other insights. He suggested we ask ourselves why we're considering converting to gas heat, and pointed out that time may not be on our side. Our current plan is to stay in our house around seven more years, until our daughter goes to college. At today's prices for heating oil and natural gas, we wouldn't even begin to see a return on our investment for about 10 years.
For one thing, today oil and gas are roughly the equivalent price for the same amount of heat value. Actually, oil is a little more. Based on the current price of natural gas, a break-even price for heating oil is around $2.20 per gallon. (See this PSE&G Web site for a handy conversion table.) Today heating oil is close to $2.50, so it's a bit more expensive.
Sure, we'd pocket some money if we converted to gas. At today's prices, we'd save about $158.00 this year. Assuming the price spread between gas and oil stayed the same, at today's rate, it would take us close to 50 years to pay for the conversion work!! Now, it's unlikely the oil/gas price ratio will be static—but even if heating oil goes to $4.00 per gallon (possible—even probable, since it was $4.20 per gallon in the Northeast at its peak last winter) and gas stays at its current price, our annual savings would be about $950 per year and it would take us about eight years to pay for our furnace conversion—just about the time we're thinking of moving!
After some investigation, I'm not saying a household shouldn't switch from oil to gas. But it's clear that there are many factors to consider. Once the recession if over, heating oil prices may rise more sharply than gas and the economics for conversion may improve. (see EM article: Why is Heating Oil More Expensive Than Gasoline?)
Also on the plus side of conversion, moving to gas could make your house more attractive to potential buyers. You might absorb the cost of the conversion or actually profit from it when you sell.
Time value of money is another benefit of gas. With oil, your distributor may fill your tank near the end of the heating season. If a cold spell comes along, you'll be grateful. But, if the weather is mild, you could end up sitting on a full tank of heating oil for six months. At $2.60, a 275-gallon tank can tie up about $700 all summer and into the fall. That's not great for your cash flow!