People who live in cold northern climates are likely to face stiff home heating oil bills this winter. If heating oil prices average $5 per gallon this winter, as some analysts are estimating, the average heating oil consumer may have to fork over more than $4,000 just to keep warm. With many low and middle-income consumers already struggling from high prices at the pump, surging heating oil bills are not an expense some will be able to bear.
One solution to ease high heating bills is wood. A cord or two of wood and a wood stove can go a long way in reducing home heating oil bills. To see the potential savings between wood and oil, you must compare the heat value or energy content of wood to the heat value of oil. The heat value of a fuel is typically measured in British thermal units (Btu). A Btu is defined as the amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
On a net basis, after adjusting for the efficiency of each fuel, a cord of wood contains about 16.8 million Btus and a barrel of oil contains 4.35 million Btus.* With crude oil trading near $120 per barrel, if you pay less than $463 for a cord of firewood, you will save on heating costs. Or viewed another way, the going rate of approximately $250 for a cord of wood is equivalent to paying only $65 for a barrel of oil.
What should be more interesting to investors than the potential home heating oil savings of wood is the energy value of an acre of timberland. Timberland is one of our favorite assets at Young Research. There are many reasons we favor Timberland for investment. Timber is a renewable resource that grows in value-about 7% per year-as it grows in size. Timberlands offer an inflation hedge; they provide diversification benefits to a portfolio of stocks and bonds; they can be converted into residential and commercial real estate at high values; and with oil and gas prices soaring, they now offer meaningful energy value.
What is the energy equivalent value of an acre of timberland with oil trading at $120 per barrel? Based on data from the U.S. Forest Service, we estimate that an acre of hardwood timberland contains an average of 20 cords of wood. Using the net Btu figures for wood and oil above, an acre of hardwood timberland is worth $9,200 on an energy equivalent basis. Of course, that excludes the cost and time required to harvest timber, but even after making the appropriate adjustments, an acre of timberland today is worth a substantial sum on an energy equivalent basis. You have to like timberland here. In Richard C. Young’s Intelligence Report, we’ve shown subscribers how to buy timberland for only $1,400 per acre.
*There are approximately 24 million Btus in a cord of seasoned firewood (hardwood) and 5.8 million Btus in a barrel of oil. Most wood stoves can convert about 70% of the Btus in seasoned firewood into heat. So on a net basis, a cord of firewood contains 16.8 million Btus. The average efficiency rating for an old oil boiler is around 65% with new systems averaging upwards of 86%. If we take an average and assume a 75% efficiency rating, the 5.8 million Btus in a barrel of oil is equal to 4.35 million Btus on a net basis. Sources: U.S. Forest Service & Chimneysweeponline.com
Jeremy Jones, CFA
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