Comparing Initial Heating Costs: Natural Gas vs Oil
Which option is more cost-effective for heating a household: natural gas or oil?
Initially, the price of natural gas is $10 per 1,000 cubic feet, the price of an oil furnace is $2,000, the average annual household income is $40,000, the cost of crude oil is $25 per barrel of heating oil, and the cost of refining oil is $15 per barrel of heating oil.
Answer:
Heating a household with natural gas is more cost-effective initially.
To determine the initial cost-effectiveness of heating a household with natural gas versus oil, we need to consider the annual expenses for each option.
For natural gas:
- Price of natural gas per 1,000 cubic feet = $10
- Average annual household income = $40,000
To calculate the cost of heating with natural gas per year:
Cost of heating with natural gas = (Annual income * Percentage of income spent on heating) / Price of natural gas per 1,000 cubic feet
Percentage of income spent on heating can be calculated as:
Percentage of income spent on heating = (Cost of oil furnace / Annual income) * 100
Percentage of income spent on heating = ($2,000 / $40,000) * 100 = 5%
Cost of heating with natural gas = ($40,000 * 5%) / $10 = $2,000 / $10 = $200 per year
For oil heating:
- Cost of crude oil per barrel = $25
- Cost of refining oil per barrel = $15
To calculate the cost of heating with oil per year:
Cost of heating with oil = (Cost of crude oil per barrel - Cost of refining oil per barrel) * (1 / Furnace efficiency)
Assuming the oil furnace is 80% efficient, we calculate:
Cost of heating with oil = ($25 - $15) * (1 / 0.80) = $10 * 1.25 = $12.50 per 1,000 cubic feet
Annual cost of heating with oil = ($12.50 * 1,000) / 1,000 = $12.50 per year
Therefore, heating a household with natural gas costs $200 per year initially, while heating with oil costs $12.50 per year. Natural gas is the more cost-effective option initially.