Propane prices are at a historic high. Look at these olnergy.com graphs and think that just a few years ago oil and gas companies burned off propane just to get rid of it as a waste material.
In some parts of the US, it may be less expensive to heat homes with electricity than with propane. Some thing is not right with this picture.
If you use propane for home heating I recommend, that you make your home as weather tight and ready for winter as you can starting now. Have a well-developed plan to use electric heat as a back up in case your cost of propane goes above the cost of heating with electricity.
Read this and you will see why.
Propane is used in many of our homes for heating, making water hot, cooking, and drying clothes. Almost as much propane is used to make petrochemicals. It is a raw material for plastics, fibers, and cosmetics. Other uses include the drying of farm crops and as a transportation fuel.
Propane naturally occurs in raw natural gas and crude oil. Propane is easily liquefied when subjected to a small increase in pressure. We store it and transport it in compressed liquid form. As a liquid, it takes up 1/250 of the space it needs as a gas. Simply opening a valve to release propane from a pressurized storage container allows it to vaporize into a gas ready for use. Like other liquid fuels, propane is sold by the gallon or by weight.
Propane is a unique fuel because it is not produced for its own sake. Propane is only made as a by-product of natural gas and petroleum processing. Propane (and Butane) is removed, as an impurity, when raw natural gas is cleaned up before sending it into pipelines. When oil refineries make gasoline and heating oil, propane is produced as a by-product. It is important to understand that the by-product nature of propane production means that the volume made cannot be adjusted when prices or demand changes.
When natural gas inventories are high its production drops. This also reduces the production of by-product propane. Disruption of natural gas production or oil refining for any reason reduces the production of propane. Hurricanes, fires, maintenance, breakdowns, strikes etc. can reduce propane production. Natural gas inventories are high now thanks to a couple of mild winters.
Addition demand is met by imports of propane. Although imports only provided about 17 percent of the U.S. propane supply last year, they are vital when demand exceeds available supplies. Propane is imported by land by pipeline and rail car from Canada. It also arrives by sea in tankers from Algeria, Saudi Arabia, Venezuela, Norway, and the United Kingdom. China is using more propane driving the price of imported propane up.
Historically, the price of propane goes up and down with the price of oil. Although propane is produced from both crude oil and natural gas processing, its price is influenced mainly by the price of crude oil. This is because propane competes most directly with oil-based fuels. The price of crude oil is high now.
The price of propane also goes up and down as the seasons change. While propane production is not seasonal, residential heating demand is highly seasonal. This imbalance causes inventories to be built up during the summer months when consumption is low and for inventories to be drawn down during the winter months when consumption is much higher. When inventories of propane at the start of the winter heating season are low, chances increase that higher propane prices may occur during the winter season. Propane inventories are lower than normal now.
The price of propane is influenced by the weather. Colder-than-normal weather can put extra pressure on propane prices during the winter heating season. There are no readily available sources of increased supply except for imports. Imports may take several weeks to arrive, during which time larger-than-normal withdrawals from inventories may occur, sending prices upward. Cold weather early in the heating season can cause higher prices sooner rather than later. Early inventory withdrawals affect supply availability for the rest of the winter. The National Weather Service is suggesting that this may be another mild winter. I hope they are right but I am not taking that to the bank.
Markets Served - Propane demand comes from several different markets. Each market has its own distinct usage patterns in response to the seasons and other influences.
• Residential demand, for instance, depends on the weather, so prices tend to rise in the winter.
• The petrochemical sector is more flexible in its need for propane and tends to buy it when prices are low. If producers of petrochemicals have to depart from this pattern, the demand could raise all prices. The economy is booming now so I would think the demand for plastics and such is up.
• Prices could also be driven up if agricultural sector demand for propane to dry crops remains high late into the fall, when residential demand begins to rise. If this year’s harvest is poor due to floods or drought then the need for propane to dry crops would be less. There is a big trend toward growing more corn for ethanol production. This is corn grown beyond the amount needed for food production. More corn means more propane will be used to dry it.
Propane prices do spike upward at times. Because propane is produced at a relatively steady rate year-round by refineries and gas processing plants, there is no ready source of incremental production when supplies run low. Propane wholesalers and retailers are forced to pay higher prices as propane markets are bid higher due to dwindling supply. Higher propane prices are simply passed on to consumers. Imports do not offer much cushion for unexpected demand increases or supply shortages due to the long travel time.
Cost vs. Price - The purchase cost of propane is fixed when it goes into storage. There are three levels of storage in the propane system. The first level is the big tanks that the producers fill as propane is separated from Natural Gas or at oil refineries. The second level storage is at the distributor level. The distributor near you has storage tanks. His purchase cost of gas is locked in when he fills his tanks. Then there is the storage tank that the end user has. Examples are the tank at your house or at an industry where propane is used. Your cost for the propane does not change after it goes in your tank. Your distributor should base his selling price on fuel that is already in his tank or based on the cost he knows he will have to pay for the addition propane needed to fill your order. Think about the gas station where you buy fuel for your car. Their cost is locked in when the gasoline goes into their under ground tanks. But, that does not stop daily price changes at the gas pump does it. The market price of propane will be what the seller can get for it today. There is very little media focus on propane profits so there is no incentive for them to hold retail prices down.
In areas of the US, where there are a large number of propane users, there may be several propane distributors. Competition among the distributors will make the price lower than in areas where there is only one distributor.
Parts of the country that are more distant from the producers of propane will have higher prices than areas that are near producers or near the pipeline or seaport terminals. Transportation costs are driven up by high crude oil prices.
What can you do?
It is a good idea to watch the price cycle and fill your tank when prices are at their low. The price is likely to be low in late summer or early autumn.
The bigger the tank you have the more flexibility you have in choosing your price. Having a big tank may make a more distant supplier willing to drive a delivery truck to your tank beating the price of the near by distributor.
Have a big enough tank may let you ride through short term price spikes.
If you are locking in at a fixed price, it may be best done, in the early fall, when prices are low. That way you can get a good average price and can budget for it. Watch out for fall hurricanes.
Notice there is nothing above about propane prices going down. It seems to be a one-way street.
Have a back up plan ready so you can switch to electric heat when your cost of propane goes too high.
I will work up a future post with a table comparing the price of fuel with the price of electricity so you will know when to switch over.
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