PROPANE
PRICES: What Consumers Should Know
What Is
Propane?
Most people
know propane as the fuel in a white container attached to a barbecue grill. But
propane has long proven its versatility for heating homes, heating water,
cooking, drying clothes, fueling gas fireplaces, and as an alternative fuel for
vehicles. However, more propane is used to make petrochemicals which are
the building blocks for plastics, alcohols, fibers, and cosmetics, to name just
a few.
Propane
naturally occurs as a gas at atmospheric pressure but can be liquefied if
subjected to moderately increased pressure. It is stored and transported in its
compressed liquid form, but by opening a valve to release propane from a
pressurized storage container, it is vaporized into a gas for use. Simply
stated, propane is always a liquid until it is used. Although propane is
non-toxic and odorless, an identifying odor is added so the gas can be readily
detected.
Where Does
Propane Come From?
A unique
feature of propane is that it is not produced for its own sake, but is a
by-product of two other processes, natural gas processing and petroleum
refining. Figure 1 shows a diagram of where propane comes from and how it gets
to the consumer.
Natural gas
plant production of propane primarily involves extracting materials such as
propane and butane from natural gas to prevent these liquids from condensing
and causing operational problems in natural gas pipelines. Similarly, when oil
refineries make major products such as motor gasoline and heating oil, some
propane is produced as a by-product of those processes. It is important
to understand that the by-pro- duct nature of propane production means that the
volume made available from natural gas processing and oil refining cannot be
adjusted when prices and/or demand for propane fluctuate.
In addition
to these two processes, demand is met by imports of propane and by using stored
inventories. Although imports provide the smallest (about 10 percent)
component of U.S. propane supply, they are vital when consumption exceeds
available domestic supplies of propane. Propane is imported by land (via
pipeline and rail car from Canada) and by sea (in tankers from such countries
as Algeria, Saudi Arabia, Venezuela, Norway, and the United Kingdom).
Figure 1. Propane Production and Distribution System
What
Influences Propane Prices?
Propane
prices are subject to a number of influences, some are common to all petroleum
products, and others are unique to propane. Because propane is portable, it can
serve many different markets, from fueling barbecue grills to producing
petrochemicals. The price of propane in these markets is influenced by many
factors, including the prices of competing fuels in each market; the distance
propane has to travel to reach a customer; and the volumes used by a customer.
More specifically, propane prices are affected by:
Crude Oil
and Natural Gas Prices -Although propane is produced from both crude
oil refining and natural gas processing, its price is influenced mainly by the
cost of crude oil. This is because propane competes mostly with crude oil-based
fuels (Figure 2).
Supply/Demand
Balance - Propane supply and demand is subject to changes in domestic
production, weather, and inventory levels, among other factors. While
propane production is not seasonal, residential 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.
Colder-than-normal
weather can put extra pressure on propane prices during the high demand winter
season because there are no readily available sources of increased supply
except for imports. And 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, since early inventory withdrawals affect supply availability
for the rest of the winter.
Proximity
of Supply - Due to transportation costs, customers farthest from the major
supply sources (the Gulf Coast and the Midwest) will generally pay higher
prices for propane.
Markets Served - Propane demand comes from several different markets that exhibit distinct 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 during the spring and summer, when prices decline. If producers of petrochemicals should have to depart from this pattern for some reason, the coinciding demand could raise prices. And when prices rise unexpectedly, as they do sometimes in the winter, petrochemical producers pull back, helping to ease prices. 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.
Figure 2. Propane Prices Follow Crude Oil Price Trends
Note: Data are not adjusted for
inflation.
Source: Crude Oil: West Texas Intermediate Crude Oil Spot Prices as reported by
Reuters News Service; Propane Prices: Energy Information
Administration, Petroleum Marketing Monthly.
Where are Crucial Winter Inventories Stored & How Are They
Delivered to Consumers?
There are three
types of storage for propane inventories (stocks): primary, secondary, and
tertiary. Primary storage consists of refinery, gas plant, pipeline, and bulk
terminal stocks. Primary inventory withdrawals provide the second largest
source of propane during the winter heating season, the largest source being
production from natural gas plants and refineries. Propane storage facilities
at the primary level are generally located near the major production and
transportation hubs and consist of pressurized depleted mines and underground
salt dome storage caverns clustered mostly in Conway, Kansas, and Mont
Belvieu,Texas. The reservoirs are linked directly to the major natural gas
liquids pipelines and are capable of maintaining high deliverability rates
during peak demand periods.
Secondary storage consists
primarily of large, pressurized above-ground tanks located at approximately
25,000 retail dealers scattered throughout the United States. Tertiary storage consists of small
above-ground tanks located mostly at residences and commercial establishments.
The primary
mode of transporting propane within the United States is by approximately
70,000 miles of interstate pipelines. The pipeline system is most developed
along the corridors between production areas and petrochemical consumers along
the Gulf Coast and the agricultural-industrial consumers in the Midwest. The
Northeast and South Atlantic States each are served by a single pipeline.The
upper Midwest also is served by two lines from Canada. _ Other modes of
transport include about 22,000 rail tank cars, 6,000 highway bulk transports,
18,000 _local delivery trucks, about 60 inland waterway barges, and several
ocean-going tankers.
The Use of Propane Varies According to Customer, Season, and Region
Petrochemical
Industry Use - Seasonal & Regional
About 47 percent of
the propane consumed in the U. S. is used in the petrochemical industry (Figure
below). Propane is only one of many possible raw materials used by this
industry to make plastics, etc. Therefore, because the petrochemical industry
can switch to other commodities when the price of propane becomes too high,
propane usage here tends to exhibit seasonal patterns, rising during the summer
_when its price is low and falling during the winter heating months
(October-March) when its price is high. Petrochemical demand is also regional
due to the high concentration of petrochemical plants in the Gulf Coast region.
Residential/Commercial
Use - Highly Seasonal & Regional
Excluding propane
gas grills, residential and commercial use accounts for 39 percent of all
propane used in the United States. Of the 101.5 million households in the U.
S., 8.1 million depend on propane for one use or another. Because 57 percent of
these households rely on propane for their primary heating fuel, this is highly
seasonal usage ._Propane is most commonly used to provide energy to areas not
serviced by the natural gas distribution system. Thus, it competes mainly with
heating oil for space heating purposes. Homeowners in the Midwest use it
predominantly for heating, while Northeast residences rely on it more for
cooking.
Farm Use
- Seasonal & Regional
Farm use is the
third largest retail propane market, accounting for about 8 percent of total
demand. Farm or agricultural uses of propane include crop drying, weed control,
and fuel for farm equipment and irrigation pumps. The amount of propane used
for crop drying, the largest component of farm use, is not only seasonal (fall
months), but can vary greatly from year to year depending on crop size and
moisture content. Agricultural use of propane is primarily concentrated in the
Midwest.
Industrial
Use - Not Seasonal But Regional
Industrial use of
propane, the fourth_ largest propane-consuming sector accounting for about 4
percent of U. S. consumption. Uses include space heating, soldering, cutting,
heat treating, and _fork-lift fuel. Sixty percent of industrial applications
for propane occur in the Midwest and are typically not seasonal.
Transportation
While transportation
represents the smallest sector to use propane, the largest alternative fuel in
use today for transportation is propane
Propane Demand Sectors
Why Do
Propane Prices Spike?
Propane prices
occasionally spike, increasing disproportionately beyond that expected from
normal supply/demand fluctuations. The main cause appears to lie in
the logistical difficulty of obtaining resupply during the peak heating season.
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. Consequently,
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. On the other hand, when propane prices do spike, the petrochemical
sector may cut back on its use, thus freeing up supplies for other uses.
For current information on propane prices,
supply, and demand, see the “Heating Oil and Propane Update” section of the
Energy Information Administration’s (EIA) web site at: www.eia.doe.gov/oil_gas/petroleum/special/heating_update/heating_update.html
