What Influences Propane Prices?
Source: U.S. Energy Information Administration, Petroleum Marketing Monthly. Propane series discontinued after February 2011.
Propane prices are subject to a number of influences, some common to all petroleum products, and others unique to propane. Because propane is easily transported, 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.
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 relationship is because propane competes mostly with crude oil-based fuels.
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 are low at the start of the winter heating season, 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, because 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 weather conditions, 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 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.
Source: Stock photography (copyrighted)
Different markets also use different volumes of propane, which has impacts on the price. For example, the petrochemical sector, primarily located near major propane supply sources, uses large amounts of propane that are delivered by pipeline. Purchasing large quantities allows for a lower unit cost (cents per gallon) for the propane compared to prices paid by other propane consumers. However, residential consumers use relatively small volumes of propane that are delivered long distances by interstate pipeline and by truck, which causes the unit price for their propane to be much higher.
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.