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 fire places, and as an alternative
fuel for vehicles. However, more propane is used to make petrochemicals which
are the building blocks for plastics, alcohol, 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.
Does Propane Come From?
A unique feature of propane is that it is a by-product of
two other processes, natural gas processing and petroleum refining. Natural gas
plant production of propane involves extracting 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-product nature of propane production means
that the volume made available from natural gas processing and oil refining
cannot be adjusted when prices and demand for propane fluctuate. Demand is also met by imports of
propane and stored inventories. Although imports provide the smallest (about 10
percent) component of U.S. propane supply, they are vital when consumption
exceeds available 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, Nigeria, and Norway).
What Influences Propane Prices?
Propane prices are subject to a number of influences, some
common to all petroleum products, and others unique to propane. The price of
propane is influenced by 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.
- 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.
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 rise in the winter. If producers of
petrochemicals should have to depart from their summer pattern for some reason,
the overlapping demand could raise 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.