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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 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.

Where 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).


U.S. Energy Information Administration schematic of propane distribution showing propane originating from three sources: 1) gas well and gas plant, 2) oil well and refinery, 3) imports. Propane from each of these three sources then moves to underground storage, pipeline station, pipeline terminal, transport (10,000 gallon tanker truck shown), retail plant (30,000 gallon stationary tank shown), transport via bulk truck (3,000 gallons) or cylinder truck, and finally to the retail customer (shown as a residential home).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.

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 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.



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