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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 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-product
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, Nigeria, Venezuela, and Norway).
Figure
1. Propane Production and Distribution System
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What Influences
Propane Prices?
Propane prices are subject to a number of influences, some
common to all petroleum products, and others 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).
Figure
2. Propane Prices Follow Crude Oil Price Trend
Supply/Demand Balance
- Propane supply and demand is subject to changes in domestic
production, weather, and inventor 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 con-sumption 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 im-ports 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 petro-chemicals 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.
Different markets also use different volumes
of propane which impact the price. For example, the petrochemical
sector, which is primarily located near major propane supply
sources, uses large volumes of propane that are delivered
by pipeline. This allows for a lower unit cost (cents per
gallon) for the propane compared to 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 propane
to be much higher.
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Where are crucial winter
inventories stored and 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.
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The Use of Propane Varies According
to Customer, Season, and Region
Petrochemical Industry
- Use Seasonal and Regional
About 40 percent of the propane consumed in the United
States 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 and Regional
Excluding propane gas grills, residential
and commercial use accounts for 43 percent of all propane
used in the United States. Of the 107 million households
in the U.S., 9.4 million depend on propane for one use
or another. Because 54 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 and 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 consuming sector
accounts for about 6 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. While transportation represents the smallest
sector to use propane, the largest alternative fuel in
use today for transportation is propane.
Propane Demand by Sector
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.
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