Winter Energy Prices to Remain High
December 1, 2000
Lisle, IL - Extended nationwide cold temperatures, record-breaking natural gas prices and continuing high crude oil prices have combined to cause rapidly rising propane prices and localized distribution problems. Since propane is a by-product of crude oil refining and natural gas processing, unexpected or unusual shifts in the supply and price of those fuels have a direct impact on the supply and price of propane.
Approximately 8.1 million households use propane gas to fuel their home-heating systems. When used as a home energy source, propane gas fuels a variety of systems and products. Millions of businesses use propane for the same reasons, and it is widely used in industry for a variety of purposes. It offers users reliability, cleanliness, improved performance and, on average, costs half as much per BTU as electricity.
The propane industry's trade association, the National Propane Gas Association (NPGA), noting that the U.S. Energy Information Administration and industry experts agree that there are ample supplies of propane, cautions consumers that they will see higher prices for propane this winter caused by several factors beyond the control of their retail propane supplier. Among the factors noted were these.
Some refiners who normally produce propane by refining crude oil are now using that propane to fuel their own refineries instead of selling it to retail distributors for traditional users such as homeowners and business. This is because the price of the natural gas they normally would use as a fuel has risen to over $9 per million BTUs, as much as 4 times its normal price. This refinery use of propane is resulting in the removal of thousands of barrels per day of propane from the market-- estimated to be 25% or more of their normal production levels-- that would otherwise be available to traditional end-users such as homeowners and small businesses.
Pacific Northwest and West Coast refiners were the first to begin using their own production as a boiler fuel to counteract the high cost of natural gas, creating temporary spot shortages in many western states. This caused wholesalers and retail marketers to ship by truck and rail tank car large quantities of propane from points in the Midwest and East. Thus, much of the industry's fleet of trucks and rail cars that are normally used for product distribution in the eastern half of the nation are now positioned in the west. This is likely to cause temporary product delivery slowdowns in other parts of the country, especially as refineries in other locations also elect to use propane internally.
Most natural gas processing plants (the other source of propane besides refineries) have the ability to leave more of the propane and other natural gas liquids in the natural gas stream rather than taking them out when natural gas prices are high. As noted by the OPIS Energy Group, many processors are now leaving propane in the natural gas stream causing large quantities of their normal propane production to be removed from the market. Some experts estimate that these volumes could range from 30% to 50% of production. With natural gas prices at current record high levels, the price of propane is being pulled higher with the resulting lower supply and higher demand due to the weather.
Natural gas price increases and the reduction in refinery propane sales is driving up wholesale prices. Wholesale propane price movements of as much as 20-50 cents per gallon in some areas of the country are being reported. Normal competitive conditions at the retail level may moderate the ability of marketers to pass through these wholesale price increases to end-users; however, all energy consumers-- whether propane, natural gas, heating oil, or electricity-- will experience higher energy bills this winter.
"These are the kinds of problems that cannot be anticipated by the propane gas industry," according to Patrick Chesterman, Chief Operating Officer of Ferrellgas, Inc., Liberty, MO, and Chairman of an NPGA Infrastructure Improvements Task Force. "Retail propane marketers and their suppliers can invest in storage, practice risk management techniques, and take other measures to properly manage their business. But when the price of propane's feedstock fuels escalate as rapidly as natural gas prices have, causing refineries and gas processors to remove large quantities of propane from the market that would normally be made available for eventual sale to homeowners and other end-users, the retail marketer is powerless to change things. The higher cost of propane means higher costs, not higher profits, for the retail marketer."
NPGA conducted a series of regional Supply Audio Conferences on Tuesday, December 12, in which leading industry experts from each region of the country confirmed the impact that high natural gas prices are having on propane supply and pricing. Representatives from some state energy offices also participated as listeners on these calls. Additional audio conferences may be held throughout the winter to help the industry stay informed on nationwide and regional supply conditions. Purvin & Gertz, a Houston-based industry consulting firm, released a series of slides for the Conferences that depict the current state of supply in the propane industry. The slides may be viewed on the NPGA website, www.npga.org.
The Propane Education & Research Council was authorized by the U.S. Congress with the passage of the Public Law 104-284, the Propane Education and Research Act (PERA), signed into law on October 11, 1996. The mission of the Propane Education & Research Council is to promote the safe, efficient use of odorized propane gas as a preferred energy source. For more information about the Propane Council, please call 202-452-8975 or visit the website at www.propanecouncil.org.