What Is Propane?
Propane is a naturally occurring product simply composed of hydrogen and carbon molecules (known as hydrocarbons). Other members of the hydrocarbon family are methane (natural gas) and pentane (gasoline).
Propane naturally occurs as a gas at atmospheric pressure but can be liquefied if subjected to moderate 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 .
Natural gas plant production of propane primarily involves extracting materials such as propane and butane from natural gas. 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, Venezuela, Norway, and the United Kingdom).
What Influences Propane Prices?
Crude Oil and Natural Gas Prices
Propane is a by-product of both natural gas and petroleum and its price is based on the going rate for both.
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
There are three supply points in the propane distribution chain:
The consumer tank - A larger consumer tank will allow the consumer to last through supply shortages.
The supplier storage - A larger supplier storage will allow for more deliveries to the consumers before resupply is required.
Wholesaler storage - Suppliers who receive resupply from hundreds of miles away are subject to transportation and logistical restrictions & problems.
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 petrochemicals 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.