Propane
What it is and what influences prices

What is Propane?

Propane is produced by two 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 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, propane is also produced during this process.

What influences propane prices?

There are several influences on the price of propane. Two of the major are the following:

• 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 – 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 higher. When inventories of propane at the start of the winter heating season are low, chances are that higher propane prices may occur during the winter season.

These two influences alone may cause very unstable prices in propane over the next year. The propane industry unfortunately is also affected by the aftermath of Hurricane Katrina.

Environmental Benefits

Perhaps the most important advantage of propane is that it is an extremely clean fuel. It emits minimal sulfur oxides and has ultra-low emissions of particulates, carbon monoxide, and volatile organic compounds. It also burns much cleaner than gasoline, home heating oil, and diesel fuel. Since propane emits less carbon dioxide per Btu than gasoline, residential fuel, coal, kerosene, jet fuel, and diesel fuel when burned, propane is an excellent fuel for reducing emissions of greenhouse gases. Electricity produces twice as much carbon dioxide as propane per pound of fuel burned.