(Photo by Raymond Gilford via Creative Commons)

No simple explanation for this winter’s propane shortages

The Midwest is feeling the pain of skyrocketing propane prices.

A gallon of the liquid heating fuel that cost a little over $1 a year ago is selling for as much as $5 this month, according to local reports.

The Midwest has the nation’s largest share of households that count on propane as a primary heating source, according to the U.S. Energy Information Administration (EIA). Many of them are in rural areas.

Governors in Ohio, Wisconsin, Minnesota, Illinois and other states have declared emergencies amid tightening supplies.

Industry observers say the price and inventory issues currently straining the region are the result of a long chain of events that goes back years.

Exports to blame?

The U.S. is producing more propane than it did five years ago, but it’s exporting much more, too.

Domestic propane production increased 27 percent over the past five years to 1.4 million barrels per day, Reuters reports. Meanwhile, exports more than tripled in that time, from under 85,000 bpd in 2009 to a pace of 280,000 bpd in 2013 through October, the most recent month EIA statistics are available.

Sen. Ron Wyden, an Oregon Democrat who chairs the Senate Energy Committee, told Reuters through a spokesman that he believes the propane price spike is a “concrete example” of the risks consumers face when companies are allowed to freely export U.S. energy resources.

Others disagree on the impact of exports on the current squeeze.

“If we didn’t have the export market there, we wouldn’t have had the production,” said Roger Leider, executive director of the Minnesota Propane Association. “What would have happened is those liquids would have remained in the natural gas stream and been used differently.”

Even now there is a surplus of propane in Texas, which northern states have been invited to tap into if they can work out transportation logistics. That supply might not exist if not for the export market, Leider said.

Most of the Midwest’s propane comes from Kansas, which is the hub that’s been most constrained this winter.

“Our issue is we just don’t have enough gas in the right place,” he said.

Chilly spring

Leider pegs the beginning of the Midwest’s problems to last year’s prolonged winter and chilly spring.

“We had people in the northern tier states who were using heat through April and May at a much greater rate than we have in the last few years. This prevented a real growth in inventories over that time period,” Leider said.

Over the summer, suppliers gradually build up inventories in storage tanks and underground caverns. Even with the late start to summer, the supply of propane going into fall was within the five-year average for that time of year, Leider said.

In its October 2013 winter fuels outlook, the EIA didn’t flag any concerns. The report projected Midwest homeowners to pay about 10 percent more for propane but use about 1 percent less over the course of the season.

Wet harvest

A few weeks later is when the region’s propane supplies took a dive. For the week ending Nov. 1, Midwest propane inventories dropped more than 2 million barrels, the largest single-week draw in any November since 1993, according to the EIA.

The reason? A record-breaking corn harvest that was also damp. Corn needs to be dry before it can be stored. When fields are wet, as they were for much of the fall, farmers use large propane-fueled heaters to dry out the grain so it can be stored safely.

“We had an exceptional crop this year, so grain drying, because it was so wet, was going on longer than usual,” said Dawna Leitzke, executive director of the South Dakota Petroleum & Propane Marketers Association. “Not just South Dakota,” she said, but “Minnesota, Iowa, Nebraska, Wisconsin, Ohio, the whole region. Everybody got behind.”

Grain drying used more propane than usual, and later in the season, leaving less time to restock supplies before winter. A pair of early cold snaps put inventories further behind, Leitzke said, and most people know what happened next: enter the “polar vortex.”

“We could have had a cold, wet fall and a normal winter and we would have been OK. Or we could have had a cold winter and a normal fall and we would have been OK. But to have both of those back to back is a little bit more than the infrastructure has been designed to handle,” Leider said.

Bloomberg blogger Matthew Klein argued in a Jan. 23 post that weather deserves little blame for the current situation. Instead, we should be pointing the finger at “lousy planning.” He argues that government should build up strategic propane reserves, as the U.S. Energy Department already does for petroleum and heating oil.

Others report that the origin of the supply issues goes back to the start of the U.S. shale boom. Bloomberg reports that increased production caused prices to plunge in 2011 and 2012, discouraging new production.

The focus now is on coming up with solutions. Several states have loosened transportation restrictions to accommodate for drivers who need to wait in long lines to fill up. Texas has also opened up its propane supply to northern states for two weeks.

What would help more than anything is a brief respite from the cold, but this winter has made clear that’s nothing we can count on.

Said Leitzke, “I don’t know when we’ll actually catch up.”

5 thoughts on “No simple explanation for this winter’s propane shortages

  1. “Bloomberg blogger Matthew Klein argued in a Jan. 23 post that weather deserves little blame for the current situation. Instead, we should be pointing the finger at “lousy planning.” He argues that government should build up strategic propane reserves, as the U.S. Energy Department already does for petroleum and heating oil.”

    So we can’t trust the market place and wall street to balance supply and demand? The market place did not want to risk the extra cost of having to much propane on hand which I suppose would depress prices and profits and customers did not want the risk and cost of buying and storing extra propane incase the price went down. So in fact we do need government involvement and regulation of the market place.

  2. As a retail consumer I routinely participate in a bulk purchase contract in July of each year. My distributor has sat on my cash for 7 months then tells me they are not going to honor the contract price. My assumption has been that a distributor hedges the total contract amount with thier wholesale source. I don’t know whether my distributor simply did not hedge his contract or if he is (as he claims) simply being cut off by his wholesaler. Either way I am not being supplied and next winter I will winterize my property in December and simply not use propane. Fool me once, my fault, screw me twice…NOT!

  3. I’m retired and on a fixed income. I cannot afford to put in a secondary heating system or I would. What I’m taking away from the above article is that we do indeed have plenty of propane but the government chose to export it to make a buck versus store it to help out the struggling middle class, oops I mean lower class now. Rural and Small Town America are your main users of propane. It’s time you start taking care of your own people Obama,instead of everyone else overseas. I’m cold and I’m struggling. Why aren’t you helping me?

  4. Dear Jane S

    So just how did the “government” export/sell the propane.

    More likely it was driven by industry in order increase annual profits.

    Industry is not in business to make sure your home is warm. They just want money, period. Give them enough money and they would not do anything. Kinda like welfare.

    You just happen to be one source of their income.

    But if in fact the government sold/allowed the propane to be sold Please state exactly who to contact to address this issue. People should not go without heat.

    If in fact Industry chose to export the fuel then likewise post those contact points as people would really like to address the issue specifically with them as well

    My propane delivery company has NEVER identified the cause of the lack of supply as being driven by the government.

    Obviously your insight will be truly revealing as to who the culprit causing the problem actually is…

  5. Why isn’t anyone asking about the use of Natural gas for home heating and for the crop drying? Okay, so it takes distribution pipelines. I doubt the XL pipeline will help the natural gas distribution to the rural neighborhoods. I keep hearing about the bottleneck of gas supplies. Lets get this fixed. If the farmers and home owners had access to the natural gas it would take a lot of pressure of the propane stocks as well as the over loaded electrical grid. Byron