At ETE, once in a while we run into propane when we have clients who are off the gas grid or have propane as an alternate back-up fuel. One of the things that we've always found frustrating is the opacity of retail propane prices. In this post, we are going to talk about wholesale and retail propane prices and then discuss TankUtility, an exciting start-up run by a former colleague from this author's days at EnerNOC.
Propane is a by-product of natural gas production and oil refining. You may hear people talk about wet gas and dry gas. Wet gas is natural gas that has a high content of Natural Gas Liquids (NGLs) such as butane, propane, etc. The EIA graphic to the right succinctly displays how propane gets to your tank from the wellhead or refinery. You'd think that we'd be sloshing in propane these days thanks to the shale gas revolution and in some places we are, but others still experience winter scarcity due to infrastructure constraints.
There are two propane futures contracts with delivery points at Conway, KS and Mount Belvieu, TX. Mt Belvieu happens to be at the beginning of the TEPPCO pipeline that ships propane to the Northeast with a terminus at Selkirk, NY. At ETE, we get propane prices at Selkirk as part of our subscription to weekly OPIS rack rates for liquid fuels. Generally, Selkirk trends about 20 cents per gallon above Mt. Belvieu, but honestly wholesale prices don't mean much to the retail end user as retail costs are at least double posted wholesale prices.
Historically, retail propane has been priced relative to No. 2 heating oil for consumers since that is its main competition for space heating. The EIA has some great data regarding historical propane prices (check it out here) and I took some of that data to illustrate the price trends of retail propane in ME, VT, and MA vs. the New England average retail cost for No. 2 Fuel Oil. To make an apples to apples comparison, we adjusted the No. 2 Fuel Oil price data to gallons of propane equivalent. No. 2 fuel oil has ~ 138,000 BTUs per gallon while propane only has 91,000 BTUs per gallon. To compare No. 2 Fuel Oil to propane, we multiplied the EIA prices by 0.6594 (91,000/138,000). As the graph shows, the correlation between Fuel Oil and propane has weakened a bit in recent years and the volatility in propane prices seems to have increased along with price spreads between adjacent markets.
You may have noticed in the graph above that propane prices went totally nuts during the winter of 2013-2014. Although it was a cold winter, the price spike wasn't entirely attributable to cold weather. Things started to go off the rails when the 2013 corn harvest was especially wet, requiring huge amounts of propane to dry the crop. As a result, the winter started off with much lower supplies than normal. Delivery infrastructure in New England severely constrains the ability to rebuild stocks quickly. This article from the Portland Press Herald provides a fantastic overview of last winter's supply constraints. Although New England can have peak winter scarcity conditions for propane, other parts of the US are beginning to export NGLs (propane and others), but that propane can't come to New England thanks to the Jones Act. This is beyond stupid, but isn't a problem that we can fix here at ETE.
The graphic to the right shows the regional propane storage infrastructure. The storage facilities in Providence, RI and Newington, NH are typically refilled by foreign tankers (see Jones Act comment above) when New England wholesale propane prices are competitive globally. Other smaller storage facilities are refilled by rail with most of those propane supplies originating in Canada.
So, how does this relate to TankUtility? A common lament of retail propane users is that the prices they pay for propane can be significantly different than the prices reported for their region. Massachusetts and Maine (and a few other states) do a great job collecting price data for heating fuels, including propane, during the winter heating season. At ETE, we've always been stunned by the range in prices between the high, average, and low prices reported for propane. The graphic from the MA Dept. of Energy Resources illustrates this clearly. There is a difference of over $2/gal between the reported high and low prices in their retail price survey. While its reasonable to expect differences due to fill size, travel time, etc., a spread of $2/gal is too high for an efficient market.
So what is a propane user to do? First, you should buy your own tank and get one that is large enough to get you through an extended cold snap. The TankUtility mobile app allows you to get quotes for propane delivery from multiple suppliers. The opportunity for price discovery is a huge win for the consumer in what is an otherwise opaque market. It can also be a big win for propane suppliers who are able to effectively manage their supply portfolio as they'll get an opportunity to compete on price and win new business. While the TankUtility product is cool in other ways (e.g., not having to go check your tank when its zero outside), we think the price discovery aspect of the product is the coolest part.
At ETE, we are always pro-consumer and pro-efficient markets and we think our friends at TankUtility are onto something. As I write this, they are trying to raise some money on KickStarter and if you are propane user, I encourage you to give them a look.