So you thought the fuel in the white container attached to your barbecue grill is some cheap fuel? You were wrong! Propane is a versatile fuel and it does not come cheap. Today there is a rising demand for propane across many sectors, such as residential and commercial, petrochemicals, farming, transportation, and several other industries.
Propane is extracted from natural gas or refinery gas streams, and its prices vary according to the customer, the season and the region. Propane is produced as a by-product in oil refineries and from natural gas plants. Since propane is produced as a by-product, propane demands cannot be adjusted when there is a demand for propane. Propane can also be bought from the international energy market via pipeline or sea tankers. Propane imports account for about 10 percent of the propane used in the US.
There are several factors that effect propane prices. Some factors are common to petroleum products, while others are specifically related to propane. Propane prices are affected by crude and natural gas prices. However, crude oil seems to be a big determiner of propane costs, since propane primarily competes with crude-oil based fuels in the market. As with any other item, propane prices are influenced by the demand-supply balance. The proximity of supply also determines the price of propane, and customers placed farthest from the major supply are likely to pay more.
The markets are also another big determiner of propane prices. Propane serves different markets, from producing petrochemicals to crop drying in farms, each with its own characteristics and needs. Propane prices in these markets are usually influenced by factors such as the prices of competing fuels, the distance propane travels to reach the user, and the volume of use. Residential demand, for example, is dependent on the weather, and so propane prices usually peak during winters. Today the residential and the commercial sector accounts for about 45 percent of all propane used in the US.
The petrochemical industry uses about 38 percent of the propane in the US. Propane is used by the industry to make plastic, cosmetics, alcohol, fibers and other commodities. With a rise in the prices of propane, the petrochemicals industry can easily switch over to other raw materials. Such a wider choice of this industry is a major driver for propane prices. Moreover, even within the petrochemical industry the demand is regional, because of the high concentration of petrochemical plants in the Gulf Coast region.