Over the past few weeks, I have seen many stories about propane shortages in the United States. As a result of these shortages, prices for propane have nearly doubled from around $2.20 per gallon at the end of last year to over $4.00 per gallon this week. This situation struck me as quite odd. We should be nearly drowning in propane at the moment. So I decided to try to figure out what was going on.
As usual, let’s start with the background. Propane is a small, simple hydrocarbon with the chemical formula C3H8. At normal temperatures and pressures, propane is a gas. By applying a modest amount of pressure you can induce it to liquefy, which is what comes in the propane tank you may be using for the grill on the back porch.
Three quarters of propane production in the U.S. comes from the refining of natural gas. The primary component of natural gas is methane (CH4). Mixed in with the methane are larger hydrocarbons such as ethane (C2H6), propane and butane (C4H10). Before natural gas can be put through a pipeline (the only economical way that it can be transported long distances), most of the propane and butane must be removed, thus resulting in most of our supply of propane and butane. Butane is what is used in most cigarette lighters.
The other 25% of propane production in the U.S. comes from petroleum refining. In order to make fuels such as gasoline and diesel from crude petroleum, there is a processing step called cracking. Cracking is just what it sounds like, the breaking up of larger hydrocarbon molecules into smaller ones. Some of these smaller molecules are propane, resulting in the rest of our propane supply.
Propane is used almost exclusively as a fuel for heating. The breakdown of propane consumption in the U.S. is shown below:
Industrial heating 50%
Residential/recreational heating 42%
Agricultural (e.g. drying grain) 7%
Due to the implementation of hydraulic fracturing (“fracking”) as a drilling technology, production rates of natural gas and petroleum in the U.S. have both increased approximately 15-20% since 2008. Therefore, production of propane, which is recovered from both of these sources, has also increased by this amount.
The increase in supply has resulted in a dramatic decrease in the price of refined natural gas, which has inspired power companies all across the country to convert from coal to natural gas for fuel. So I set about trying to determine how there could be a shortage of propane and a surplus of refined natural gas at the same time.
I checked U.S. propane consumption to see if increases in demand were outpacing the large increase in supply. The U.S. Energy Information Administration data shows that propane consumption in both October and November of 2013 was slightly above normal while use in December had fallen back to within the norm. This small increase in demand last fall could have put some strain on supply, but not enough to explain the dramatic price spikes on its own.
Then the likely answer occurred to me. Since natural gas can only be transported in an economically feasible manner via pipeline, nearly all of U.S. production is consumed domestically. Propane gas can easily and economically be compressed to a liquid. Liquids are easy to transport and, thus, easy to export.
That turned out to be the answer to the mystery. In 2008, only 5% of U.S propane production was exported. By 2013, driven in large part by high demand in Asia, the amount exported increased to 20%!
Let’s work the numbers. In 2008, the U.S. produced an average of 1.8 million barrels a day of propane, exporting 0.1 million barrels and leaving 1.7 million for domestic use. By 2013, production had increased 20% to 2.16 million barrels a day, but now 0.43 million of these were exported, leaving just 1.73 million for domestic use. As you can see, essentially all of the production increase since 2008 has been allocated to export.
The consumption of all fuels in the U.S. increased along with the growth of both population and the economy. Therefore, while the 1.7 million barrels a day of propane met demand in 2008 – a year with a weak economy – the 1.73 million barrels a day allocated to domestic use were just barely enough for 2013. As a result, even the minor increase in demand which occurred last fall was enough to cause a large spike in price.
This chain of events which led to the propane shortage this winter warrants some additional reflection and analysis. Consider the following timeline:
• In 2004-2005, natural gas production in the U.S. from traditional extraction technologies was not keeping pace with the demand and resulting in dramatic price increases.
• The high price for natural gas was a primary driver in the dramatic expansion of fracking in the U.S., which significantly increased the supply of natural gas and, thereby, caused a drop in its price.
• Fracking also brought about a large increase in propane supply.
• Because drilling companies are compelled to maximize near-term shareholder return, the surplus propane is being exported.
• Ensuring that U.S. citizens benefit from the increased propane supply in the form of lower prices stemming from surplus domestic supply would require the type of government regulation of the energy sector which is vociferously opposed by Republicans.
• Most homes which use propane for home heating and kitchen cooking, the people who are most harmed by the price increases, are located in rural areas.
• Rural areas tend to steadfastly vote Republican.
When the Republican politicians who represent those harmed by these price increases are pressed to provide an explanation for why their constituents’ heating bills have doubled, they tend to offer a list of talking points about excess government regulation. They offer the libertarian vision that if only the oil companies were free of government constraints, all would be well. As I laid out for you above, this explanation is demonstrably false.
When I ran unsuccessfully for a seat on the CHCCS Board of Education in 2005, I campaigned on my commitment to data-based decision making. That phrase lacks “zing,” which may explain why engineers make for mediocre political candidates. To me, though, the current domestic propane price increase is a perfect example of the need for data-based governance. The data tells us that the propane shortage in the U.S. is the result of the rise in exports. Our lawmakers should make policy based on this data to ensure that American citizens reap the benefits of increased American energy production. For those of you I confused back in 2005, this is what I meant.
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