George’s Corner: October 2011

Or, where the heck do they get their numbers?

There are many mysteries in the known universe and one of them is how propane fuel is priced. For some reason unknown to me, I am often asked how the price of propane is determined. The truth is, if I really knew how propane pricing was formulated and set, I would probably be writing this from my yacht somewhere in the Turks and Caicos Islands instead of my basement home office.

In actual fact, propane pricing is impacted by and results from a large number of variables. Some of these variables change daily. A somewhat simple answer proffered by some is that propane pricing is influenced by the pricing fluctuations of crude oil and natural gas supply (because propane is derived from these two strategic fuel products). True to some extent, but there is much more to propane pricing than just that.

Many would go on to argue that propane pricing is influenced by the simple economics of supply and demand. Again, this is true in part only. First and foremost, remember that while there is an abundance of propane on our planet, propane still has to be obtained, stored and transported. This sounds simple enough, except the technologies to do this cost amounts of money that make Lotto wins look like finding a lucky penny.

It costs serious money to extract propane from natural gas and oil refineries. It is expensive to process propane, to add an odorant for safety and to store it in special underground caverns or in heavy-duty tanks. It takes deep pockets to find the monetary resources to transport propane, whether in pipelines, ships, trains, trucks, or even cylinders. Just consider the insurance fees for all this specialty equipment.

And, yes, do not forget the ongoing safety training for professional staff operating the equipment to transport and handle propane. Then add in special regulatory labelling, paperwork and inspection fees from a small army of government inspection officials.

Anybody who runs a business knows you need an ample line of credit or copious amounts of cash stuffed into your mattress to manage all the aspects of a propane operation. Just to make matters more interesting, propane is derived from various geographical locations. We are by definition also innocent victims of monetary exchange rates, which ironically also fluctuate like the price of propane.

Had enough information yet? Well, there is more. So lean in and listen. Generally speaking, propane is produced year-round. However, the demand for propane is highly seasonal: typically high in the winter and usually low in the summer. The result is, when demand is high and inventories are low, propane prices tend to rise. Hence higher prices in the winter.

Just when you thought you had it, there is even more. Let’s suppose that due to a hurricane or natural disaster you were not able to pump as much propane into a Texas holding cavern in the spring to replenish what you used during the winter and build up your summer reserves. Then you have a tight supply, which – wait for it – leads to an increase in propane pricing.

And remember, do not always blame your propane supplier for price increases because he is a supplier and not the producer of the product. He is just as vulnerable to price increases as the consuming customer.

One last thing. International military conflicts and tsunamis thousands of kilometres away in distant countries on the other side of the world all combine to impact the cost of propane delivered into your tank or little barbecue cylinder.

Ultimately, remember what they taught you in high school math: what you do to one side of the equation will affect the other side. Now go and enjoy that steak on your propane barbecue.

George A. Olah is presently the general manager of operations at ABCO Equipment & Supplies, a family-owned rental company located in Weston, Ont.