Perplexing pricing

Some questions seem to take on a life of their own and never seem to go away. I have been involved with propane in Canada for nearly 35 years. At social events, it never fails to amaze me that during my conversations with friends, relatives or strangers they inevitably ask me three universal propane-related questions seeming to be of upmost urgency. Even away from the relatives, I have had MPs, MPPs, senators, mayors, presidents of companies and various store employees where I shop ask me these very questions over and over again.

The first question for some reason is a serious querying asking which propane barbecues are the best. Yes, propane barbecues are top of mind compared to world hunger or access to clean water. The second involves a spirited interrogation regarding propane safety issues. After this harangue, which usually goes back to question number one, a third question is posed. This of course is the granddaddy of all propane questions, namely, how propane fuel pricing is set. Truthfully, if I had definitive answers to all these questions my resultant and remarkable economic status would land me on the Forbes 400 list.

Nevertheless, today, I will put aside the questions on barbecues and propane safety for another occasion. Instead I will try to tackle the so-called mystery of propane pricing in Canada. Maybe we can put this question to bed or at least try to give it a nap.

I will start off simply by saying that propane is a commodity bought and sold on North American and international merchant exchanges and investment markets the same as beef cattle or hogs. Propane competes with and tracks crude oil pricing in the market place. As oil pricing goes so usually does propane pricing. Prices for propane, like for oil, move up or down daily based on supply and demand for the products. Sometimes the pricing changes are relatively stable; sometimes – well, not so much. And this is where consumer pricing concerns kick in.

Most of Canada’s propane comes from Alberta. Alberta is Canada’s main supplier of Natural Gas Liquids. NGLs, as they are generally referred to, include propane, butane, ethane and pentanes. Some propane is a by-product of oil refinery processing.

This also means that propane customers in Ontario usually pay more for propane than in Alberta because they are further from the source. Transportation costs are a major factor and not inexpensive. Pipelines costs, rail transportation, trucking and storage all add costs to the ultimate end user. In the case of Ontario, propane travels all the way from Alberta to Sarnia where it is stored and redistributed to other storage locations in Ontario.

Many other factors can influence propane pricing. The main influencers are inventory levels, weather (especially cold winters), and Canadian propane production. Consumption and consequently demand for propane is not steady. In fact, demand for propane is highly seasonal. In the summer, propane demand is much lower than in winter. Simply put, a propane furnace during a cold Canadian winter uses more fuel than your backyard summer barbecue. What this also means is that this imbalance in propane demand results in propane inventories being built up in the summer, then these supplies are reduced reflecting winter consumption for heating homes, factories, farms and construction sites, to name a few.

If propane inventories are low at the beginning of the heating season this may place upward pricing influence on the cost of the fuel, especially if climate forecasts are for a colder-than-normal winter. As with any commodity, if there is less of the product than is needed, the price will go up. It is simple economics. What complicates things further is if there is a colder-than-normal winter when inventory supplies are relatively low. Then there is a price spike.

There is no doubt that colder weather puts pressure on the pricing and supply of propane. Longer winters also serve to put further pressure on propane inventories and upward pressure on wholesale prices of propane. There is no quick way to replenish propane inventories during periods of high demand.

Canada does not set the price for propane, just like beef prices are not set in Canada. Canadian propane exports are but a small portion of North American demand. Beef prices for North America are set in Chicago, not in Toronto. Likewise propane reference prices are set in a small place called Mont Belvieu in Texas. This Gulf-coast location is the major strategic pricing centre for propane in North America that in turn influences pricing in Conway, Kansas, Edmonton, and Sarnia, Ont. Importantly, Mont Belvieu’s location is close to major refineries and has significant storage and pipeline capacity. It has ideal global access to NGL product from Africa, Europe and the Middle East. Moreover, NGLs are in greater demand in Asia and particularly from a growing China with its huge demands for propane for home heating.

There is no doubt that the production of natural gas supply and subsequently NGLs influences the pricing of propane. The market for this product has moved beyond its traditional North American market. These recent market shifts have resulted in finding both the propane marketer (your supplier) and you the customer competing with the international demand for propane. This adds another and often volatile pricing variable.

As in Canada, propane has become a very popular global fuel for its remarkable qualities. It is portable, clean-combusting and can be used in a variety of applications from home heating to crop drying to chemical processing, to propelling industrial lift vehicles in factories and warehouses to fuelling automobiles and buses and, yes, to providing heat to grill your hamburger on the ubiquitous backyard barbecue.

Aren’t you glad you asked?

With over 30 years of coast to coast experience, George is a consultant in rental sales and marketing and propane equipment training for the construction industry.