An unusual combination of circumstances caused winter propane prices to explode

Feb 27, 2014

Credit wvut.org

Folks living in rural areas across the High Plains know when the weather is warm, propane is cheap.  When it gets cold, both demand and the price go up.  But, this season the price skyrocketed to unheard of levels due to the combination of the Fukushima Nuclear Power Plant disaster, wet corn, and a string of winter storms. according to a recent article from StateImpact Oklahoma.

The power plant disaster in Japan created a huge need for energy.

“Obviously, when the earthquake and the tsunami happened in Japan, it changed a lot of their energy situation,” she says. “They shut down a lot of their [nuclear power plants]. They started importing a lot more propane and butane,” said Kelly Van Hull, an energy market analyst for Houston-based RBN Energy.

One source for natural gas was the Bakken Formation in North Dakota where the gas is a byproduct of oil production.

“Production came on very strong. There was not incremental domestic demand to soak up that propane, so prices fell down to 70 cents,” Van Hull says. “That created up to a dollar arbitrage opportunities between propane in the United States and propane in Japan.”

The industry responded by reversing pipelines that once carried propane north from refineries in Texas and Louisiana now would carry natural gas from the north to the Gulf Coast to be exported.  There was no reason to pump natural gas to the north where there was already a surplus.

Rains made the fall corn crop very wet.  The massive heaters that dry the grain mostly run on propane, which created more demand.

The last ingredient was a string of winter storms driving down temperatures, reducing production, and making delivery difficult for propane trucks. 

Governor Mary Fallin took steps to ensure high prices did not put Oklahoma residents in the freezing cold.  She put propane users at the front of the line when extra home heating assistance money became available through a federal program.

Van Hull says this winter was a 20 to 50 year anomaly.  She says she doesn’t expect a spike of this kind anytime soon, but we’ll have to wait until next winter to find out.