Propane may be exceptional energy, but liquid propane prices can also be somewhat volatile. If you live in a rural area, there is a good chance that you use propane for part or all of your heating energy needs. Because propane prices can change significantly from month to month and season to season you could save quite a bit of money if you pay attention to price trends and plan your tank refilling accordingly. As we hear about record crude oil prices, it can make sense that propane prices are going to suffer as a result. So, by paying attention to the overall price trends, you can find ways to maximize your next propane purchase.
What Causes the Change in Propane Prices?
We are all aware of the talk on the news about crude oil prices and gasoline that may approach $4.00 a gallon this summer but what really drives the cost of propane? Propane prices behave a little differently and are influenced by many different factors:
1. Crude Oil and Natural Gas Prices. Propane is manufactured from the crude oil refining process and natural gas manufacturing. Because of this relationship propane prices typically trend in the same direction as these gas prices.
2. Supply and Demand. Supply and demand, one of the basic economic drivers that we learn in school, obviously has an impact on energy prices including propane. Propane is produced year-round so there is little change in the output for supply but the use of propane is highly seasonal since much of the propane produced is used for heating. Since the majority of propane is produced domestically if there is a severe cold weather snap that increases demand it can create a price spike because it is difficult and slow to obtain imported propane.
3. Location. Propane is produced in a few main production centers in this country and depending on how far away you live from these sources it can greatly affect your price. Propane has to be transported in large pressurized tanks so these costs are passed on to the consumer.
How Can You Find Recent Price Trends?
Thanks to the internet, it is fairly easy to find information on commodity prices such as propane. While not as readily available as stock and mutual fund quotes I have found one site that is very easy to use over at Trading Charts. Below is a sample weekly chart that shows propane prices from early 2005 to 2007. The price units are in dollars per gallon.
You should be able to see the somewhat cyclical pattern that has occurred during this time period. While it does follow a regular pattern, notice the times of peaks and troughs are not at the same time of year in this case. In October of 2005 you see the peak price for propane, while the following year the peak came a few months earlier with October of 2006 actually experiencing some of the lowest prices in the cycle. So it isn’t enough to place your bets on when to buy your propane on the time of year alone.
Additionally, you should take note as to the price difference from one extreme to the other. The difference between recent lows of between $0.80-$0.85 per gallon to highs well over $1.15 a gallon could mean a price difference of $0.35 just a few months apart. Even with a standard size propane tank for a single family home, you could be looking at a fill up price difference of $100-$200 on propane costs alone when the price swings even a little bit. When factoring in specific pricing for your location and delivery costs it could amount to an even wider margin.
How You Can Benefit
For those of you who rely on propane strictly for furnace heating, you will have the greatest benefit. Since your propane needs are limited to the cold months, you can easily monitor propane prices throughout the summer months in order to plan for your purchase. On the other hand, if you use propane year-round, you may not have the flexibility to wait out prices. What you can do though is to check with your provider to see if they offer a way to lock in the prices. If you can and you need to fill up your tank when prices are low, see if you can secure that price for a specified period of time. This stability could hedge against soon to be rising prices.
Your actual savings may vary significantly upon many factors so this is strictly a guide to help you become aware of what causes propane price fluctuations as well as how to spot pricing trends to optimize your refilling schedule. There are many factors at play with the actual distribution of propane so be sure to call around to your local providers in order to secure the best price.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.