Wed., Feb. 26, 2014 | NEWS
h-e-L-P: The propane crisis in-depth
Part One: The basics, history and the issues
Part Two: The impact, stories and relief
Part Three: The causes, possible changes and conclusions
Greg Marsten | Staff writer
FREDERIC – Shortages and subsequent sticker shock for residents who rely on liquid propane for their primary heat have caught much of rural North America with their proverbial long underwear down. The shortage has had a huge dominolike effect on consumers, suppliers, vendors and, as we'll see later in this multipart series, may have a dramatic effect on the regional economies of a huge chunk of the Midwest.
Without a doubt, the recent LP issue qualifies as a crisis, but it also has a number of unique issues that have turned many eyes to an industry that has been largely unregulated since 1981, when it was set free of 1970s-era "energy crisis" price controls, but more on that later.
First, we need to cover the basics of what LP is, is not and why it is such a widely used fuel in agriculture, rural home heating and other applications such as cooking, water heating and even hot air ballooning.
But we are not alone when we speculate that going into the future, the past few weeks and months may be looked at as the beginning of a true paradigm shift in rural home heating, as a new "energy crisis" emerged with a vengeance, and the public no longer looks at liquid propane in the same way.
A basic primer on LP
Without getting deep into its chemical properties, LP is a hydrocarbon byproduct of gasoline and natural gas production, first discovered in 1910 by U.S. Bureau of Mines chemist Walter O. Snelling, who also was instrumental in underwater explosives development and is credited, somewhat, with helping to make the Panama Canal possible.
Snelling's discovery was huge and was quickly touted as "a gas plant in a steel bottle" for its ability to be separated into a liquid under pressure and transported in round metal "bottles," which are the great-grandparents of the giant time-release-pill-looking tanks we see in modern backyards of rural America.
(Fans of the cartoon "King of the Hill," where Hank Hill is a dedicated propane advocate, may notice occasional references to Snelling's innovations, calling him "the father of propane.")
Snelling worked with several other scientists and engineers to quickly develop ways to commercialize the refining process, combining several gaseous components, including methane, isobutane and about 57 percent propane. He formed the American Gasol Company, and a few years later sold his patent for LP to what would eventually become known as the Phillips Petroleum Company.
Propane is "created" during the separation of several hydrocarbon gases during natural gas production, as they cannot be in natural gas, due to their condensation properties, which can quickly erode gas lines.
How many homes use LP?
According to the Propane Education and Research Council, the total number of U.S. homes relying on propane for heating or cooking declined during the recent recession, but began to rise again in recent years. However, greater efficiencies and expanded worldwide demand have tested the supply chain at times, according to the Propane Council, in an extensive market report from several years ago.
While the actual number is somewhat in flux, it is believed that approximately 10 million U.S. homes rely on LP for either their cooking, water heating or space heating, with the great bulk, approximately 6 million of those homes, using LP as their primary space-heating source. Numbers suggest that approximately 2.6 million Midwestern homes rely on LP, with about 2.2 million using it as their space-heating source.
Where does it come from?
Next week we will go into the sources and elaborate storage infrastructure, but in a nutshell - and this figure has been argued at length in recent months – it is believed that the U.S. produces between 80 and 90-percent of what the nation uses. As for the remaining imported product, most comes from Canada, while other, smaller amounts come generally from other various sources.
PERC released this statement one month ago, as the crisis began to unfold and prices doubled seemingly overnight in many states: "To be clear, the supply of propane is not a problem. In fact, the United States is producing more propane now than at any time in decades. The real problem is getting propane from where it’s stored to where it is needed. The industry is mobilizing to meet this challenge," they stated.
In fact, there has been a relative boom in domestic production in recent years with the shale oil and offshore drilling, which produces a higher volume of so-called "wet gas," which has more liquid and is more friendly for propane production. However, the demand/need for LP overseas has generally expanded, as well, ironically as Third World development grows and tries to get away from using wood and dung as their cooking source.
But if the U.S. is producing so much LP, why is it so expensive and hard to find? PERC was quick to defer criticism on the LP industry several weeks ago, and has been the primary source of industry explanations, excuses and reasons for the crisis, falling back on several causes, statements that notably have been challenged by some high-placed individuals in the industry.
Regardless, the PERC explanations for the crisis come down to four issues, which some have called a "perfect storm" of circumstances:
• An unexpectedly high demand for propane for grain drying last fall depleted local inventories in the Upper Midwest heading into winter.
• A major pipeline in the Upper Midwest shut down in December.
• The sharp increase in oil and natural gas production has created unprecedented competition for access to pipelines and rail cars.
• Local opposition has prevented or slowed building increased propane storage in some communities, including the hard-hit Northeast.
While various parties initially blamed the shortage purely on extraordinarily cold temperatures, that was more likely just a trigger of the actual gun, the commonality of demand created by thousands of empty residential tanks as the weather grew very cold. But blaming the LP crisis on the cold weather might be akin to blaming cigarette smoking on the growing use of cigarette lighters versus matches; it just made it happen faster.
In the coming weeks we will address all of these issues and causes, as they seem to have merit but also seem to show potential foibles and true weaknesses in the industry.
For instance, few governmental bodies or LP industry representatives have openly discussed the possible relationship between the domestic LP shortage and the growing volume the U.S. now exports. The U.S. Department of Energy estimates those exports have risen from approximately 5 percent of the domestic production in 2008 to as much as 30 percent of the domestic production five years later.
According to a recent USA Today article, U.S. propane stocks totaled 30.8 million barrels, which was nearly 45 percent less than a year ago. It might be hard to ignore, but it seems the industry doesn't want to open that door.
The '70s energy crisis
While many critics have suggested the LP industry needs price controls, a little history is in order.
Just as the 1970s were known for disco, polyester clothing, the Watergate scandal and the beginning of excess, one of the true watershed issues of the era was the Arab oil embargo that led to the energy crisis, resulting in long gasoline lines, price spikes, mild rationing and an eventual serious turn toward fuel efficiency in vehicles, as the words "environmental" and "protection" became cohesive and suddenly entwined. Energy sources and supplies became a true domestic concern.
Numerous agencies were established to better keep a handle on energy issues, and while it was a true watershed for America, it also led to things like the eventual Corporate Average Fuel Economy standards that transformed the automotive industry unlike any other event.
Lost in those shadows of the energy crisis was that the U.S. was also quickly relying on propane for home heating and cooking. It can also be said that the home heating in rural communities across the colder climes of America quickly moved away from heating oil, called "No. 2 Diesel" or "Red Diesel," as a primary furnace fuel. Some areas of the Northeast still rely heavily on heating oil, but it is rare in our region.
LP used to have price controls
LP was the natural alternative to heating oil, and was seemingly bulletproof as a reliable fuel, with large outdoor tank storage, somewhat more stable pricing and clean-burning efficiencies.
But that 1973 Arab oil embargo shocked the nation's crude oil addiction, which led to long gas lines and huge price spikes in all the fossil fuels. Even LP prices skyrocketed as gasoline supplies were reduced, and price controls were put into place on the oil and gasoline industries shortly thereafter.
Dan Myers, former executive vice president and general manager of the National Propane Gas Association, thought the subsequent price controls the U.S. government took to take control of oil pricing, supply and allocation led to regulations that adversely impacted retailers and led to propane shortages and steeper prices.
"(These controls) worked significant hardships into the industry," Myers said in an LP gas handbook released last year. "During that time, many retailers were driven out of business because they couldn’t charge or sell enough (propane) because of the governmental red tape."
That scenario may be recurring again, only for the opposite reasons, it seems. History shows that the price limits led to the pendulum going the complete other way. In 1981 President Ronald Reagan eliminated all price controls on propane, as well as on gasoline and crude oil.
"Ending price controls is a positive first step toward a balanced energy program - a program free of arbitrary and counterproductive restraints – one designed to promote domestic conservation and vigorous domestic production," Reagan said in January 1981 of the complete decontrol, which was first instituted by President Nixon in 1973, in the wake of the Arab oil embargo.
The removal of price controls was by executive action – a practice now frowned upon by many in Congress – under the Energy Policy and Conservation Act. The decontrol was mainly targeted at gasoline and oil, but LP tagged along as a byproduct of their production. In reality, the price controls were scheduled to phase out anyway, but Reagan's action was meant to spur domestic oil production and create incentives for an industry relying more and more on foreign product.
That price decontrol was also meant to spur drilling on this side of the oceans. While his critics in Congress warned of $2-per-gallon gasoline and billions in windfall oil industry profits, they were all, in essence, somewhat correct. Eventually, decontrol did lead to dramatic price increases, as well as a growth in domestic production. But growing dependence on oil absorbed most of that domestic increase, leading to a steady price rise ever since.
While domestic oil production has seen a major boom in recent years with the development of shale and offshore drilling, it also spurred domestic LP production in its wake.
In the years since
For the past 40 years, LP has become a standard for rural furnace heat, especially in manufactured and mobile homes, while LP reliance for cooking and water heating have also risen, as has its agricultural uses, mainly for livestock warmth and grain drying.
It has been a steady and reliable source for almost half a century. Although the price has been in mild flux in the past half decade, it wasn't until recent weeks that the LP reliance – some may argue it is a rural addiction – received an intervention, as supplies dwindled and prices doubled and even tripled across the Midwest and northern parts of the U.S., throwing budgets to the wind and threatening the safety and heat of millions of primarily rural Americans.
Near the end of January, prices were moving up faster than ever imagined, and as supplies went dry with a serious cold weather snap, the price kept thousands of regional and local customers with little choice but to turn their thermostats down to meat-locker levels, fire up dangerous electric space heaters and search for answers, or money sources to cover the sudden cost of tank filling that for many people, passed their mortgage payments in cost.
Stories of families with frozen plumbing, newfound reliance on woodstoves and four-digit bills to their LP companies finally showed up on the radar of stunned officials, many of whom have since realized that they were woefully underprepared for an LP crisis, they were at a loss for how to deal with the crisis, and price gouging resulted in many areas, with the price going up more on one day in January than it had cost per gallon, just a month prior.
What can we expect next week?
Unlike the 1970s energy crisis, this energy crisis could not be blamed on Middle Eastern turmoils, OPEC or general reliance on a fuel that was produced overseas. But the responses have triggered unusual and unique efforts to combat the impact, many of which we will get into next week.
We will also go in-depth on how consumers can try to overcome the crisis, seek assistance, and also delve into the future of an industry that has been largely ignored by so many users.
While the media firestorm has generally died down in recent weeks, the impact of a regionwide LP shortage continues to be felt by thousands of local Minnesota and Wisconsin residents who rely on the stinky gas in the big pill tanks as their primary heating source.
And while there have been several announcements by various governmental agencies about shipping and trucking regulations to help with product transport, as well as temporary rule changes in low-income heat-assistance-type programs, the reality of those programs and the true impact on consumers is not all that well documented.
With continued cold snaps, the industry and market remain highly fragile and supplies have yet to rebound, as pocketbooks dwindle.
While it seems that the temporary changes have somewhat helped address the shortage, the true impact will likely be felt for months to come, and may trigger a true adjustment in rural living, much like those gas lines and skyrocketing heating oil prices moved people away from 3-ton cars and heating oil in the basement in the era of "Saturday Night Fever."
As the crisis unfolds, the Leader is attempting to assess the impact on several fronts: The causes, the impact, the responses, and the changes that might help to avoid the problem in the future.
It may be controversial at times, and we seek your input or stories of how you have handled, or been affected by, the crisis, and suggestions or questions you may have.
It is not an easy issue to cover, and, frankly the "propaganda factor" is huge.
We hope it helps.