(February 20, 2014 – KOSU) StateImpact: How Corn, Cold Weather, and a Nuclear Disaster Caused Propane Prices to Explode (By: Nikole Robinson Carroll)
The 400,000 or so Oklahomans who rely on propane for heat know the routine: When the weather is warm, propane is cheap. When it gets cold, and demand goes up, so does the price.
But what happened this winter is unprecedented. Prices are starting to ease after blowing past all-time records in January, reaching a national average of more than $4 a gallon.
There are many reasons the price of propane jumped so high so fast, but it all starts in Japan three years ago, when an earthquake triggered the tsunami that caused the disaster at the Fukushima Nuclear Power Plant.
JAPAN IN NEED
When disaster struck Japan, it turned to, in part, to propane to meet its energy needs. Kelly Van Hull, an energy market analyst for Houston-based RBN Energy, explains:
“Obviously, when the earthquake and the tsunami happened in Japan, it changed a lot of their energy situation. They shut down a lot of their [nuclear power plants]. They started importing a lot more propane and butane,” Van Hull says.
Around the same time, production of oil and natural gas — of which propane is a by-product — was gushing out of places like the Bakken Formation in North Dakota. The central U.S. was awash in propane, and the price bottomed out.
“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 quickly.
In 2013, the flows in pipelines that once carried propane north from refineries in Texas and Louisiana were switched to get more to the Gulf Coast for export, with analysts seeing little reason to keep pumping propane to places already awash in it.
DAMN THE WEATHER
Then it started raining: The fall corn crop was very wet, and the giant heaters that dry it mostly run on — you guessed it — propane, as Van Hull’s colleague, Callie Mitchell, reported in a prophetic post on RBN’s quirky but informative website in Nov. 2013, called “Farmer Dries Corn, and I Do Care:”
The upper Midwest is enjoying the largest bumper crop of corn in the record books, and due to recent weather it is “wet” corn needing more drying, thus more propane. With the U.S. “bumper crop” of propane from processing shale gas flooding the market, you might wonder why there is a problem. Clearly the answer is logistics – having the barrels at the right place at the right time. And that’s the reason for more concern when we get to next year.
Then a string of winter storms reduced production, while also making it more difficult for delivery trucks to navigate icy roads. All this as demand went through the roof.
“Nobody saw the combination of the crop drying and the cold weather back to back happening,” RBN’s Van Hull says.
Read the full article here: http://kosu.org/2014/02/stateimpact-propane-price-spike-leaves-some-rura...
