Editor’s note: This commentary is by Mike Ryan, who worked for 25 years in management at Digital Equipment Corp., followed by several years working as an independent consultant. He is retired and lives in Hyde Park.
I am a concerned citizen of Vermont, a real independent who sees merit in the positions of both parties as well as the problems with both.
My family is, like many others, stuck with using propane for heating and cooking. Other than that, I have no dog in this fight. I have no affiliation with the energy industry or any regulatory body. I found it necessary to write this op-ed because even now I have seen nothing in the Vermont media that explains what the real issues are behind the scarcity and high price of propane in the northern United States — including Vermont. It is based on investigative work that I did initially for myself.
In November 2013, I had sufficient information to be able to share my specific concerns with those people that I thought should be responsible for doing something about it. I was disappointed.
I called the office of the Vermont Attorney General and talked to a “staffer.” He told me that there was no law being broken and that we needed changes to laws, or new laws, the responsibility of our Vermont and federal legislators.
A “staffer” in Sen. Sanders’ office said he would pass my information on to the senator but I never heard back from them. I contacted my state representative, Linda Martin, and I am happy to say that she was interested and met with me for more than an hour. Since then she has worked with me and the legal people in the Statehouse to draft a resolution that is currently making the rounds with other legislators in the Statehouse.
On Jan. 29, Linda set up a short meeting between herself, Gov. Shumlin and me where I was able to pass on the highlights of what I have learned. Both the governor and Linda are supportive of me writing this op-ed.
How big is the problem?
Anywhere from 15-30 percent of homes in the northern states mostly in rural communities are dependent on propane for heating. The problem is particularly acute right now to this significant minority of more than 60 million people. There is no shortage of heating oil or natural gas and prices for these are very similar to last year. With the very lax laws pertaining to uses of U.S. produced energy, this could all change for these other fuels in the future unless something is done.
Governors in 22 states have called some form of state of emergency in an attempt to mitigate the worsening impact. As of Feb. 1, I learned that Sens. Chuck Grassley, R-Iowa, and Tammy Baldwin, D-Wis., are pressing the Federal Trade Commission and the White House to take action to quickly get to understand the problem and fix it. Vermont is not yet at either of these tables but I am hoping that this will change very quickly.
Fuel dealers in all of the affected states are scrambling to secure supplies of propane at prices their customers are willing and able to pay. In Vermont it seems that supplies are being found, at least for now but at prices that are significantly higher than last year. It is not possible for me to say exactly how much more Vermonters are paying compared with this time last year as there is a total lack of transparency about pricing differences from dealer to dealer in our state. I do know that our dealers are having to pay $2.68/gallon right now compared with $1.91/gallon on Jan. 6, 2014 – an increase of 37 percent in less than four weeks; this increase is being passed on to all Vermont propane customers regardless of the volume they use. Those customers who are on an auto fill arrangement have no idea what a given fuel load will cost until after they have been filled up and they see the invoice.
The U.S. Energy Information Administration report of Jan. 27, states that the average retail price for propane across the nation is now $4.01/gallon. This is $1.71 or 74 percent more than this time last year and it is getting worse.
I don’t want to make the Vermont dealers out to be the bad guys behind the current crisis but they have not helped themselves or us citizens with their lack of transparency. They failed to alert the Vermont governor, the Legislature or the media on the real causes and the extent of what is a serious national problem and how it would affect us in Vermont. The dealers, our legislators and us consumers need to learn from this experience and fix it, but I would stress again that the dealers are not the cause of this major crisis; indeed their margins are getting squeezed as customers push back on these dramatically higher prices.
What has caused the problem?
The narrative that we have been fed by the media suggests that the shortages and high prices are being caused by the extreme cold weather and transportation disruptions. There is some truth to this but these are not the main reasons.
Simply put, since the summer of 2013, U.S. produced propane is being exported to Japan, China, Europe and Central America in vast, unprecedented quantities from terminals principally in the Gulf of Mexico. The main reason for this is that there are huge profits to be made shipping to countries where propane commands a much higher price than it does in the U.S. Unlike crude oil or most other oil derivatives the U.S. Department of Commerce has placed no limits on the amount of propane that can be exported to any country, friend or foe regardless of the impact that this has on the domestic marketplace.
Producing propane for export has now become a primary mission of the U.S. oil business and producing for domestic consumption very much a secondary one.
The energy industry has been getting organized to take advantage of these rules and export opportunities for months if not years. It is all connected with the oil that is becoming available as a result of the shale/fracking activity in a number of U.S. states. Their logic — it is no use producing a lot of oil in the U.S. if it would result in oversupply of the U.S. market as this glut would drive down prices. Oversupply would be a fact under current rules since the export of crude oil is not permitted except for very minor quantities to Canada. It was necessary therefore for the owners of the crude oil to change its chemistry to something that had no export restrictions. In other words, create a proxy that would fit the existing Commerce Department rules.
The industry decided that it made sense for them to convert the crude oil into gasoline, propane and butane since there were no export restrictions on these. In order to make it work they had to reconfigure the flow through existing pipelines displacing in some instances propane that was previously headed north with crude oil that was needed in the south could be moved swiftly and cheaply to the refineries clustered around the Gulf of Mexico for conversion to propane. Then, with a minimum of delay and storage they figured out how to move it smoothly onto ships destined for their new high-paying customers.
I should point out that had they not done this, then many of the fracking activities currently under development or planned would be shut down because the then low price of oil would not cover the high exploration and development costs at a profit.
Producing propane for export has now become a primary mission of the U.S. oil business and producing for domestic consumption very much a secondary one. This means not getting priority at refineries or on transportation to where the domestic product is used. Propane is getting shipped to northern states by rail. This is much more expensive than using pipelines and as recent events have shown, it is very dangerous. These rail cars make their way through our towns and cities anonymously day and night. It is only a matter of time before we have a very major disaster.
The unofficial message to us from the industry – “You can have propane in the northern states if you are willing to pay the prices we can get on world markets – and, since we don’t have adequate transportation infrastructure or refining capacity to meet all of the needs of all of our customers especially up north, bad weather or transportation accidents might cause you some surprise supply interruptions or additional price volatility.”
The following quote speaks volumes.
“This month (November 2013) we’ll export 450,000 bbl/d of propane off the Gulf Coast. It didn’t matter that there was a propane shortage in the Midwest. There was not one single rule in place that prevented 450,000 bbl off the Gulf Coast.” (Rusty Braziel, president of RBN Energy at the Center for Strategic and International Studies mid-November 2013.)
This is only one company. The most recent information I have from the Department of Commerce says that in total 12,307,471 bbl were exported in November 2013. This was 76 percent higher than total exports in November 2012 and it is growing month by month. It is expected that 2013 exports of propane will be double the 2012 level.
I hope that everyone who reads this will internalize what it means to them and even if they don’t use propane, consider what it means to their neighbors and consider also that if this thing is allowed to snowball unchecked your fuel could be next.
I would encourage you all to contact your state representatives, federal delegation in Washington, and governor to express your concern and interest in calling on President Obama to take action to moderate exports of propane and provide for the creation of a strategic propane reserve so that we can have continuity of supply throughout the year at prices no worse than heating oil on a BTU efficiency/$ basis.
Right now heating oil is priced nationally at 37,838BTU/$. Propane is priced nationally at 22,820BTU/$ which makes propane on average 40 percent more expensive.
