The cost of high prices

This winter’s rampaging propane prices spared no marketers from lost customers, crimped cash flow and mangled margins.

Their collective outrage hit a crescendo in March when crude prices soared to an all-time high of $111.00. Propane dutifully followed, of course. The average price for U.S. residential LPG topped $2.60, while wholesale prices crested at $1.77.

Patrick Hyland

The pattern of ever-surging prices has ramifications beyond the day-to-day operations of the industry’s 8,000 retail companies. It is driving the U.S. Department of Commerce perilously close to shutting down the industry’s promotional campaign that claims to have added 65,000 new propane households and $118 million in revenue.

The impact of such a move would be lost momentum for seven years of research and strategic outreach that would be almost impossible to regain.

Outreach jeopardized

Through the Propane Education & Research Council (PERC), the industry has spent about $100 million in advertising and marketing to add customers and build load since 2001. At $15 million to $20 million a year, the consumer education campaign represents 35 to 40 percent of PERC’s total expenditures.

But a little-known provision in the legislation that created PERC could force the council to drop the campaign as early as next year. The drastic step depends entirely on the rising price of propane.

By law, the U.S. secretary of commerce prepares an annual report that assesses changes in propane prices compared to changes in the price of residential electricity, natural gas and fuel oil. If the ratio of propane price increases to that of the other energy sources exceeds 1.10 (10.1 percent), PERC must restrict its activities to research and development, training and safety matters. That means no more promotion.

Ratio of Residential Propane Prices to Composite Index of Residential Electric, Natural Gas and Fuel Oil Prices

Approaching cutoff

The department’s Feb. 12, 2008, report shows the industry is fast approaching the threshold. Using 2006 prices as its most recent data, the report says the ratio has steadily grown from 0.94 in 1997 to 1.09 in 2006 – just one-tenth of a percentage from the cutoff point.

The threshold almost certainly will be breached once record-high 2007 pricing data is calculated in next year’s report. In fact, PERC President Roy Willis admits he expected to exceed the limit this year and was preparing his response.

There are no criminal or civil penalties at stake, but Willis likely would have to answer to Congress or challenge the report’s findings in court.

Price growth comparisons

The report says the price of residential propane has grown 89.4 percent since 1996. Most of that growth came between 2003 and 2006 when prices jumped an average of 14.7 percent each year. (The total increase in propane prices for all sales types was 94.9 percent from 1996 to 2006.)

Prices of competing energy sources have increased too, of course. But while natural gas and fuel oil prices have grown much more rapidly than propane prices, residential electricity prices have risen only modestly.

Residential electricity prices grew an average of 5.4 percent per year over the last four years and a total of 19.4 percent from 1996 to 2006. Residential natural gas and fuel oil prices averaged about 15.1 and 28.5 percent growth, respectively, between 2003 and 2006 and a total of 116.9 and 194.5 percent since 1996.