For the past several years, our research for LP Gas Magazine's annual State of the Industry issue has focused on details ... looking at the business models and practices retailers used to manage and operate their businesses. The results were interesting, displaying, for example, the details of the differences between small and large retailers, and the fundamental differences in goals, objectives and practices between owner or investor-owned businesses and customer-owned farm co-op retailers.

This year we took a different approach ... stepping back to look at the larger, more strategic issues in the propane retailing business. Although issues headlined in our previous years' reports – like regulatory compliance and insurance costs – are still present, the issue that seems overwhelmingly front-of-mind for retailers is propane prices – prices paid and prices charged.

Stimated cost of residential heating

What does this mean for the propane retailing business? According to the U.S. Department of Energy's Energy Information Administration (EIA), it puts propane – as well as heating oil – at distinct price disadvantages against natural gas and electricity. The chart on page 17 shows EIA's estimates of the cost of residential heating for this winter for these four sources, as well as the percent of increase for each (all national averages).

Average price per gallon to consumers

As of this report being written, the price of a barrel of crude oil hovers near $100. The direct impact is obvious. The prices of petroleum-derived products are near, at or above record levels – at least without adjusting for inflation. Unfortunately, the factors that drive the price of oil show few signs of abating.

The most fundamental factor is supply and demand. The consumption rates in other parts of the world – especially China – are closing the gap on the United States. The EIA projects that the United States and China together will account for more than half of the world consumption growth in 2007 and 2008.¹

Who’s the competition?

On the supply side, global oil inventories have been tight. Production has been limited by Organization of the Petroleum Exporting Countries (OPEC) production decisions and low spare production capacities, lower than expected non-OPEC production growth and, in the United States, limits on new on- and off-shore exploration and production as a result of environmental concerns and regulation.

Magnifying the supply situation, the rate of converting crude into finished product has been hampered by worldwide refining bottle-necks and, in the United States, by unexpected refinery outages and the decades-long lack of new refining capacity.

This foundational supply/demand price driver is compounded by the continuing and uncertain geopolitical risks in the OPEC region, and increasingly in non-OPEC regions and countries such as Venezuela.

Adding another pricing layer is the American dollar in which the world crude oil markets trade. As the dollar falls against other world currencies, the United States pays a relatively higher price for each barrel than other countries.