Where have all the gallons gone?

Editor’s note: This is the first in a three-part series analyzing the decline in propane sales over the last decade.

Despite an unprecedented $250 million investment that delivered new products and helped add 1 million new propane-heated homes over the last decade, U.S. propane sales for combined residential, commercial, engine, farm and industrial uses have dropped an alarming 2.5 billion gallons since 2000.

The new millennium arrived with sales at a healthy 12.1 billion gallons, according to data from the American Petroleum Institute. They dropped steadily through 2006 to 9.5 billion gallons before colder weather triggered a slight rebound in 2007 and 2008. But the slide continued in 2009 to 9.6 billion gallons.

And preliminary 2010 data indicates they will fall another 300 million gallons.

Michael Sloan, senior project manager for the consulting firm ICF International, says the API numbers are somewhat tainted.

“The API survey reported an increase in sales of odorized propane to industrial customers from 746 million gallons in 1998 to 1.4 billion gallons in 2000, before dropping back to 588 million gallons by 2006. I believe that a significant part of the decline in gallons reported by API between 2000 and 2006 was the result of improvements in the API survey that resulted in more accurate calculation of the total odorized propane market,” Sloan explains.

“I would estimate this change to be around 400 to 500 million gallons, although this is based on judgment and modeling analysis, rather than reported survey data.”

But there is no denying that propane sales dipped markedly over the decade, he concedes.

Analysts say the decline reflects fundamental changes in the historically staid propane market. Those changes are testing the tenets of how propane marketers have traditionally done business during the industry’s first 99 years, and threaten to drastically impact the years ahead.

The magnitude of the plunge, meanwhile, is stoking concern and a series of questions about the long-range viability of the market.

Where have the lost gallons gone? Is the decline temporary? Can the trend be reversed? How much has it impacted the propane industry?

One industry leader calls the trend “the most relevant question in our industry that is not being addressed.”

Since 2003, much of the trend’s detail has been studied by researchers at ICF (and its predecessor company) for the Propane Education & Research Council (PERC). Their analysis offers some answers and insights about a market on the cusp of profound changes.

The changing market drivers
Energy markets overall have been transformed by the combined effects of volatile energy prices, evolving environmental and energy policies, historic swings in the economy, advancements in propane and competitive technologies, and improvements in energy efficiency. Individually and collectively, they are having a widespread impact on sales in most every market application.

The propane industry is not the lone energy segment to suffer sales losses during the decade. Fuel-oil sales to residential and commercial customers have dropped 23 percent, while natural gas sales to end users (excluding power generation) have declined by more than 14 percent, according to ICF.

In the short term, weather remains the single largest variable in propane sales. The difference between a cold winter and a warm one can easily push propane sales by more than 600 million gallons. Temperature differences drove sales in 2000-01 vs. 2006, accounting for a decline of more than 500 million gallons. However, colder winters in the last two years have supported sales by about the same amount.

Of course, wet weather can also boost sales. In 2009, for example, excessive rain added about 200 million gallons for grain drying.

Maintaining current markets
Residential sales have always been the backbone of the U.S. propane market. But the industry’s largest and most profitable segment is highly regional and market specific. Since 2000, growth in the Northeast has been offset by losses in the South, while market share gains in new site-built homes have yielded to cutbacks in the manufactured housing segment.

Yet even among satisfied residential customers, propane consumption has steadily dropped due to conservation and improved efficiency in furnaces, space- and water-heating equipment and home insulation. ICF estimates that average consumption per customer fell by more than 15 percent – costing about 800 million gallons in sales – in the last decade.

Those losses have outweighed growth in the total number of residential customers in that key market segment. U.S. Commerce Department data shows that total number of site-built households using propane has increased by about 13 percent.

Overall, propane is giving way to electricity as the energy of choice for home heating beyond the gas mains. Despite the growing total of residential propane customers, the number of home space-heating customers has been falling since 2005. ICF estimates that propane marketers have lost more than 1.3 million heating customers to electricity and about 200,000 heating customers to other fuels (primarily wood and natural gas) in the last 10 years.

The addition of almost 1 million new propane heated homes has reduced the sting of those losses somewhat. These new homes are generally larger and burn more propane than the units that have been lost. Still, the net decline in site-built heating homes since 2005 has cost the industry 200 million gallons in sales per year, according to ICF.

Much of that market share loss – particularly in the South – is due to competition with conventional electric heat pumps. Recent technology advances are improving heat pumps’ traditional shortcomings. New generations are much more efficient and provide greater comfort than older units. Heat output has been increased, equipment reliability improved and service life extended.

In colder regions where conventional heat pumps have not been a major competitive concern because of their operating costs, geothermal heat pumps are a growing threat. These popular new units maintain high operating efficiency even at outside temperatures below 20 degrees. And the high cost of installation that used to hinder sales is being remedied by tax incentives from a federal government bent on promoting “green” technology.

Propane also is losing its traditional pricing advantage over electricity. Since 2000, residential propane price increases have outpaced electricity, increasing on average by 91 percent between 2000 and 2010. By comparison, electricity prices rose 41 percent during this period.

ICF data shows that electricity has become more competitive against all alternative fuels. The electricity market share in new residential construction has blossomed from 26 percent in 2000 to 34 percent in 2005, and to 45 percent in 2009. Most of that gain has come at the expense of natural gas and fuel oil.

The collapse of the housing market starting in 2007 was a huge blow just as the propane industry was making measurable strides in market share gains into that booming segment. Propane-heated, single-family new home starts accounted for just 70,000 units in 2001 and 2002, before climbing to well over 100,000 in 2004 and 2005.

Through PERC, the industry spent hundreds of millions of dollars to promote propane’s value to homebuilders and buyers. Riding a record number of new housing starts in 2004-05, the campaign helped push propane’s market share from 5.2 percent in 2002 to 6.5 percent by 2007. That’s when the recession-choked market flatlined and single family housing starts tumbled from 1.7 million in 2005 to just 445,000 in 2009.

The manufactured housing market likewise tanked, accounting for about 15 percent of the decade’s total drop in propane sales. In 2000, ICF estimates that the propane industry sold about 847 million gallons to some 2 million residential customers in this market. By 2009, the customer count slid to just 1.65 million, and annual sales fell to about 537 million gallons.

According to ICF, the plunge is due to an overall decline in the number of people living in manufactured housing plus a loss of market share in new unit sales to all-electric homes.

Data from the Manufactured Housing Institute shows that new unit shipments have plummeted from a peak of 373,000 in 1998. Sales fell to 251,000 in 2000 and a feeble 50,000 by 2009 and 2010. Propane’s space heating market share in those new units, meanwhile, has fallen from 35 percent to below 10 percent in that same period.

Agriculture engine market
The agriculture market accounts for more than 10 percent of all odorized propane sales in the United States – almost 1.2 billion gallons a year. In fact, about 80 percent of the 2.2 million U.S. farms use propane in their fields and buildings, according to PERC research.

With irrigation acreage increasing from 55.3 million acres in 2002 to 56.6 million in 2007, water-pumping equipment burns a large share of gallons on the farm. According to the U.S. Department of Agriculture, the standard propane engine runs 1,065 hours in an irrigation season. Each will use about 7-8 gallons of propane per hour – or 7,500-8,500 gallons per season – for a welcome summer load.

Among the hundreds of thousands of irrigation pumps of all types in the field, however, the 2007 Census of Agriculture reported the number of propane engines in the field fell from 17,700 to 12,200 between 2003-08. ICF estimates that 31 percent drop cost the propane industry about 22.5 million gallons in sales.

LPG on-road vehicles
The on-road vehicle market is another key area where propane has lost significant market share – and gallons – since 2000. Vehicle estimates differ widely by source, but by all counts the total number of propane cars and trucks on U.S. roads took a steady nosedive through the last decade.

According to the U.S. Department of Energy, there were about 182,000 on-road propane vehicles in use in the United States in 2000. The total peaked at about 190,000 in 2003, and then slid by almost 40,000 vehicles to 151,000 in 2008. Based on available sales figures, another 10,000 vehicles are expected to be lost from that total through 2010.

ICF calculates that the shrinking number of units over the decade has cost some 60 million gallons of propane consumption.

As the last decade unfolded, more propane was being burned in alternative fuel vehicles than natural gas, methanol, ethanol and electricity combined. LPG still boasts the largest number of vehicles (and refueling sites) among alternative fuel types, but it began the new century with the slowest growth among competing options.

The erosion of propane’s dominance among alternative fuel vehicles can be traced to two primary sources.

The 1970s boom was primarily built on aftermarket conversions as upfitters changed more than 4,000 gasoline and diesel cars and trucks annually. But a host of performance, emissions and service issues killed that market outright. In particular, new emissions permitting regulations drastically increased the cost and difficulty of bringing new vehicles to market, effectively eliminating their availability.

Meanwhile, the major original equipment manufacturers failed to deliver a sustained, competitive LPG product line to meet the needs of fleet owners, the general public or even propane marketers themselves. Today, the attrition of older propane vehicles being retired from service far outpaces the new ones coming on line.

Will the trend continue?
Many of the major drivers of the decline are expected to continue to impact propane sales for the foreseeable future, according to ICF.

The firm is projecting a continuing drop of consumption per customer in the residential market by 1.5 percent per year through 2015. ICF attributes that decline to relatively high propane prices and continuation of improvements in efficiency. It also expects continued losses in manufactured housing as existing units are retired and not replaced.

They also expect the threat from electricity to expand as equipment technology improves and as energy efficiency legislation continues to favor electricity over other fuels.

The good news is that economic growth and a rebound in the housing market should help offset future declines, and growth in new engine fuel markets appear likely to offset future losses and result in increased longer term sales.

Next: What do the troubling sales numbers mean for the propane industry, and what is the plan to combat the losses?