Industry faces period of remarkable, profound change

December 12, 2011 By    

I want to take this opportunity to pass along what others in the industry are saying as I have traveled around the country as the chairman of the National Propane Gas Association.

First, there is a sense that we are facing stiff winds of change. We must acknowledge that for many years we enjoyed consistently positive tailwinds composed of solid housing starts, economic advantage over competing fuels and steady, solid growth of 2 to 4 percent per year.

Now the realization has set in that these favorable conditions are no longer present, and in fact reversed.

I have talked to retailers who relate their personal stories of bearing the brunt of energy conservation, few housing starts, a tough economic market and a pricing differential to competing products gone negative. Many have an understandable level of anxiety about the future.

These are some of the questions I hear from marketers:

■ How is it that we have the strongest propane production curve in our history, yet we are no longer the cheapest fuel compared to our competitors?

■ While propane is almost 100 percent domestically produced, why do we struggle to get attention for what propane can do to contribute to a cleaner environment and reduce dependency on foreign oil?

■ Since we are producing more propane than ever and our total demand for propane has dropped, why are our wholesale prices so high?

There is a lot of irony in these questions. It is clear that there has been a fundamental shift in the relationships that a lot of marketers built their business upon.

Mike Sloan of ICF International offers a glimpse into the propane industry’s future, based upon continued in-depth industry research. Some conclusions from a recent report are:

■ Growth in supply improves our résumé for energy security and environmental rankings.

■ World LPG demand has repositioned the U.S. from being an importer to an exporter.

■ Higher oil prices have pushed propane prices higher relative to electricity and natural gas.

■ Propane is becoming a North American resource, with 98 percent produced in the U.S.

■ Conventional markets will remain challenged if current market fundamentals remain – abundant natural gas from shale and strong world demand for NGLs and crude oil.

■ Economic opportunities in the on-road and off-road motor fuel markets exist because gasoline and diesel prices are likely to continue to increase relative to propane.

■ Economic opportunities remain strong for high-end residential housing.

■ Propane supplies will remain more than adequate, although regional disruptions remain part of the industry.

■ Future technological advances can have a significant ability to create new opportunities.

Clearly the U.S. propane industry is in a period of remarkable and profound change. However, the same can be said for virtually all fuels today. We are participating in a world where demand for crude, natural gas and NGLs is growing by double digits, while the U.S. market is focused on conservation and demand is flat. The U.S. will become a net producer of natural gas and NGLs, when just a few years ago we were importers.

Historically the propane industry’s changes have been gradual, but now we encounter dramatic-step changes. All of our news is not bad, and changes in these fundamentals – always hard to forecast – can swing back our way.

We continue to offer a clean, domestic product that, if positioned well, can significantly contribute to cleaning the environment and creating more independence. Most certainly our business models will also have to adapt and adjust to profitably participate in the future.

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