(Originally published here.)
The price of propane available for sale in Conway, Kansas, the main hub for customers in the U.S. Midwest, has spiked to a record high:
Price of propane at Conway, Kansas hub. Source: Bloomberg.
Yes, it’s cold, but it’s winter time, so the surge in demand for heat fuel isn’t really the issue. But lousy planning is. The episode is a useful reminder that resources should be conserved even when they seem to be plentiful.
The Midwest’s propane stockpiles were low going into this winter (thick yellow line) compared with the past 10 years, thanks in part to a relatively wet autumn. Farmers had to burn more propane than normal to dry their crops during harvest time, which reduced the amount of fuel available for the winter:
Annual comparison of propane stockpiles. Source: U.S. Department of Energy.
Then a cold snap — dubbed the Polar Pig — a few weeks ago froze pipelines, so gas and other petroleum products couldn’t be moved from refineries to consumers. The last straw was the recent drop in Midwest temperatures below 0 degrees Fahrenheit (-18 Celsius), which led to a rise in demand from homeowners. According to the Energy Information Administration, Midwest households use more propane than households in any other part of the U.S. and are more dependent on propane as a heating fuel. As a result, Bloomberg News reported that “governors of 15 states have declared emergencies to allow propane tanker drivers to work longer hours to make extra deliveries.”
Aside from demand from farmers, stockpiles were low heading into winter even as supplies have surged. We can thank the booming shale gas industry for that, with total domestic propane and propylene production rising 40 percent during the past three years:
10-year graph, propane and propylene production. U.S. Department of Energy
The problem is that the U.S. has been exporting a large chunk of its propane and propylene bounty.
10-year graph of U.S. propane and propylene exports. Source: U.S. Department of Energy.
The solution isn’t to prohibit exports — as Izabella Kaminska of the Financial Times has argued, those bans just transfer profitsfrom oil and gas explorers to domestic refiners — but for state or local governments to accumulate strategic reserves when the supply is plentiful. Those skeptical that this is a proper function of government should remember the biblical story of Joseph, who advised the Egyptian Pharaoh to save some of the surplus crops harvested during the seven good years as a hedge against future famine. There is also the more modern example of the U.S. Department of Energy, which stockpiles petroleum and heating oil to guard against the risk of instability in oil-producing regions of the world.
Sooner or later, the shale bonanza will ebb. Government should prepare for that by stockpiling natural gas and other fuels while prices are relatively low. Otherwise we may hear many more stories of winter shortages.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)