Why does propane cost so much?
Factors that determine the price.
Heating a home fueled by propane can be one of your major expenses each year. Knowing how to buy smarter will save you money. Propane is used by 65% of the world as the main fuel for heating and cooking but in America it is used mostly by homes that cannot get natural gas to their home. These are the main factors to consider when buying propane:
- The types of propane - depending on where you live, quality can vary and anything can be called propane as long as it can hold a flame. HD5 is the highest grade you can use to heat your home.
- When to buy - the price varies daily and is based on the cost the vendors pay at the different pipelines they buy. During the heating season when demand is high, propane will be the most costly, during the non-heating months, when the supplier sales are the lowest you can get propane at the best price.
- Do you own your own tank? – propane companies can sell you a tank or lease you a tank, the difference is when you lease the tank you can only buy from that company no matter what they charge and they usually charge a higher price per gallon (PPG) because most companies will supply the lease tanks for little or no charge. When you own your tank you can shop around for the best deal.
- The size of your order – there is a cost to deliver propane and I will explain in detail a little later how that impacts the PPG. The bigger your order the cheaper it is for them when you consider cost of delivery vs gallons delivered. The size of your tank will help determine how much you can buy and the amount you consume per year.
- How you buy – supplier have several programs that you can use to buy propane in ways that let you take advantage of discounts they offer. The easiest ones to understand are things like; pre-buying your propane in large quantities, cap or lock-in programs that set a limit to how much they can charge, and a variety of creative options to get you to commit to buying more propane from these suppliers.
Let’s go into more detail about these different factors starting with:
Types and grades - Different states regulate the quality of gas that can be sold in that state, for an example, if you have a diesel vehicle and you travel you will notice that in some states you don’t get the same miles per gallon as in other states. Cheaper gases tend to find their way to these states. There is an additional reason the quality can be different. The ability to store the different gases produced when propane is made will give the producers a way to profit from these gases. When the propane producer have natural caverns that can be used to store and separate the different gases these gases are sold to companies for a variety of products but in states that don’t have these caverns they most likely would have to burn these gasses off. What they can do instead is bulk these gases into the propane and give the propane companies a better price for this propane. You can tell you have this type because the flame burns more yellow than blue and you might find your pan seems a little dirtier or blacker on the bottom. The accepted grades of propane are HD5, HD10, and commercial. HD5 is the highest grade that can be used to heat your home and it has to be at least 90% propane, no more than 5% propylene. HD10 propane can have as much as 10% propylene and most compare commercial to HD10.
The more propane in the mix the hotter it burns so the less you need to achieve the heat you want. Additionally, there are many gases that are consider bad for people and buying HD5 propane restricts how much of these gases you can have in the mix. The problem is that most companies want you to think they are using HD5 and most may be, but others just don’t want you to know the reality. If they are selling HD5 it would be to their advantage to market that.
When to buy. Supply and demand is the key here so if you buy when the suppliers is having a problem selling propane and supply is high, the PPG will be low. Conversely, if the snow is 3 feet deep and it is very cold, people are burning through their propane and everyone is buying the supply is lower, demand is very high, and the PPG will be very high. Different times during the year different groups go through large amounts of propane like farmers during harvest using grain dryers or propane suppliers selling propane outside of America because they can get a high PPG.
You want to buy in the spring for the best PPG. Keeping in mind propane prices tend to go up over the years as shown in this chart from the EIA.
Weekly Heating Oil and Propane Prices (October - March)
Source U.S. Energy Information Administration (EIA)
Do you own your own tank? – Owning your tank will put the control in your hands because you can shop around for the best propane at the best price. Leasing a tank limits you to buying only from that supplier no matter what they charge. The problem is that tanks can cost several hundred dollars in addition to getting the tank filled in the first time. Buying a tank means getting the tank, having it installed, having it delivered, and paying for the additional hardware that would be needed.
When you buy a tank you want to get the tank size as close to what you will use in the year. Buying a bigger tank will let you buy more propane at a lower PPG as well as reducing extra costs for delivering the propane.You can get new or refurbished tanks as well as above ground or underground depending on your tastes.
Order size matters – The cost of delivering can be very high for propane companies, they have the cost of fuel, the cost to maintain the fleet and the distance from the plant they store the propane at to your home. This is why they want to make sure they are selling you a full tank. Any less would cost them more to deliver per gallon, they also want to make sure they are selling the most propane they can so they offer a discount on lower PPG’s for bigger orders.
How to buy – Let’s say that in a normal year you go through 1,100 gallons of propane to heat your home and you have a 500 gallon tank that can be filled to 400 gallons, (a tank can be filled to 80%), so in the summer for the sake of this example you paid $2.00 ppg and in the winter you will pay $4.00 ppg then in the later part of winter you would pay $5.00 ppg. The first 400 gallons would cost you $800.00. The next 400 gallons would cost you $1,600.00, then the last 300 gallons would cost you $1,500.00 bring the total to $3,900.00 for 1,100 gallons buying it this way. Now you pre-buy the 1,100 gallons at a summer pre-buy of $2.50 ppg bring this total to $2,750.00 saving you $1,150.00 by pre-buying in the summer. Some companies will let you cap the cost for a small yearly fee using this example you buy the first 400 gallons at $2.00 and a cap for let’s say $100.00 with you propane being capped at $3.00 ppg. The first 400 gallons cost $800.00 but the next 700 gallons you would pay no more than $3.00 ppg costing $2,100.00 bring the total to $2,900.00 with the $100.00 fee your cost this year would have been $3,000.00 saving you $900.00 and letting you spread your cash over the year.
So to sum it up this is the best way to buy your propane for the best savings:
- Buy the best propane because you will burn less to get the heat you need.
- Buy when it is warm and you don’t need it to heat your home, you will get the best deals.
- Own the tank and make sure that the tank is big enough to let you buy in bigger volumes.
- Take into account how much propane you will use during the year and buy accordingly.
- Take advantage of programs like pre-buys and caps to get the best savings.