The oil market covers a diverse number of products. While separate in their own individual use, heating oil, propane, gasoline and diesel products all follow the same calculation in determining market price and cost. When looking at the cost difference in oil versus propane, many factors must be weighed.
What is Propane?
Propane is a byproduct of both natural gas or oil through processing. The pipelines that carry natural gas or oil are under extreme pressure and without relieving, condensation would develop that's harmful to the operating mechanisms of the pipeline. Valves release the pressure, capture the gas and process and refine it into propane. Propane occurs as a gas, but liquefies when exposed to increased pressure. You can feel liquid swishing around in your propane tank, but only the gas is released.
Method of Calculation
Although propane is actually a gas and not an oil, it shares a common basis of the British Thermal Unit, or BTU, in measurement. Fuel oil has 145,000 BTUs per gallon. This figure is transferred to millions of BTUs for easier calculation, so 145,000 BTUs is read as .145 per million BTUs. Propane has 91,600 BTUs per gallon, or .0916 per million BTUs. If both fuel oil and propane were priced at £1.3 per gallon, fuel oil would cost £8.90 per million BTUs ($2 divided by .145) and propane would cost £14.2s per million BTUs ($2 divided by .0916). This shows that price per gallon when using energy measurements of BTU is not the same as dollars and cents. Balance the price according to the BTU energy value, instead of price per gallon to get a more accurate price for available energy.
Other Cost Factors
Transportation is a large additional cost factor. There are less than a dozen pipelines that run throughout the United States with oil. The farther you're from a pipeline and a refinery, the higher the price of oil because of added transportation by truck or rail car. Propane outweighs oil in transport costs by being able to utilise oil and natural gas pipelines. However, it's more expensive to refine propane for resale than it is for oil.
The Cost of Crude Oil
Crude oil trading includes propane, even though it has little to do with oil that's processed into gasoline and diesel by being considered a direct competitor. Propane pricing falls into the movements of the oil market. Heating oil fluctuates seasonally, but propane is not as erratic. Not used solely for heating, 37 per cent of all propane produced goes into manufacturing petrochemical products like plastics.
Supply and Demand
Another factor that determines the cost of fuel oil and propane are the changes in domestic production, inventory levels and the weather. An overabundance of supply drives down the price. Having too little oil or propane drives up the price. Because propane feeds off of the natural gas and oil pipelines, its livelihood depends on the supply and demand of oil and natural gas.
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