Understanding the Winter Freeze and Alt-Fuel Prices

With much of the country suffering under frigid winter weather, a spike in home heating demand sent wholesale natural gas prices to their highest level last week in nearly four years. You might think the specter of shortages and skyrocketing pump prices is sending shivers down the spines of fleets using alternative fuels such as CNG (compressed natural gas) and propane autogas — though the reality is more “business as usual.”

For CNG, average retail fuel prices have not risen markedly — or at all — during this cold snap, according to the Department of Energy’s fuel price data. An anecdotal survey of fleet users backs this up.

Tom Ustanik of Lansing Cleaners in Lansing, Mich., reports that CNG pump prices in his area are virtually unchanged. Charlie Feder of Rossmoor Pastries in Signal Hill, Calif., concurs. “There has not been any change in the cost of gas coming into our building,” says Feder, who compresses natural gas onsite to fuel his van fleet.

“I don't expect a price increase at the pump because the profit margins locally on CNG are high,” says Bob Wisz of Doreen's Gourmet Pizza & Distributing of Calumet City, Ill. “I believe that the CNG sellers don't want to get close to the price of gasoline, if they did, then why use CNG? I expect most sellers to eat the cost increase in the short term.”

Prices for fleets using propane, however, have gone up. Some 70% of the propane used in the U.S. comes from the production of natural gas, while 30% comes from the production of crude oil.

“We are not too happy with the price spike,” says Eric Hansen of Competitive Lawn Service of Downers Grove, Ill. Hansen says his propane supplier takes the spot price for each day and averages it throughout each month. After recently filling his tanks with 1,500 gallons of propane, Hansen says the January delivery cost him 50 cents more per gallon than last winter’s average price.

But the seasonality of the lawn care business works in the favor of propane, Hansen says. “We should see prices go down in March and April when propane companies are trying to sell the additional supply,” he says, adding that the price swings are still less pronounced than those for gasoline and diesel in the last few years.

“Indeed propane prices are up about 60% over last winter,” says Gary Kulp of Austin Gutter King in Austin, Texas. “It is usual for propane to spike in the winter, but not to this degree.”

But like Hansen, Kulp isn’t too worried. There is no shortage of propane in Texas, he says, and he expects the usual pattern of falling prices in late winter. “While I doubt that we will see 60 cents propane [GGE or gas-gallon equivalent] again, the fuel is still reasonably priced,” says Kulp, who pays $2 GGE for the propane he uses to fuel onsite.

“Yes, prices have jumped significantly,” says David Rhoa of Lake Michigan Mailers of Kalamazoo, Mich. “Looking forward, we are still expanding our propane converted fleet as we are still saving considerable money by using propane over gasoline,” Rhoa says.

The current price increase for propane is not related to overall supply, writes Brian Carney of ROUSH CleanTech — a manufacturer of propane autogas fuel systems — but instead to a lack of drivers and a temporary storage issue.

“This is a short-term blip that has been exacerbated by strong demand for propane for crop drying last fall and an early and extended cold start to the winter season,” he writes. “Yes, there may be short periods of time where the difference between propane and gasoline is not $1.50 plus per-gallon, but if we look at the last three or more years, [the difference has] been pretty consistent in that range.”

Carney says that many ROUSH customers, especially schools and governments, have locked in year-long or multi-year long prices with their fuel provider, thus mitigating or eliminating short-term price fluctuations. He expects prices to start dropping in the next month.

When looking at natural gas pricing overall, it’s important to understand wholesale spot market prices and their relation to changes in price at the pump.

“The spot market price isn’t anything to panic about,” says Peter Grace, senior vice president of sales for Clean Energy Fuels, a provider of natural gas transportation fuel.

Commodity prices on the New York Mercantile Exchange are quoted in million British thermal units (mmBtu), but the price that trickles down to the pump is diluted by a factor of eight. As an example, the commodity of price of natural gas in April 2013 averaged $4.09 mmBtu, and that price has risen to 50 cents today. Yet this only produced an increase of six or seven cents per GGE at the pump.

Similar to many propane customers, most utilities buy their fuel on long-term contracts, so a price spike is spread out over billions of BTUs. “It’s a big deal to raise [CNG] prices at the pump a dime a gallon,” Grace says. “We are buying our gas on a monthly basis, not on the spot market.”

However, as gasoline and diesel fuel are bought on the spot market, fluctuations of up to 13 cents a day are common.

Another factor affecting cost is the raw commodity cost compared to the final price: While the commodity cost for diesel fuel is 60% of its pump price, the commodity cost for CNG is only 25%, further insulating the final pump price of CNG from severe price swings.

For both alternative fuels, fleets should plan for the long haul, not short. Based on demand and domestic gas resources, the government forecasts the cost of natural gas to actually decrease by 2020, and stay low for at least the next 20 years.

Originally posted on Business Fleet