4.4 Fuel Price Stability

The research team concluded that:
“Propane pricing has been, and is likely to be, more stable gasoline, diesel, and ethanol-blends well into the future”

4.4.1 Propane prices should continue to prevail at levels well below that of gasoline, even if domestic propane demand rises sharply.
Energy pricing reacts rapidly to changes in the underlying supply and demand of the fuel. When supply outstrips demand, prices face downward pressure and vice-versa. As a fleet operator, stability of fuel pricing is important to the operation and budgeting of the fleet.

The Canadian propane production infrastructure is well developed, and supplies with ease the domestic demand as well as the export requirements.⁵⁰ There are not any foreseeable delivery capacity issues within Canada that would significantly, over a long period of time, adversely affect the supply/demand balance.

Approximately 85% of Canadian propane production results as a by-product of the production of Canadian natural gas for the North American marketplace, with the remainder produced as a by-product of crude oil refining.⁵¹ According to a study conducted by Purvin and Gurtz, over the past five years, propane supply in Canada has averaged 11.9 billion litres, with domestic consumption averaging 3.3 billion litres, and exports averaging 8.6 billion litres.⁵²

This excess supply position of Canadian-produced propane acts to damper the volatility of propane pricing over time. Monthly, Canadian propane producers must “place/sell” their production that results from natural gas and crude refining activities. Storage capabilities are limited in relation to the size of the production. In addition to the well-recognized uses of propane, such as heating, cooking, and transportation fuel, a large amount of propane is consumed by the North American petrochemical sector, as a process component. To market their supply of propane successfully, Canadian producers must ensure pricing is competitive with the other alternatives that are available to this sector (e.g. ethane, butane and naphtha).

Using a wider perspective than Canada, there are multiple international sources of propane available to the US market, and the world currently has an excess of supply. Should demand for propane rise substantially in Canada due to the increased demand as a transportation fuel, it is unlikely that pricing would be significantly affected due to the ability of the excess supply to absorb demand increases, and the ability of the industrial complex to choose alternative input feed stocks. Propane, along with other alternative fuels, enjoys excise tax relief at the Federal Government level and in some provinces, has road tax reductions relative to gasoline.

4.4.2 Propane prices are more stable than gasoline prices and are expected to continue their pricing behaviour into the foreseeable future
Retail pricing for propane is based on its wholesale price, as set by the producers, plus transportation costs, and a margin for the propane marketers. Federal and provincial taxes are added as applicable. In most cases, propane prices at the retail level do not exhibit the day-to-day price volatility that is evident with gasoline and diesel prices.

As shown in Chart 4, the price of propane in Ontario over the last 12 years has been consistently about 40% lower than gasoline.⁵³ The chart also reveals that, while there have been a number of propane price spikes over the years; overall, propane has experienced less price volatility than gasoline. It is anticipated that this historical price gap between gasoline and propane will continue due to the combination of the limited North American gasoline refining capacity and world demand for crude oil contrasted against the excess supply of Canadianproduced and world-produced propane.

CHART 4

Historical Gasoline and Propane Pricing Ontario

4.4.3 Gasoline, Gasoline/Ethanol blends, and Diesel Fuel pricing will continue to be volatile
The pricing for refined gasoline, gasoline/ethanol blends, and diesel fuel is driven by supply and demand for both raw materials components (crude oil) and for the finished products themselves. Crude prices are driven by new and rising demand from developing nations, demand resulting from strong economic performance of developed nations, and from various factors affecting the uncertainty of the supply.

As world demand strains crude oil supply capacity, crude pricing escalates significantly.⁵⁴ Contributing to the uncertainty and sensitivity of crude oil pricing is the fact that a significant percentage of crude oil supply lies in politically unstable regions. Furthermore, OPEC, with 12 members, controls 40% of the world’s crude oil production, and 75% of the world’s known oil reserves.⁵⁵

Even with modernization, upgrades and improvements, North American refinery capacity utilization rates are near 100%.⁵⁶ Finished product supply disruptions can be caused by many factors including the weather and the lack of spare international refining capacity. In addition, seasonal fluctuations in demand can create significant pricing fluctuations.

Chart 5, from Natural Resources Canada, illustrates the historical relationship between crude oil and gasoline prices over the last five years in Canada, and notes the major price disruptions that have occurred in North America ⁵⁷. It is anticipated that the gasoline market will remain volatile for the foreseeable future, as the timelines to develop additional refining capacity from approvals to start-up are significant.

CHART 5

Historical Relationship between Crude Oil and Gasoline Prices

With respect to gasoline blended with ethanol, the price volatility factors remain similar to conventional gasoline. Crude input costs combined with refinery capacity issues concerning both gasoline feedstock and the supply of ethanol for blending are significant influences. Historically, in the United States, the wholesale price differential between convention unleaded gasoline and E85 has been between 35 and 80 cents per gallon.⁵⁸ Prices for ethanol and unleaded gasoline are relatively volatile and appear to follow similar patterns. Chart 6, shown below, is supplied by the California Energy Commission and shows that fuel ethanol prices in the United States have been volatile over the past 10 years.⁵⁹

CHART 6

4.4.4 In spite of differing factors affecting supply and demand, the longterm trend for natural gas pricing is higher and its pricing stability is linked to the stability of crude oil
A recent report on the “Outlook for Canadian Natural Gas until 2020” published by Natural Resources Canada suggests that, in spite of differing factors affecting supply and demand, the long-term trend for natural gas pricing is higher. Increasingly, the North American market is being influenced by factors in other markets.⁶⁰ For example, liquefied natural gas (LNG) is expected to become the next major continental fuel source. Numerous natural gas storage and delivery facilities are being built in Canada and the United States. Additionally, Natural Resources Canada explores the pricing link between the price of natural gas and the price of crude, highlighting the capability of industrial oil products users to shift demand to natural gas as pricing differentials escalate, moderating oil pricing and putting upward pressure on the prices of natural gas.⁶¹ Chart 7 below illustrates the relationship between crude oil prices and natural gas prices since 2000. Elevated natural gas levels have driven down the price of natural gas in 2006-07. As natural gas supply levels are depleted, however, it is expected that the historical relationship between crude and natural gas will be restored.⁶²

CHART 7

Similar to crude, natural gas faces the potential for supply disruptions caused by the U.S. Gulf coast hurricane season. During 2005, the hurricanes, Katrina and Rita, shut down approximately 90% of the US offshore production of natural gas, significantly increasing pricing during the disruptions.⁶³ In fact, natural gas commodity prices reached a record level in 2005, with Intra-Alberta prices 25% higher than 2004 and 70% higher than 2000.⁶⁴

It is estimated that North American natural gas demand will grow from 25.8 trillions of cubic feet (Tcf) in 2005 to about 31 Tcf in 2020. Much of the growth is pegged to increased demand in the Canadian (Alberta) industrial sector, and both the United States and Canadian power generation sectors as shown in Chart 8.⁶⁵

CHART 8

Natural Resources Canada forecasts natural gas prices to be above $7.50/GJ for the next three years and averaging $7.36 by 2015. The forecast is for natural gas prices to be in the $8.00 to $10.00/GJ range by 2020.⁶⁶ These forecasts do not take into account supply disruptions such as hurricanes and other world events. Historically, natural gas prices have been volatile and it is anticipated that this will continue as increased demand stresses sources of supply.