Propane is a liquefied petroleum gas (LPG) that is stored directly on your property in a tank (above- or underground) or in a cylinder. It is a convenient, clean, safe and versatile source of energy that can be used for heating homes, water heating, cooking, clothes drying, gas fireplaces or as an alternative fuel for vehicles.

Propane economics

Propane is a byproduct of oil and gas production. The first factor affecting the propane price is the market price of crude oil. If crude oil is more expensive, propane prices will increase, and vice-versa. The graph below shows the relationship between the price of crude oil and that of residential propane prices.

Propane price also depends on supply and demand. The more people want propane, the likelier it is that the price of propane will increase. This is why propane is often more expensive in winter given its use for indoor heating.

How close you are to a major supply source (the Gulf Coast and the Midwest) can add to or reduce the price you pay for propane since propane companies factor transportation costs into the prices they offer residential customers.

Propane is measured by the gallon so propane is priced per gallon. During the 2011-2012 heating season propane prices ranged from $2.74 to $2.88 per gallon, meaning that a 500-gallon tank cost between $1,100 and $1,150 to fill. 

Propane compared to other energy sources

That propane prices have increased over the last 10 years does not mean that, compared to other sources of energy it is necessarily more expensive. You can see on the chart below that propane prices remain below those of heating oil, which is also used for residential indoor heating.

Propane also fares relatively well compared to other sources of energy in general. Only natural gas is cheaper.

Energy	Price (per million BTU; 2011 dollars)
Propane	24,16
Fuel Oil	27,02
Natural Gas	10,65
Electricity	33,86

Source: US Energy Information Agency

Additional factors affecting propane costs

Other factors affect what propane will cost you. First, propane is stored in aboveground or underground propane tanks. If you lease a tank you could pay anything between $25 and $250 per year (your company will probably install it for free). Buying and installing an underground 500-gallon tank costs between $800 and $2,500 and an aboveground 500-gallon tank between $1,800 and $3,000.

Additional costs for propane include various fees for delivery, administrative costs, etc. Costs for these services range between $5 and $100 per item. For example, Amerigas (the largest propane company in the country) charges for fuel recovery, HazMat and safety compliance, late payment, propane pump-out, special trips, using the company meter, or dispatching a technician.

Installing a propane tank also requires having a permit ($25-50) and depending on how far your propane tank is from your house you might pay extra for piping ($1-2 per foot). Lastly, if you lease a tank from one propane company it is illegal to fill it through a different propane dealer (fines go up to $10,000 depending on the state).

On the other hand, various propane companies offer new customers an initial amount of free propane (50-100 gallons) or a discounted price (50 cents per gallon on average) at the beginning. Propane retailers can also reward costumers who pay their bills quickly (5-50 cents per gallon) or who refer other customers (50-100 gallons free or $50-75 credit). You can also save on propane if you organize a group rate (discount ranging from 10 cents to $1 per gallon). Similarly, you can buy a tank second-hand if you do not want a new one ($375-625 for a 500-gallon tank).

Example of propane costs

According to the US Energy Information Administration on average an American household uses 464 gallons of propane per year. A typical 2,200 square-foot house uses between and 1200-1500 gallons of propane every year: 50 gallons for cooking only, 50-100 gallons for drying and 300-400 gallons for water heating. At $2.81 (average price per gallon in winter 2011-2012) an American household using propane spends $1,300 on average and a family living in a 2200 square-foot house will pay between $3,372 and $4,215 per year: $140 for cooking, $140-281 for drying, $843-1,124 for water heating.

Usage	Gallons	Yearly cost in dollars (at $2.81 per gallon)
American average	464	1,300
2,200 sq foot home: low average	1,200	3,372
2,200 sq foot home: high average	1,500	4,215
2,200 sq foot home: cooking	50	140
2,200 sq foot home: drying (low)	50	140
2,200 sq foot home: drying (high)	100	281
2,200 sq foot home: water heating (low)	300	843
2,200 sq foot home: water heating (high)	400	1,124