An important element of choosing the type of energy you want to fuel your home will probably be its cost. This is a slightly complex issue with propane. Indeed, residential propane prices have varied significantly over the last decade: propane cost $1.04 per gallon in October 1990 and $2.36 in October 2012, peaking at $2.88 per gallon in March 2011.

The relationship between propane prices and crude oil

Propane is a byproduct of the production of oil and gas. Therefore, propane market prices tend to follow trends in crude oil prices. This means that when crude oil prices increase, it is likely that propane prices will go up. Various factors affect crude oil market price, including the political situation in the Middle East since they are responsible for a large part of global crude oil production.

Propane spot price

The price you will pay for propane will depend on the propane spot price, which is the price at which propane is traded on financial markets. Indeed, propane is a commodity that is bought and sold on a global market. Spot prices change according to supply and demand: the more propane is bought on the market, the smaller the supply becomes and the higher the chance of propane spot prices rising. Interestingly, the propane spot prices have decreased significantly over the last year, from $1.45 per gallon in November 2011 to $0.89 per gallon in November 2012.

Source: US Energy Information Administration

Residential propane prices

What a home is likely to pay for propane is called the residential propane price, which is affected by all the factors mentioned above (crude oil price, propane spot prices, national and international political and economic issues, etc.). Residential propane prices also depend on supply and demand (which explains why propane is more expensive in winter: homes need more propane for indoor and water heating so demand increases). Lastly, your proximity to a major supply source (the Gulf Coast and the Midwest) will increase or decrease your propane price because propane companies include transportation costs when offering you a price for propane.

Source: US EIA