So has the Mid East war and China’s economic boom.
First, the regulations.
Jim O’Conner, president of CF’s fuels division, says new driver regs militate against helping the rare customer who calls up on a cold winter night because he or she has exhausted the household’s propane.
“The new regs say a driver can’t go out after 9 at night if he starts work at 8 in the morning,” O’Conner said. “So now all of a sudden I have a problem in taking care of customers at night.”
He said the firm doesn’t get emergency calls often, but it receives them often enough to be an issue. “Just put yourself in this position,” he said. “You get a call:
“‘Hi, I just ran out of propane. I went to Florida. I forgot. I meant to call you. I was supposed to call you. I didn’t call you. So deliver me.’
“‘I’m sorry, I can’t.’
“‘Well, DOT says I can’t go out.’
“‘Because DOT says it’s unsafe after a certain time.’”
O’Conner said that a homeowner receiving that kind of answer quickly will find one of 40-some other propane competitors to do the job.
“We don’t like it,” O’Conner said. “So our countermeasure right now is to run staggered shifts, starting some drivers at noon or 1 and, some places, as late as two. They can handle their delivery rounds and be available washing trucks for that kind of emergency.”
What causes the scheduling crunch, he said, is that during winter Crystal Flash drivers usually must work the maximum allowable 55 hours a week. And before USDOT promulgated its new regs, the firm had a state exemption that allowed a driver to come back into the plant at night for an emergency run.
“But the new Federal regs overrode the state exemption,” he said.
So being able to respond to emergencies meant setting up staggered shifts among 34 drivers. The arrangement might not seem too onerous, but O’Conner notes that those drivers are spread among 13 distribution centers, so that the new hours affect all of them.
He said each driver puts about 18,000 miles on each of the company’s 36 delivery vehicles, the bulk of that mileage coming during the six-month October-to-April heating season.
The regs also affect the six drivers who operate CF’s four big transport rigs that top off the centers’ storage tanks with product that they bring into Crystal Flash’s main territory — an area extending west from the Lansing-Jackson line to Lake Michigan.
All told last year, CF drove nearly 800,000 miles to distribute 23 million gallons of propane to 24,000 customers. O’Conner said this year it will distribute about 24 million gallons.
CF’s transport rigs bring propane from a Chicago refinery and from huge salt caverns at Marysville and Sarnia.
O’Conner explained that propane is a byproduct derived either from refining crude oil or the other liquid fossil fuel that the industry calls natural gas. He stressed that what the industry calls natural gas is not to be confused with the piped gas that most city residents burn in household furnaces.
“We were originally just a little fuel oil company,” O’Conner said.
But he said the popularity of fuel oil began fading two to three decades ago because it was regarded as a dirty fuel by comparison with propane.
“Fuel oil got a bad reputation,” he said, “because at first it was being used in old, coal furnaces with the original venting and duct work. So people started switching over to natural gas and propane, and fuel oil starting to fade quickly.
“Well, as smaller people began getting out of the fuel oil businesses or just couldn’t make it any longer, they would sell out to us. So, we probably purchased 35-plus companies over the past 20 years.”
He said CF buys propane from a number of direct producers who refine gas from the Calgary area in Canada, or from crude oil refiners in Chicago.
And he noted that in the past four years, propane prices became so volatile that CF’s logistics now necessarily includes futures buying and summer buying to protect its customers and, thereby, itself from loss of supply.
He explained that though the larger amount of propane comes from natural gas, the volatility of Mid East oil prices in the last four years has directly influenced propane prices.
Typically, he said, propane’s price is about 60 percent of the price of crude oil. “Well, when something happened in Iraq, crude went from $25 a barrel to $32 — this week it’s $34 and change — and, all of a sudden, propane went from 60 to 90 cents a gallon. It just took right off with it.”
He said consumers don’t understand. “They’re asking, ‘Why’d that happen? Natural gas is coming out of Canada and it had nothing to do with Iraq.”
He said the hike in crude meant that Canadian gas suppliers could sell their unrefined product for a better price in the Midwest. “When it got cold like it did in the Midwest they could sell that natural gas for double the money. So why would they want to break it apart and sell it to us for less money when they could make more money selling it elsewhere?”
Complicating factors, he said, is the fact that China is exerting tremendous demand because it can’t build refineries fast enough to keep up with its energy needs. Meanwhile, he pointed out that domestic oil companies can’t afford to build refineries at all.
“The environmental regulations make it too expensive,” O’Conner said. “We’ve gone from 200 refineries in this country to 70, so that if anything happens at any of them, it immediately affects the market.”
In order to retain its supply of propane, he said, CF has turned to the futures markets and to buying product during summer when demand is low. It inventories its summertime purchases.
“We can buy it for 55 cents a gallon, put it in the ground, and the money to buy it costs us 59 cents. So we hold onto it and we can promise our customer, for example, a base price of $1.09, for example.
CF also must pay for storage, delivery and freight, winding up with a price of $1.29 this year, he said.
“So our customers are ecstatic because propane this year is running $1.49, and they aren’t having to pay that amount.”