UPDATE 2-U.S. propane shortage hits millions during brutal freeze

Fri Jan 24, 2014 2:35pm EST

By Sabina Zawadzki and Edward McAllister

NEW YORK Jan 24 (Reuters) - Millions of Americans are feeling the pinch of a propane shortage this week as brutal cold exposes the supply vulnerabilities of a fuel that heats homes, schools and businesses across wide swathes of the United States.

Prices of the fuel, a liquefied petroleum gas, have rocketed to all-time highs in Midwestern states, distributors are rationing supplies, and some schools have shut due to a lack of the fuel during this year's second bout of Arctic weather.

On Friday, propane heading for the Midwest changed hands at $4.30 a gallon - more than double its price just last Friday - although it had traded even higher at close to $5 a gallon on Thursday.

Distributors were quick to point out the absence of any reports of homeowners running out of fuel. But as a record-breaking freeze coincides with pipeline outages and low inventories, the crisis is expected to linger.

"It's not a permanent shortage and we won't run out, but there are no avenues to deal with this shortage today other than a break in the weather," said Brandon Scholz, managing director of the Wisconsin Propane Gas Association.

"We could be sitting in this situation to spring."

Most households are not connected directly to propane pipelines, and the system relies heavily on truck fleets now running at full capacity to get emergency supplies to states across the Midwest, Northeast and Southeast.

The U.S. Department of Transportation has issued emergency orders suspending the limits on the amount of time truck drivers can spend on the road for 10 Midwestern states and 12 Northeastern states, a rare regional order.

A spokesman for Pennsylvania-based AmeriGas, the largest U.S. propane retailer, said it was rationing deliveries to "small pockets" of Alabama, Georgia and Tennessee on Thursday, reducing supplies to 100 gallons per customer from the standard delivery of some 250 gallons.

"Supply is very tight. There is propane to be had out there, but there are supply and transport issues across the country," spokesman Simon Bowman said.

All the while, federal policymakers representing the Midwest have heard complaints from constituents angry about the high fuel prices.

Iowa Senator Chuck Grassley called on the Federal Trade Commission to review the cause of a propane price spike in his state on Wednesday to "ensure that any supply shortages are not created artificially."

RATIONING, PRICE SPIKES

U.S. propane production has grown in recent years thanks to the shale oil and gas boom, but the resulting higher supplies have caused domestic prices to sink below global levels. That in turn, has encouraged exports of the fuel from the U.S. Gulf Coast to Japan and Latin America, where prices are higher.

The shortage in the Midwest comes at a confluence of events: namely, record-breaking cold at the start of January, when stocks were already low after large amounts of propane were used to dry out a bumper corn harvest.

A pipeline outage during most of December exacerbated the situation, and this week's freezing weather, expected to last to the end of the month, has heightened the situation.

All the while prices have soared. Propane heading for the Midwest is priced against supplies in the hub in Conway, Kansas. Prices there touched almost $5 a gallon on Thursday, compared with Friday's pre-freeze price of around $1.75.

Texas has lifted the need for out-of-state trucks to be registered with the state to allow other trucks to come and pick up supplies.

"Long lines have formed at Mont Belvieu," said one Houston-based broker, referring to the largest propane supply hub in the country. "Lots of out-of-state trucks are showing up."

LOW SUPPLIES

In northern Tennessee, the Stewart County School System opted to close on Thursday and Friday because of warnings from suppliers they were focused on deliveries to residences of up to 150 gallons, said Leta Joiner, assistant schools director.

"We're not sure how long this is going to last," Joiner said. "We decided to err on the side of caution."

One propane supplier in northern Indiana said customers pleaded for more fuel when he did his rounds on Thursday. Other customers were more hostile, accusing his company of exploiting the shortage to raise prices.

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