Five More Questions: Rep. Jerry Hertaus says ‘perfect storm’ of factors caused propane shortage

MinnPost photo by Brian Lambert
Rep. Jerry Hertaus: "I will say that I think the entire market — from refiners, to storage, to distributors, to consumers — will be making adaptations as a result of this episode."

Editor’s note: Five More Questions is an occasional series by Brian Lambert that follows up on people and events in the news.

Like all politicians, state legislators are bombarded with partisan email demanding accountability and action on every facet of every imaginable issue.

But in the midst of a stratospheric spike in propane prices across the Midwest (the largest propane-consuming region in the country), a blast e-mail from Alan Maki, director of organizing for the Midwest Casino Workers (and self-described Socialist), caught the attention of first-term GOP Rep. Jerry Hertaus of Greenfield, out on the edge of the west metro.

In the message titled “Propane heating rip-off … when will government step in on the side of the people?” Maki smelled “free-market” connivery, manipulation, government lassitude and worse. (There are precedents for some of what he charges.)

Rep. Hertaus responded, arguing a familiar, conservative, free-market perspective. Hertaus said, in part:

It is government having gotten in the way of the private market that has significantly interfered with providing competitively priced energy. Impeding production, refining, and transport of energy culminates in higher prices matched to demand and production. Propane is in short supply in part, due to gov’t mandates of ethanol.

Excess demand for corn in ethanol production has driven up food prices, feed for poultry, beef and pork, consumed enormous amounts of propane to dry a wet harvest, exacerbated by the fact that propane is principally transported by railway and pipeline construction has been thwarted to the benefit of owners like Mr. [Warren] Buffett who is moving all the oil from the Bakken.

There’s nothing sexy about propane, and by spring, the “crisis” (which it certainly is to those with no free-market alternatives who are forced to pay 300 percent more for a life-and-death commodity) may well be forgotten.

But the episode offers an opportunity discuss what’s free about the “free market,” who gets the tab when the free market stumbles and the government’s role in preventing a recurrence.

GOP leadership may have more parsed and tightly framed responses to the issue, but Hertaus’ thinking on what responsibility if any government has in an episode like this may … may … hue a bit closer to street-level thinking.

We talked first in his office in the calm-before-the-storm quiet of the State Office Building. (Later, after I fat-finger deleted the entire interview, Mr. Hertaus was generous enough to answer my five questions all over again.)

MinnPost: So why did you decide to get into this debate? Why not just ignore it?

Jerry Hertaus: Well, partly because of the accusation that this was a planned or contrived shortage designed to take advantage of less-fortunate Minnesotans. The mere suggestion that it was market manipulation bothered me. Being a businessperson, I know that those individual propane distributors have a customer base, and there’s nothing in it for them to have a short-term gain and take advantage of their customer base at the expense of their long-term business. Their livelihood depends on providing a reliable source of propane.

MP: Well, the local distributors would seem to be the middle-men in this episode. They have no control over supply. Shouldn’t the real focus be on how and how well the refiners prepared for this season?

JH: Well, the problem is that propane is not refined or stored, to any significant degree, in Minnesota. There are two major storage locations. One in Canada and another in salt mines in Kansas. After the so-called “perfect storm” of a late planting season last spring, a very wet harvest season and an early heating season, the propane industry, which has historically been producing 120 percent of demand found itself facing a 200 percent increase in need for propane, in places where it is not stored in great quantities.

MP: From what I’m able to understand, what you say is true. The industry has had this surplus of propane and went out aggressively looking for new markets, which it found overseas, to the extent that American refiners are now exporting 300 percent more propane than a decade ago. So the question sort of becomes, in a free -market, should there be a rule — government intervention — that requires an “America First” contingency? Where refiners are required to first meet the needs of American consumers at predictable prices?

JH: Well, as I say, I think the issue wasn’t so much lack of supply as it was location. Production has increased as a side effect of the Bakken field in North Dakota. But in this case, there was gas in Texas, for example.

5 More QuestionsBut to your question, ‘Should there be a priority of filling domestic contracts versus international contracts?’ I don’t know what the answer to that is, other than that in most circumstances we wouldn’t have this problem. The excess demand this year was extraordinary, and certainly the industry is going to be looking at keeping bigger reserves available and keep more gas stored locally. I will say that I think the entire market — from refiners, to storage, to distributors, to consumers — will be making adaptations as a result of this episode.

MP: Do you look at this as a failure of the free market in managing a vital commodity? And are you opposed to a government-mandated propane reserve, like the Strategic Petroleum Reserve?

JH: Well, I don’t view it as a failure, but it certainly caught them unprepared. The story I’ve heard over and over again is that under normal circumstances, we have enough storage capacity. But nobody could foresee a 200 percent increase in demand.

As for the reserve idea, I think the market will adequately respond to that. As it is, I think the salt mine storage in Kansas pretty much serves that purpose. Here in Minnesota, I think distributors will certainly look at ways to increase storage capacity.

But in terms of government response, I’ve checked on the Low Income Heating Assistance program and confirmed that taxpayers could get a 40 percent more leverage on their money if contracts for those people were front-end-loaded to permit fills prior to the heating season. That would have a positive effect on both the storage issue and the early-heating-season rush. Something like that would be proactive.

MP: I was intrigued to find a few stock tout sites writing prior to the winter heating season that there was good money to be made betting on propane. This isn’t to say that the refining industry cooked the deal, but that a few savvy characters did accurately calculate the likely effect of the “perfect storm” you mentioned and the money to be made off the industry’s lack of contingency infrastructure.

JH: I wouldn’t doubt that at all, if there are some futures markets for propane. It shouldn’t surprise me. There are futures markets for every commodity. There certainly is for oil. So there probably were a few bucks to be made. It’s not unlike anything else we have in our market system, whether it’s eggs or pork bellies, or whatever.

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