Governor Scott Walker declared a State of Emergency for Wisconsin on January 25, 2014, for the propane shortage. The shortage is a major concern because there are approximately 250,000 people, in Wisconsin, who rely on propane to heat and run appliances in their homes. The three reasons given for the propane shortage include the below average winter temperatures, pipeline maintenance in late fall to early winter, and a wet fall increasing propane consumption to manually dry crops (Governor Scott Walker's Office, 2014). Rural Wisconsin townships, residents, and businesses are all impacted by the propane shortage: the decreased supply and increased demand for propane; the need to find and risks involved with alternative heat sources; and the government enacting emergency assistance funds.
Law of Supply and Demand
When evaluating the propane shortage from an economic point of view, one would notice that the price increase reflects the law of supply and demand in action. Regrettably, propane consumers need more propane due to the weather, despite the decreased supply to the Midwest due to pipeline maintenance and increased propane use to dry crops during the fall harvest.
By definition, the law of demand refers to the inverse relationship between price and quantity demanded, meaning when the propane price rises, quantity demanded decreases and vice versa, however the definition implies ceteris paribus, or all else held constant (Case, Fair, & Oster, 2014). Therefore, the law of demand in regards to the propane situation is slightly different. Due to propane being a nondurable good with no perfect substitute and few alternatives, propane consumers are typically forced to pay what the supplier is charging. In the current situation, ceteris paribus is not applicable to the propane shortage due to temperature fluctuations influencing the demand and consumption of propane. As you see in Figure 1, the number of days requiring heating was above the days in a “normal winter.” The graph refers to “heating degree days” which measure the difference between the outside temperature compared to room temperature in order to calculate the demand for energy needed to heat a specific area, the higher the heating degree day, the colder the weather and vice versa (Pan, 2014).
Figure 1: 2014 Weather Compared to Normal (Pan, 2014)
Figure 2 was published by the U.S. Energy and Information Administration showing the price trend of residential propane for the United States (Heating Oil and Propane Update, 2014).
Figure 2: U.S. Residential Propane Price
(Heating Oil and Propane Update, 2014)
Figure 3 from YCharts shows the Wisconsin Residential Propane Price from November 26, 2013, to February 26, 2014 (Wisconsin Residential Propane Prices, 2014).
Figure 3: Wisconsin Residential Propane Price Chart
(Wisconsin Residential Propane Prices, 2014)
When comparing Figure 2 and Figure 3, the Wisconsin and national propane prices seemed to be aligned...