A propane price war on Martha’s Vineyard has pushed prices lower than national and regional averages, creating savings for Islanders who use propane to heat their water and homes. But the war may be near its end. The Island’s newest provider, Rymes Propane, recently raised its introductory rate.
A family-owned business based in Pembroke, New Hampshire, Rymes entered the Vineyard market two years ago, offering prices of $2.49 per gallon for residential customers. At the time, it was almost a dollar less than the prices offered by the two established Island propane suppliers, Vineyard Propane, a subsidiary of national propane giant AmeriGas, and Island Propane Inc. (IPI), a locally based company.
As the number of Rymes tanks increased, Vineyard Propane and Island Propane responded by lowering prices, according to several customers interviewed by The Times. And in some cases, the companies were willing to approach or match Rymes’s prices.
Gavin Franklin of West Tisbury said that he called Vineyard Propane several months ago after hearing about the Rymes prices from friends. “I asked them if my price was the best I could expect and they lowered my price from over $3.00 to $2.60 per gallon,” he said. “I think you have to keep an eye on the propane companies if you want to get the best possible prices.”
Jamie Stringfellow, a Times employee who lives in Oak Bluffs, signed a seven-month agreement with Vineyard Propane in December at $2.39 a gallon after telling them she was thinking of switching to Rymes.
Propane suppliers often offer a schedule of charges based on tank size, whether the tank is owned or leased, and estimated annual usage.
A representative of Vineyard Propane said their introductory price as of January 14 is $2.91.
John Rancourt of IPI declined to provide specific pricing information. He said their pricing is determined on a customer by customer basis because there are so many variables.
In a change that may signal an end to the price war, John Rymes, co-owner of Rymes Propane and Oil, told The Times last week that Rymes has raised its introductory rate for residential customers using propane for heat and cooking to $2.99 per gallon.
That price was lower than last week’s Massachusetts average of $3.14 listed on the web site of the Mass Executive Office of Energy and Environmental Affairs.
Mr. Rymes said the increase is the result of higher wholesale prices. The new price will not apply to existing customers, he said, adding that it is the first increase since he opened an office in Vineyard Haven almost two years ago.
Competitor John Rancourt, vice president and general manager of IPI, questioned Rymes’s pricing strategy on an Island where the norm is paying more, not less, than mainland prices.
“We know things cost more on the Vineyard. They are giving it away to get customers,” he said. “They are trying to gain market share and will no doubt eventually raise their prices as they are evidently doing.”
He said he thinks the deep pockets of AmeriGas allows Vineyard Propane to more easily match Rymes pricing.
Mr. Rancourt said that he owns half of IPI. The company is partly owned by the employees and an investor, David Patten of Patten Gas, a propane dealer in North Haverhill, N.H., who sells propane to IPI that is delivered by common carrier.
“We are prepared to work with our customers to come as close as we can to meet their needs for as long as we have to,” Mr. Rancourt said. “We had to lower our prices not to lose them. We cut our margins way down.” He said he couldn’t come down as low as Vineyard Propane and Rymes in all cases.
Mr. Rancourt said that IPI has a plan that allows people who pre-pay for the winter to get a locked-in price and they give a 10 percent Island card discount.
Cliff Karako, the Island-based manager for Vineyard Propane, said he was not free to discuss company policies. An Amerigas spokesman was not available for comment.
Asked to comment on the notion that he is purposely taking a loss, Mr. Rymes said that defies common sense. “The idea that I am selling below my cost is absolutely incorrect,” he said. “Why would I want to do that? The prices were so high on the Vineyard. I think we can sell at a lower price because we probably run a tighter ship.”
Mr. Rymes said that of the Island propane companies his is the only one that uses its own trucks to bring propane to the Island. “We own our own tractors and trailers and two railroad terminals in New Hampshire that allow us to buy from out West and ship to the East at the lowest possible prices,” he said. “We were able to offer an introductory rate of $2.49 as a result of volume buying last year.”
Michael Whinston is an economist at the Massachusetts Institute of Technology (MIT) who specializes in industrial organization and competition in oligopolistic markets — that is, where competition is limited, as on the Vineyard.
“The low price strategy is only worthwhile to the new guy if it helps him build market share, which is much less likely if AmeriGas lowers its price,” Mr. Whinston told The Times in a recent telephone conversation.
The lower pricing strategy is also a method to deter similar entry from other suppliers. “This is a familiar strategy in airline markets where entry by low-cost carriers was often met with very aggressive pricing by established firms.”
The entry of a new company into a market generally lowers prices, Mr. Whinston said. “It is a common strategy for propane businesses to offer lower prices and to essentially move a tank onto your property with little or no promises about future prices,” he said. “So basically they lock customers in with this strategy and it makes it difficult for customers to switch. If you lock customers in with low prices you are going to make money on the back end.”
In addition to his academic work on markets, Mr. Whinston also has personal knowledge of the New England propane market. He buys propane for a house he owns in Vermont from a cooperative buying group that adds a flat 65 cents to the wholesale price or the Selkirk price, the price of propane at Selkirk, N.Y., a distribution center. In December Mr. Whinston said the Selkirk price was $1.88 and he was paying $2.58 per gallon for propane.
Propane is a by-product of natural gas processing and petroleum refining, it is commonly used as a fuel for engines, barbecues, ranges, portable stoves, and residential central heating. Most American propane comes from Texas and New Jersey refineries and some comes from European and North African sources, according to industry spokesman Joseph Rose, president of the Propane Gas Association of New England. Propane is purchased from the refineries at the refinery price by wholesalers, called mid-stream suppliers, who normally transport it to distribution centers — by pipeline, railroad tanker car, tanker truck, or ship — where it is sold at the wholesale price to buyers, who then generally transport it by truck or train to their distribution centers. It is then sometimes sold to smaller distributors or buying clubs or delivered directly to end-users by truck.
Wholesale propane prices fluctuate according to market conditions, supply and demand being chief among them. Prices are generally lower in the summer months when propane usage is less and higher in the winter. Companies with large storage capacities can buy in the summer to lock in lower prices for their customers, while companies without large storage capacities are subject to more volatile pricing.
IPI and Vineyard Propane said their propane is currently coming from a distribution center in Providence, R.I. Last week a delivery of 10 million gallons arrived by ship in Providence from Norway, according to Mr. Rose, who said the U.S. produces enough propane for the country’s needs but that transportation is the problem.
“There are not enough trucks or trains or pipeline capacity to carry the propane needed by New England in the winter,” he said, “and it can’t be delivered by boat although the U.S. sells to other countries by boat.”
Mr. Rose said the 1920 Merchant Marine Act allows the transportation of goods between United States ports only on U.S. flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. “There are no ships that meet those requirements,” he said, “so we can’t have it delivered by ship from Texas. It has to come from outside the U.S. We are paying 75 cents per gallon more for that propane.”
The IPI and Vineyard Propane is trucked by J.P. Noonan Transportation, Inc., a common carrier, to storage tanks on the Vineyard. Rymes uses its own trucks to bring propane to the Vineyard from its storage tanks in New Hampshire.