Study of the Determinants of Demand for Propane

1
Study of the Determinants of Demand for Propane

• Prepared and Presented By
• Joe Looney
• J.D. Laing
• Ernest Sonyi

2
Background

• Propane is used for
• Heating homes
• Heating water
• Cooking
• Drying clothes
• Fueling gas fireplaces
• As an alternative fuel for vehicles

3
Background

• Propane is used in the Petrochemical industry to
  make
• Plastics
• Alcohols
• Fibers
• Cosmetics

4
Background

• Propane is used in agriculture for
• Crop drying
• Weed control
• Fuel for farm equipment
• Fuel for irrigation pumps

5
Propane Use by Sector
6
Objectives

• To determine the variables and interactions of
  these variables upon the demand for propane in
  the United States
• Attempt to use econometric data to show a direct
  relationship between propane prices and propane
  demand

7
Assumptions

• The weekly supply data for propane reflects a
  replenishment of used stores of the product in
  the market
• Meets all five assumptions for regression
• The model makes sense
• There is a significant statistical relationship
  between variables
• There is an acceptable percent variation between
  variables
• There is no problem with autocorrelation
• There is no problem with multicollinearity

8
Hypotheses

• H1 Demand for Propane is explained by poultry
  production
• H2 Demand for Propane is explained temperature
• H3 Demand for Propane is explained by prices
• H4 Demand for Propane is seasonal

9
Variables

• Dependent Variable
• Weekly quantity of Propane supplied to the market
• Independent Variables
• Weekly poultry slaughter counts
• Used as a measure of Agricultural impact on
  demand
• Spot Prices for Propane in Texas, the Midwest and
  Northwest Europe
• Weekly temperature average for the United States
• Weekly temperature averages for the Northwest,
  Northeast, Southwest and Southeast regions of the
  United States

10
Variable Identification

• Endogenous
• U.S. demand for propane

• Exogenous
• Temperature averages
• Poultry slaughter rates
• Propane prices

11
Methodology

• Used WinORS to analyze data
• Weekly data was collected covering the time span
  between 2004 and 2007
• Stepwise regression was used to identify the
  statistically significant variables
• Ordinary Least Squares was used to test for
• Normality
• Homoscedasticity
• Autocorrelation
• Multicollinearity

12
Linear Demand Model

• Qx 2226.016 -2.352Tx -7.154Ux-5.108Nx-127.42D1-2
  62.222D2-122.885D3
• Qx Weekly quantity of propane supplied
• Tx Weekly spot price of propane in Texas
• Ux Weekly temperature average for the US
• Nx Weekly temperature average for the Northeast
  US
• D1 Spring Dummy Variable
• D2 Summer Dummy Variable
• D3 Fall Dummy Variable
• all other variables were determined
  statistically insignificant by the stepwise model

13
Preditictive Ability Graph
14
Constant Variance Graph
15
Statistical Significance and Coefficient of
Determination

• The P-Value is 0.00001 therefore it satisfies the
  99 confidence interval

Root MSE 154.774 SSQ(Res) 3808838.392 Dep.
Mean 1234.163 Coef. Of Var. (CV) 12.541 R-Squa
red 74.089 Adj R-Squared 73.111
16
Homoscedasticity and Normality

• P-value for Whites is gt .05 therefore the data
  is homoscedastic
• Correlation for Normality is below the approx.
  Critical Value therefore the data is not normal
  (flaw of this model)

White's Test for Homoscedasticity 6.81 P-value
for Whites 0.86988 Correlation for
Normality 0.9945 Approx. Critical
Value 0.999
17
Autocorrelation

• Durbin value should be gt 2, in this case the
  value is close enough to not reject the data

Rho 0.019 Durbin 1.935 Durbin H n/c D Lower
Limit 1.651 D Upper Limit 1.817 Ho Rho
0 Rho Pos Neg Do Not Reject Rho Positive Do
Not Reject Rho Negative Do Not Reject
18
Multicollinearity (VIF)

• All values for VIF for all independent variables
  should be less than 10 to ensure no
  multicollinearity

Independent Variable VIF
Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon) 1.042
Weekly Temp Avg - National 15.241
Weekly Temp Avg - NE 14.241
Summer Dummy 6.407
Spring Dummy 3.714
Fall Dummy 2.393
19
Elasticity

• The elasticity of all the independent variables
  is inverse and inelastic

Independent Variable Elasticity
Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon) -0.18828
Weekly Temp Avg - National -0.35136
Weekly Temp Avg - NE -0.22362
Summer Dummy -0.03033
Spring Dummy -0.07443
Fall Dummy -0.02297
20
Conclusions

• We reject the hypotheses that the demand for
  propane is explained by poultry production or
  temperature
• We accept only the hypotheses that demand for
  propane is seasonal and is explained by prices
  specifically the spot price of propane in Mont
  Belvieu, TX
• The only flaw in the model is that the data may
  not be normal because the correlation for
  normality is just below the approx. critical
  value
• The spot price of propane in Mont Belvieu, TX is
  inversely inelastic to the demand for propane in
  the U.S. with an elasticity of -0.18828,
  therefore a 10 increase in the spot price would
  result in only a decrease of 1.8 in demand
  nationally