Spring is approaching, and gasoline prices are once again climbing. But you may not know that this ritual of climbing prices happens almost every year about this time. If you check the history of gasoline prices at the Energy Information Administration’s (EIA) website you can see that gasoline prices almost always rise between January and May.
The primary reason this happens is due to a seasonal switch in gasoline blends. There are two key (although not the only) specifications that refiners must meet for gasoline. The gasoline must have the proper octane, and it must have the proper Reid vapor pressure (RVP). While the octane specification of a particular grade is constant throughout the year, the RVP specification changes with the seasons. (See Refining 101: Winter Gasoline for a more detailed explanation of gasoline blends).
The RVP is based on a test that measures vapor pressure of the gasoline blend at 100 degrees F. Normal atmospheric pressure varies, but is usually around 14.7 lbs per square inch (psi). Atmospheric pressure is caused by the weight of the air over our heads. If a liquid has a vapor pressure of greater than atmospheric pressure, that liquid boils. For example, when you heat a pan of water the vapor pressure increases until it reaches atmospheric pressure. At that point the water begins to boil.
In the summer, when temperatures can exceed 100 degrees F in many locations, it is important that the RVP of gasoline is well below 14.7 psi. Otherwise, it can pressure up your gas tanks and gas cans, and it can boil in open containers. Gas that is vaporized ends up in the atmosphere, and contributes to air pollution. Therefore, the Environmental Protection Agency (EPA) has declared that summer gasoline blends may not exceed 7.8 psi in some locations, and 9.0 psi in others. The particulars vary, but key considerations are the altitude and motor vehicle density of a specific location.
The EPA publishes a schedule for the RVP transition:
Guide on Federal and State Summer RVP Standards for Conventional Gasoline Only
The schedule varies somewhat from region to region, but in general is as follows. After allowing vapor pressures as high as 15 psi in the winter, the limit drops starting on May 1st:
May: 9.0 psi
June – Sept. 15: 7/7.8 psi
More congested areas and hotter areas will tend to have a limit of 7.0 psi, while cooler climates generally opt for 7.8 psi. Some cooler climates maintain a 9.0 psi limit throughout the summer. One of the disadvantages of having different requirements for different areas is that summer gasoline is less fungible. This can cause price imbalances in different areas, and sometimes prevents product from flowing from one area into another to ease the shortage.
Refiners will start to pull down their inventory of winter gasoline well in advance of the May 1st deadline. On that date, all gasoline in the system has to meet the stricter requirements, and this “summer blend” is costlier to produce because it contains less butane.
Butane, which has an RVP of 52 psi, can be blended into gasoline in higher proportions in the winter because the vapor pressure allowance is higher. There are two advantages in doing this. First, butane is a cheaper blending component than most of the other ingredients. That makes fall and winter gasoline cheaper to produce.
But butane also adds to the total gasoline pool, so that means that gasoline supplies increase in the winter as more butane is added to the mix. Not only that, but this takes place after summer driving season, when demand typically falls off. These factors normally combine each year to reduce gasoline prices in the fall (even in non-election years). The RVP is stepped back down to summer levels starting in the spring, and this usually causes prices to increase.
One misconception some have is that they can save money by buying cheap gasoline in the winter and storing it for the summer. Remember that winter gasoline will pressure up as the weather heats up, and the contained butane will start to vaporize out of the mix. You will end up with less gasoline than you paid for, and that would also contribute to the air pollution problem that summer gasoline was designed to avoid.
If, on the other hand, you were to buy summer gasoline and try to store it until winter, you might find yourself having problems getting the fuel to ignite, due to the lower vapor pressure. This would be like putting a little bit of diesel in your gasoline – not very good for your car.
So how high might gasoline prices climb this spring? The EIA’s gasoline inventory database can provide some guidance. In the spring of 2007 gasoline prices spiked above $3.00 a gallon for the first time. But that year gasoline inventories also dropped sharply. Rapidly falling gasoline inventories are a good predictor of sharply higher gasoline prices. In the fall of 2005, Hurricane Katrica also caused a sharp drop in gasoline stocks, leading to an atypical fall price increase.
So far in 2010, gasoline inventories have been at very healthy levels. While some inventory draw down can be expected during the transition to summer gasoline, it is a pretty safe bet that the current high level of gasoline stocks will prevent a rapid escalation of prices this spring. I would expect no more than a mild price increase between now and summer, and at the current inventory levels it would not be surprising to see prices start to decline from present levels.
However if oil prices escalate, that could trump high gasoline inventory levels. This is why gasoline is presently about $1 more than it was last year at this time; oil prices were $30-$40 lower than they are now. But that’s a topic for a future essay.
Yest but gasoline is about $1 higher that last March. This year there was no downward trend.
That's because oil prices plunged after demand was crushed when crude hit $147/bbl. Crude prices this time last year were $30-$40 cheaper than they are now, which is why gasoline is $1 more this year.
RR
I don thin so, Buckaroo.
They drew down a lot of that offshore "floating" storage in February,
OPEC just cut their shipments 550,000 bbl/day,
and we're starting to use more gasoline. (Last week the four week average was 8.8 mbpd, the week before it was 8.7, and the week before that it was 8.6.)
RBOB closed at $2.27 friday, and that translates out to $2.97 at the pump.
Put me down for $3.35 by the 4th of July.
The only prediction I will make is that when gasoline goes up, TV news will have a story about gouging featuring some guy wearing a John Deere ball cap filling up a big SUV jacked up up an other few feet with tractor tires.
Put me down for $3.35 by the 4th of July.
You could be correct if oil prices skyrocket, but gasoline inventories are presently abnormally high. Conditions as they are now don't warrant further increases in gasoline prices (except if oil prices climb).
RR
Get this – from Dec 1979 to June 1981 the moving average of the previous year's YOY increase in US gasoline prices never dropped below 20%. When did the moving average top 20% in the last decade? October 2000 to Feb 2001. Didn't quite reach those heights in the 2nd half of the decade, although it operated in a 15-19% band a lot of the time. This was due to volatility.
From a June 1978 absolute peak of 7913 kb/d gasoline consumption had declined 30 weeks later to 78.78% of this value. 30 weeks before Dec '09 gasoline hit its recent local peak of 9640 kb/d (July '07). If consumption had declined in the same pattern as in the 70s Dec '09 consumption would have been 7002.12 kb/d instead of 8888 kb/d, a difference of 1885.88 kb/d. I've worked out same figures for all the monthly data that extends back to the 70s, and the current regime of "peak demand" isn't living up to this historical equivalent at all. The diff for "Crude Oil and Petroleum Products" in Dec was 5400.42 kb/d. Yergin must be very long on Range or Tesla to be serious. Or perhaps CERA are closet economic doomers.
OPEC just cut their shipments 550,000 bbl/day,
I am going to post this one at Forbes. Comments like this are the reason I like to post these essays here first. I think it is important to point out that sharp changes in the underlying oil price will cause gasoline price movements that are independent of inventory levels. I am going to add that to this essay as well.
RR
We're not even the "important" ones, anymore. China is the one that's increasing it's demand by leaps and bounds. They're a hard act to follow, but they're increasing demand somewhere in between seven hudred thousand and a million bpd, annually.
Add in internal demand in OPEC, India, and the rest of the "developing" world and you're somewhere in the neighborhood of 2 million bpd increase in demand every year.
Add on top of that, the Wiki Megaproject shows only 2.8 mbpd coming online in 2011, and a global decline rate estimated to be in the vicinity of 3.5 to 4.0 mbpd, and it's not a pretty picture.
And, OPEC cut exports by 550,000 bpd, all the while waxing eloquent about how they "loved" oil in the seventy to eighty range.
I'm pretty sure they have "some" spare capacity left, which means they don't "love" the present range nearly as much as they'd "Love" the $100.00 Range.
Another thing: The "Crack" Spread is pretty High right now. I think the refineries are smelling "shortage developing."
Oh, Gasoline is up another $0.0125 in Asia as we speak.
Add on top of that, the Wiki Megaproject shows only 2.8 mbpd coming online in 2011, and a global decline rate estimated to be in the vicinity of 3.5 to 4.0 mbpd, and it's not a pretty picture.
Unless Saudi really did voluntarily shut in 2 mbpd, then 2011 shouldn't be a problem. Guess we will fund out huh?
OD
Very informative article RR – I did not know there were so many differences between winter and sumer grade, and differences for different regions – would certainly make inventory management more complicated.
Interesting also about butane – what do they do with it in the summer?
One thing that I am surprised you did not mention, and even more surprised that Rufus did not mention, is the effect of theanol blending on vapour pressure.
Pure ethanol has a vapour pressure of only 1.5psi, much lower than gasoline, but it doesn't behave this way when mixed in low concentrations (like E10) because it's polar behaviour doesn;t happen at low concentrations.
From Ethanol Producer magazine (Feb, 2007);
“Evaporative emissions are inherently higher at the E10 blend,” Wuebben tells EPM. “But at the higher blends like E40 and up, testing shows evap emissions are lower than gasoline.”
I couldn't find hard numbers on the RVP of E85, the best I found was "6-12psi"
Presumably, the higher number is winter grade E85, but clearly, with E85, you can lend with higher RVP gasoline to meet the summer requirement, so presumably, they could have a higher portion of butane in there.
Of course, more butane in 15% is probably less in total than a lower portion of 90%, but still, the cost of the gasoline portion would be somewhat lower.
And maybe E85, at least, would be fungible between areas.
Of course, with suitable electric pre-heat for cold starting, having cars on hydrous E100 (or M100) would solve the problem altogether, summer and winter.
Good work, Paul. The reason I didn't mention it is because I didn't know anything about it. I know there was a lengthy discussion in Florida concerning E10, but I wasn't aware of much concern outside of there.
The feeling I got at the time was that they might have "moved the wire" just a touch to allow E10 to slip in under it (as I said, that's just a feeling – I'm not at all sure that that is what happened.)
E85 selling at 27% Discount all over Wisconsin.
Of course, that's with the Blenders' Credit added in, so they're making real good money even at those prices.
Interesting also about butane – what do they do with it in the summer?
Paul,
That probably explains the lower price of cigarette lighters and reusable matches in the summer months. 🙂
Oil's well that ends well…
http://www.1sky.org/blog/2008/08/around-the-blogs-this-week-88
Short 2-minute video worth watching.
I've worked out same figures for all the monthly data that extends back to the 70s, and the current regime of "peak demand" isn't living up to this historical equivalent at all. The diff for "Crude Oil and Petroleum Products" in Dec was 5400.42 kb/d.
Warning to Benny "All BOOM No DOOM": Reality is about to burst your Peak Demand bubble!
Yergin must be very long on Range or Tesla to be serious.
Yergin has such a bad track record, it's amazing that anybody still takes him serious. Previously he was anti-Peak Oil: There is plenty of oil, folks. Next month (or year) prices will be much lower.
Sounds like he switched to a different theory (Peak Demand) to conveniently support the same conclusion.
Or perhaps CERA are closet economic doomers.
More like closet idiots.
I can't resist mentioning that the summer/winter thing is another advantage to CNG vehicles – there is no changing grades, and no evaporative loss at all.
Actually, same would apply to a CNG/E100 flex fuel vehicle (my personal favourite). But there's not much profit in that for the oil companies, just the retailers.