Gasoline prices have been climbing rapidly of late, and it is happening earlier than normal. But why does it happen at all in the spring? There is no question that it does happen. If you check the history of gasoline prices at the US Energy Information Administration's (EIA) website you can see that gasoline prices almost always rise between January and May. For example, in 2011 the price rose by 90 cents a gallon between January and May. Last year, the price increase was 65 cents a gallon.
Many factors influence gasoline prices, but there are specific reasons behind the seasonal changes.
Two critical specifications that need to be met for each gasoline blend are the octane rating and the Reid vapor pressure (RVP). Octane rating is important for avoiding engine knocking. But the octane rating for a gasoline blend is consistent throughout the year, and is not the reason for the seasonal price fluctuations.
The RVP spec, however, does change with the seasons and this change can have a major effect on the price of fuel. The RVP is based on a test that measures vapor pressure of the gasoline blend at 100 degrees F.
Normal atmospheric pressure varies with location, but averages about 14.7 lbs per square inch (psi) at sea level. Atmospheric pressure is caused by the weight of the ocean of air pressing down on us. If a liquid has a vapor pressure greater than atmospheric pressure, that liquid boils. For example, when you heat a pan of water the vapor pressure increases until it reaches local atmospheric pressure. At that point the water begins to boil. (In the mountains where the atmospheric pressure is lower, water boils at a lower temperature.)
In the summer, when temperatures can exceed 100 degrees F in many locations, it is important that the RVP of gasoline be well below 14.7 psi. Otherwise, the fuel may build pressure in fuel tanks and gas cans, and it can boil off lighter components 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.
More congested areas and hotter areas will tend to have a limit of 7.0 psi, while cooler climates are generally allowed to be slightly higher at 7.8 psi. Some areas, however, maintain a 9.0 psi limit throughout the summer.
Refiners will start to pull down their inventory of winter gasoline well in advance of the May 1 deadline. On that date, all gasoline in the system has to meet the stricter requirements. One reason the "summer blend" is costlier to produce is 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. A typical winter gasoline blend may contain 10% butane, but the butane fraction drops to 2% or lower in the summer.
Butane is a cheaper blending component than most. Presently, the spot price of butane is around $1/gallon lower than for finished gasoline. The higher butane allowance in winter means that winter gasoline is cheaper to produce.
But butane also adds to the total gasoline pool and its lower allowance in the spring comes at exactly the wrong time for consumers: Supply is restricted just before summer driving boosts demand - which generally results in higher gasoline prices.
Butane is then added back to the system in greater volume in the fall: on Sept. 15 the RVP allowance starts to increase, and in some areas the allowed RVP eventually increases to 15 psi. So in this case we see higher supplies just when demand is falling. It shouldn't come as a surprise then that gasoline prices typically decline in the fall.
During election years, this pattern spawns lazy conspiracy theories, as people imagine the gasoline price drop is engineered for political ends. But the pattern is there in most non-election years as well, regardless of the political party in power.
Bear in mind that sharp changes in the price of oil can mask the seasonal change. If oil prices were to rise heading into fall, then gasoline prices might not decline. This has happened a few times in recent years. Or, less likely, oil prices might decline enough in the spring to cause gas prices to fall ahead of the summer driving season.
But that's the story of why gasoline prices -- almost like clockwork -- generally spring forward in the spring and fall back in the fall. It's an important transition to keep in mind when tracking fuel prices.
– This article originally appeared in Energy Trends Report, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Energy Trends Insider.