Why do gas prices seem to increase in the warmer months and decrease in the colder months? NACS’ John Eichberger provides a quick explanation in the video above.
1. Refinery Maintenance During the First Quarter
Refineries convert crude oil into a variety of products, including gasoline, diesel fuel and jet fuels, among other products. The United States has greater demand for gasoline (as opposed to diesel fuel) than most other countries.
That means U.S. refineries are optimized to produce gasoline, with maintenance schedules based on gasoline demand. And because demand for gasoline in the United States is generally lowest in the first two months of the year, refinery maintenance, known as a “turnaround,” is often scheduled during the first quarter of the year. That’s also the time between peak heating oil season and peak summer drive season, allowing refineries to retool for summer-blend fuels.
A turnaround is a planned, periodic shutdown (total or partial) of a refinery process unit or plant to perform maintenance, overhaul and repair operations, and to inspect, test and replace materials and equipment.
On average, refineries experience turnarounds about every four years, meaning that about one quarter of the country’s refineries experience a turnaround in a given year. These turnarounds are scheduled at least one to two years in advance, and last one to four weeks.
Because of the long lead time required to plan turnarounds, they usually proceed as planned, even if refining capacity is tight because of unplanned shutdowns elsewhere.
Add to this mix the drop in the number of refineries throughout the country: There are currently 143 operable refineries in the United States, about half the total from 1980. So it’s not hard to see how any unanticipated refinery shutdowns can have a ripple effect on supply.
Plus, like any maintenance, some turnarounds may take longer than originally anticipated, further stressing the system.
2. The Switch to Summer-blend Production in April
The U.S. Environmental Protection Agency defines April to June as the transition season, as refineries switch to summer-blend production.
The blends of gasoline used in the summer months are different than those used in the winter. In the winter, fuels have a higher Reid vapor pressure, meaning they evaporate more easily and allow cars to start in colder weather. In the warm summer months, these evaporative attributes would lead to increased emissions and the formation of smog.
The Clean Air Act Amendments of 1990, which had final implementation in 2000, require that different fuels be used in many metropolitan areas. That affects more than 30 percent of the gas purchased in the country. Reformulated gas, known as RFG, is required in cities with high smog levels (and considered optional elsewhere). It’s currently used in 18 states and the District of Columbia.
Adding to the complications of producing new fuels, there are more of them. In the winter months, only a few fuels are used across the country. However, because of various state or regional requirements, 15 different fuel specifications are required for the summer months. Refineries must produce enough for each area to ensure there are no supply shortages.
Summer-blend fuel is more expensive to make than winter-blend fuel for two reasons. First, the process to produce it takes longer and is costlier. Second, the overall yield of gasoline per barrel of oil is lower. Estimates of the added cost per gallon for summer fuel range from around 3 cents to as much as 15 cents.
And the price of these higher-grade fuels is magnified by increased demand, maintenance costs and capacity decreases.
3. Retail Deadlines Through June
In most areas of the country that require summer-blend fuels, retailers have until June 1 to switch to selling summer-grade gas.
Some retailers must sell summer-blend fuels much earlier. California has among the most stringent requirements, both in terms of the complexity of the fuel and the date at which it fuel must be sold. In Northern California, retailers must sell summer-blend fuel a month earlier than the rest of the country: May 1. In Southern California, the deadline is two months earlier: April 1.
One of the reasons California has a longer summer-blend period than other states is because of its longer period of high temperatures. This is particularly relevant in the desert areas, which are located in the region with the worst air quality. Also, California’s summer-blend fuels season lasts longer than the rest of the country, going through the end of October.
Other key deadlines also put stress on the system. Nationwide, refiners must produce summer-blend fuel no later than April 1. (Obviously, deadlines are earlier for California’s fuels.)
From refineries, fuels travel through pipelines at about 4 miles per hour, or 100 miles per day. Fuels refined in the Gulf Coast can take several weeks to reach storage terminals throughout the country. This is why the deadline to have summer-blend fuel at terminals and storage facilities is May 1—a month after the transition at the refineries.
The May 1 deadline for terminals is considered one of the biggest factors in the seasonal price increases. Terminals have to fully purge their systems of winter-blend fuels and be near empty to make the transition or face stiff penalties. So most terminal operators would rather be out of inventory than out of compliance. This regulatory requirement leads to lower inventories at the terminal. And combined with increased demand, this puts upward pressure on prices.
4. Demand Increases Beginning in February
In 2013, U.S. demand for petroleum products averaged 19.02 million barrels per day, of which 8.76 million were gasoline. But global demand is more than four times the total of U.S. demand and 10 times U.S. demand for gasoline alone. While U.S. demand for gasoline had declined over five years, world demand for oil has increased, which has elevated oil prices, which drive gas prices.
Still, U.S. gasoline demand is a factor in the annual spring increase. Demand increases every year beginning in February and typically peaks in August.
The common misperception is that there’s a huge increase in demand for the Memorial Day weekend and the official beginning of the summer-drive season. There is an increase in demand, but it’s only a few percentage points per month.
However, a 1% increase in U.S. gasoline demand means an extra 87,600 barrels per day must be produced, which is the equivalent of the output of a small refinery. During the seven-month period when demand increases, enormous pressure is put on the system and makes it extremely vulnerable to supply disruptions.
As demand decreases and temperatures cool, retailers can switch over to selling winter-blend fuel, beginning September 15. While these winter-blend fuels are cheaper to produce, the complications of the switchover often lead to a temporary bump in price, usually a few cents per gallon.
The weather may also affect gas prices in the fall. Hurricanes, especially those that damage Gulf Coast operations, can put significant pressure on supplies and spark price bumps across the country.
Unlike in the spring, the change to winter-blend fuel is not required. However, because winter-blend fuel costs less, retailers obviously want to sell the cheaper fuel so they can be as price competitive as possible.
Not all retailers begin selling this fuel on September 15. Most wait to make the switch until their inventories are low and need a new shipment..
By the end of September, gas prices generally decrease as the complications from this switchover are worked through and demand continues to fall. Despite what conspiracy theorists believe, price decreases in the fall have everything to do with a decrease in demand and nothing to do with pre-election politics.
Combined with world demand for crude oil, the patchwork of summer-blend fuels requirements places enormous stress on the fuels distribution system each spring. It’s easy enough to have gas. The challenge is to have the right gas at the right place at the right time.
Learn more about what impacts the price of gasoline.