By springtime, gas prices begin to increase and generally peak around Memorial Day. Most consumers assume that prices peak at this point because of the advent of the summer-drive season. But is that the case?
To a certain extent, seasonal demand is a factor. But there are other events that collectively have a greater effect on prices each spring, leading to price peaks right before Memorial Day. In six of the past 15 years (40% of the time), the seasonal peak took place between May 9 and May 24.
Crude oil prices drive gas prices, but how the crude oil is processed also plays a significant role in price increases. The petroleum industry’s switchover to summer-blend fuels, a process that begins each February and ends June 1, creates challenges that also affect retail fuels prices. Since final implementation of the Clean Air Act Amendments in 2000, the seasonal transition to summer-blend fuel has helped gasoline prices climb significantly before they reached their peak. Comparing prices the first week in February to their seasonal peak, increases have ranged from a low of 20 cents per gallon in 2003 to a high of $1.13 per gallon in 2008; on average, the average annual increase is 52 cents per gallon.
Refineries convert crude oil into a variety of products, including gasoline, diesel fuel (known as “distillates”) and jet fuels, among other products. The United States has greater demand for gasoline (as opposed to diesel fuel) than most other countries. Therefore, U.S. refineries are optimized to produce gasoline, and their maintenance schedules are based on gasoline demand.
Demand for gasoline in the United States is generally the lowest during the first two months of the year, so refinery maintenance, known as a “turnaround,” is often scheduled during the first quarter. Another reason for scheduling turnarounds during this period is that it is 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 shut down (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 can be from one to four weeks in duration.
Because of the long lead time required to plan turnarounds, they are costly to reschedule and usually proceed as planned, even if refining capacity is suddenly tight because of unplanned refinery shutdowns elsewhere. Add to this mix the reduction in the number of refineries throughout the country — there are currently 142 operable refineries in the United States, about half the total from 1980 — and any unanticipated refinery shutdowns can have a ripple effect on supply. Further, like any maintenance, some turnarounds may not go as planned and take longer than originally anticipated, further stressing the system. To minimize the impact of turnarounds on overall supply, they are staggered through a roughly three-month window.
The U.S. Environmental Protection Agency (EPA) defines April to June as the “transition season” for fuel production. Refineries lead this transition and switch over to summer-blend production in March and April.
The blends of gasoline used in the summer months are different than the blends 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, requires that different fuels be used in many metropolitan areas, affecting more than 30 percent of the gas purchased in the country. Reformulated gas (RFG) is required in cities with high smog levels and is optional elsewhere. It is currently used in 18 states and the District of Columbia. (EPA publishes a listing at www.epa.gov/otaq/fuels/gasolinefuels/rfg/areas.htm of where RFG is used.)
There are also more fuels to produce during the transition season. In the winter months, only a few fuels are used across the United States. However, because of various state or regional requirements, 14 different fuel specifications are required for the summer months. Refineries must produce enough for each area to ensure that there are no supply shortages.
Summer-blend fuel is more expensive to make than winter-blend fuel for two reasons. First, the production process takes longer and is costlier. Second, the overall yield of gasoline per barrel of oil is lower. These complexities add as much as 15 cents per gallon to the cost to produce these higher-grade fuels.
In addition to added costs to produce the fuel, prices are also affected by increased demand, maintenance costs and capacity decreases.
The end point in a series of handoffs to prepare for summer-blend fuel is the date that retailers must sell the fuel. In most areas of the country that require summer-blend fuels, retailers have until June 1 to switch to summer-grade gas.
Some retailers must sell summer-blend fuels much earlier. California, which has one-eighth of the country’s population, has among the most stringent requirements, both in terms of the complexity of the fuel and the date at which summer-blend 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 why California has a longer summer-blend period than other states is because of its longer period of high temperatures — particularly in the desert areas, which are located in the air district with the worst quality of air.
There are other key deadlines that additionally 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 and be in compliance. Those out of compliance 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. Combined with increased demand, this puts upward pressure on prices.
Demand is often cited as the main reason for spring price increases. In 2014, U.S. demand for petroleum products averaged 19.1 million barrels per day, of which 8.9 million were gasoline. But world demand for oil is around 91 million barrels per day, 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 from its peak in 2007, world demand for oil has increased, which elevates oil prices and subsequently drives 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 is 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 is only a few percentage points per month. However, a 1% increase in U.S. gasoline demand does mean that an extra 90,000 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, the problem is compounded. Demand in August 2014 was 849,000 barrels per day (10.3%) greater than demand in January 2014. That demand increase creates enormous pressure 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 refining operations, place significant pressure on supplies and affect prices across the country.
Unlike in the spring, the change to winter-blend fuel is not required. However, because winter-blend fuel costs less, retailers often 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. A retailer’s volume will dictate how often a station receives deliveries, with some stores having multiple deliveries per day and others needing just one or two deliveries per week.
By the end of September, gas prices generally decrease as the complications from this switchover are processed 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.
Also, California’s summer-blend fuels season is longer than the rest of the country. Both Northern and Southern California’s summer-blend requirements run through the end of October. This exacerbated the problems with supply in California in early October 2012, when fires at two important refineries limited state-specific production and caused wholesale and retail gas prices to spike to record levels.
Summer-blend fuel requirements may be relaxed in times of emergencies or when potential shortages are possible. That was the case in 2005 as Hurricane Katrina made landfall in Louisiana at the end of August and significantly affected Gulf Coast refining operations. Several states successfully petitioned for waivers to temporarily exempt retailers from RFG requirements through September 15. Only the U.S. Environmental Protection Agency has the authority to issue these waivers.