Gasoline prices are on the rise, climbing nearly $0.30/gallon since the beginning of the year. What you may not realize is that this price rise happens nearly every year. In fact, if we look back to 2000, the only time gasoline prices didn’t climb between January and May was in 2020 — when the COVID-19 pandemic collapsed oil prices.
In the fall, the reverse happens. Nearly every year between August and December gasoline prices decline. People tend to notice this during election years, convinced that politicians are manipulating gasoline prices in order to stay in office. To be fair, sometimes they attempt to do that, but there is a more fundamental reason for the annual rise and decline of gasoline prices.
There is a seasonal factor behind the changes in gasoline prices. As someone whose job it once was to blend gasoline for ConocoPhillips, allow me to explain the reasons.
The Environmental Protection Agency (EPA) strategically regulates gasoline blends seasonally to minimize emissions, particularly those contributing to smog, because gasoline evaporates.
The EPA achieves this regulation through seasonal limits on something called the Reid vapor pressure (RVP). The RVP specification is temperature-dependent because evaporation rates increase at higher temperatures.
To lower evaporation rates of gasoline, the EPA requires lower RVP levels during the summer. While specific RVP limits vary by state, 7.8 pounds per square inch (psi) is a common limit in much of the U.S. during summer.
The summer gasoline compliance date for refiners and product terminals is May 1. Retailers have until June 1 to complete the changeover. This means that refiners spend March and April making the switch, so their tanks are in compliance on the May 1 deadline.
There are two reasons this changeover generally correlates with higher gasoline prices. First, it is more expensive to produce summer gasoline. A key reason for this is butane.
Butane, with a high RVP of 52 psi, can be blended into gasoline at higher rates in the winter blends, since the overall vapor pressure of the gasoline can be higher. Butane is cost-effective as it often trades at a $1/gallon discount to crude oil or gasoline. It also increases gasoline supplies by adding a generally abundant component to the gasoline blending pool.
In the summer, stringent RVP limits make blending significant amounts of butane impractical. Removal of butane means it has to be replaced with more expensive components, hence the finished gasoline becomes more expensive. The limited ability to add butane to summer blends also decreases the overall supply of gasoline blending components.
The second factor that helps increase prices is that this switch to summer blends happens just as the high-demand summer season is beginning. Combine higher production costs with lower supplies and higher demand, and that’s a recipe for higher gasoline prices nearly every year.
There are occasional external factors like hurricanes in the Gulf of Mexico, geopolitical events, or a global pandemic that can disrupt these seasonal trends. But most of the time gasoline prices follow this seasonal trend.
There is one silver lining in this transition, beyond simply trying to keep smog under control. Butane has a lower energy content than other components of gasoline, so the energy content of summer gasoline blends tends to be higher. Thus, you usually pay more, but you should also see a slight improvement in your vehicle’s fuel efficiency.
Of course, since this is an election year, you can expect the usual nonsense when gasoline prices inevitably start to decline in the fall. But now you will be in a better position to explain to people why this almost always happens, regardless of elections.
By Robert Rapier
