The popular belief is that gas prices rise in the summertime because more people travel. While people do tend to be more mobile in the warmer months, they also take to the roads all year long. Increased demand has some effect on prices, but there are many other factors as well. Government regulations, crude oil prices and supply, problems at refineries in pipelines, and the switching of seasonal blends impact the costs per gallon of gasoline.
According to statistics from the U.S. Energy Information Administration, retail gasoline starts to increase in price during the spring, and peaks in late summer. In its analysis, the Administration found that regular grade gasoline was on average 47 cents per gallon more in August than in January, based on data from 2000 through 2015. The reason goes beyond the fact that people do more driving. Other elements of the equation include:
Crude Oil Prices/Availability
Supply and demand around the world affect crude oil prices. In the 1990s, most instances of gas price increases were due to spikes in the cost of oil. World events have triggered shortages that caused gasoline to quickly become more expensive. These have included the Persian Gulf War in 1990, the Iran/Iraq war in 1980, and a 1973 Arab oil embargo. In 2008, a lower valued U.S. dollar and political events and conflicts in oil-producing areas led to a record spike in crude oil prices.
As for the seasonal shifts in gasoline costs, the following factors are in play:
Reformulation of Gasoline Blends in Cities
The Environmental Protection Agency requires reformulated blends to be used in metropolitan areas, from April through September. It has followed this practice since the Clean Air Act was introduced in 1990. The costs of producing this type of fuel are higher, leading to a 2-4 cent per gallon increase in prices on average, which is partially a reason why prices go up in the summer. Reformulating the blends causes price spikes because:
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Petroleum companies have more power over the market, and regional monopolies, during the warm season.
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Each city has a unique formulation to address its air pollution issues, making it difficult to deliver fuel to areas where supply is low.
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Switching from one blend to another is costly for petroleum companies, as they must reconfigure plants, add storage to separate blends, and acquire additional equipment.
Also, summer blends are more expensive to make because of a longer, more costly production process, and a lower yield of gasoline per barrel of oil. Reformulated fuel doesn’t yield the same mileage either. Therefore, drivers must purchase more fuel to go the same distances, costing them more overall, but retailers must purchase greater quantities of fuel too. That also leads to higher market prices.
Production Factors
The rise in gas prices by the summer has much to do with what happens at refineries. In March and April, they switch over to producing blends that have a lower Reid vapor pressure. Higher vapor pressure fuels are preferred in winter because they more readily evaporate, making it easier for vehicles to start when it’s cold, but a high evaporation rate would increase atmospheric emissions in the summer.
In addition, refineries schedule their maintenance around the demand for gasoline. Since it is lower in general during January and February, this is when much of this maintenance occurs. The costs of maintenance and turnaround must be considered, as those related to the number of refineries shut down to maintain, repair, overhaul, and test equipment. Typically, a quarter of the refineries in the U.S. are in a turnaround in a given year, and the average one is overhauled once every four years.
If a turnaround is rescheduled, the shift in planning can be costly. Refineries, therefore, tend to proceed with their plans, even if there are unexpected shutdowns elsewhere in the country. Capacity may tighten significantly if extended shutdowns don’t go as planned. Also, the number of operating facilities has declined in recent decades, so unexpected downtime can have a greater effect on gas prices, especially during the summer.
A refinery turnaround can last a week or up to four weeks, but the associated costs are just part of why summer gas prices are higher. The switching of blends, which usually occurs by April, is costly. Facilities produce more fuel during this transition and need to accommodate the 14 different fuel specifications that meet various state or regional requirements. Therefore, production and maintenance costs are factors, along with lower capacities and increased demand during what can be considered a challenging time for refiners.
Terminal and Retail Deadlines
A few deadlines put a strain on the production and supply system. In addition to the April 1 deadline for producing summer-blend fuel, there are delivery constraints to consider. Terminals must stick to a May 1 deadline, fully purging winter blends to make room for and ensure compliance with summer ones. Terminal operators are faced with decisions that can cause them to run out of inventory, causing spikes in seasonal prices. The transport of fuel doesn’t help since it can travel through a pipeline at only about four miles per hour. For that reason, fuel produced by Gulf Coast refineries can take weeks to arrive at storage terminals elsewhere.
These challenges occur while demand is increasing during the spring months. Changes in demand can exacerbate the issue. A 1 percent increase in demand nationally means about as much fuel as a small refinery can output must be added to the system, according to the National Association of Convenience Stores. Such an increase happening when demand is usually on the rise can compound the problem. The amount of extra gasoline needed can exceed the capacity of the largest refineries in the country.
These are the reasons gas prices spike in the summer, in a typical year. Fluctuations in oil prices can compound or offset the rise. Reformulation of gasoline, various production and delivery factors, and pressure on terminals and retailers also help boost prices at the pump in the summer.
