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By Robert Rapier on Oct 8, 2013 with 19 responses

Why Gasoline Prices are Falling

Fall Means Falling Gasoline Prices

Fall is always a welcome change of pace for most people after a long, hot summer. Not only from the temperatures, but fall almost always brings relief at the gasoline pump. Pundits frequently notice this phenomenon during election years, and assume that vested interests are trying to manipulate prices to win elections. But there is a more straightforward explanation to what’s going on, and it isn’t limited to election years.

Regulating Smog

Everyone knows that gasoline evaporates. What you may not know is that there are numerous recipes for gasoline, and depending on the ingredients, the gasoline can evaporate at very different rates. And because gasoline vapors contribute to smog, the Environmental Protection Agency (EPA) seasonally regulates gasoline blends to minimize emissions of gasoline vapors.

The way the EPA regulates these vapors is by putting seasonal limits on the Reid vapor pressure (RVP). The RVP specification is based on a test that measures vapor pressure of the gasoline blend at 100 degrees F. Vapor pressure is a measure of the tendency to evaporate; the higher the vapor pressure the faster the evaporation rate. Normal atmospheric pressure is around 14.7 lbs per square inch (psi) at sea level. Substances with a vapor pressure higher than normal atmospheric pressure are gases, and those with a vapor pressure lower than normal atmospheric pressure are liquids (assuming they are exposed to normal atmospheric pressure).

But vapor pressure is also a function of temperature. Under normal atmospheric temperatures water is a liquid because its vapor pressure is below 14.7 psi. It still evaporates (i.e. it still has a vapor pressure), but very slowly. As water is heated, its vapor pressure increases, and as the boiling point of water is reached the vapor pressure of water reaches that of atmospheric pressure and the water becomes a gas (steam).

The same phenomenon is true with gasoline. As the temperature increases, the vapor pressure increases. Thus, in summer it is important to keep the RVP of gasoline at a lower level than in winter. The specific limit varies from state to state (and tends to be more restrictive in congested areas and warmer locations), but 7.8 psi is a common RVP limit in much of the US in the summer months. After gasoline has been blended, it must be tested and it must be below the RVP limit for the month in which it will be sold.

Each year in September, the RVP specifications begins to be phased back to cold weather blends. In cold weather, gasoline can have an RVP as high as 15 psi in some locations. This has a big impact on the cost of producing gasoline. The reason for this is butane. How do I know this? Because I spent several years blending gasoline and I dealt with this transition twice a year.

More Butane, Cheaper Gasoline

Butane has an RVP of 52 psi, which means pure butane is a gas at normal pressures and temperatures. But butane can be blended into gasoline, and its fractional contribution to the blend roughly determines its fractional contribution to the overall vapor pressure of the mixture. As long as the vapor pressure of the total blend does not exceed normal atmospheric pressure (again, ~14.7 psi) then butane can exist as a liquid component in a gasoline blend.

But with a vapor pressure as high as 52 psi, butane can’t make a large contribution to summer blends where the vapor pressure limit is 7.8 psi. For example, if a gasoline blend contained 10 percent butane, butane’s contribution to the vapor pressure limit is already 5.2 psi and you would still have 90 percent of the blend to go. It isn’t feasible to blend much butane into gasoline when the vapor pressure requirement is low. But when the limit increases by 5 or 7 psi, it becomes feasible to blend large quantities of butane.

Why do we care about blending butane anyway? Because it is abundant and cheap. Butane can routinely trade at a $1/gallon discount to crude oil or gasoline. Butane is a byproduct of oil refining, but is also a component of natural gas liquids (NGLs), which are condensed out during natural gas production. Given the huge expansion of natural gas production in the US, it should come as no surprise that NGL production is also on the rise.

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Thus, butane lowers the cost of producing gasoline in the “winter” blends. Not only is it cheaper, but because butane can be blended at higher levels after September 15th the gasoline supply effectively increases. For example, in the summer a gasoline blend might only contain 2 percent butane. In the fall, that gasoline blend might contain 10 or 12 percent butane, which can reduce the cost of production by a dime a gallon — and further reduce the price because gasoline supplies have increased by 10 percent due to the inclusion of butane.

The Perfect Storm

On top of that, this transition takes place after the high demand summer driving season has passed. Hence, supplies increase and cost less to produce just as demand falls. This perfect storm takes place every fall, and will generally drive down the cost of gasoline for consumers.

Sometimes other factors can trump this perfect fall storm. In 2005, another perfect storm called Hurricane Katrina caused more than enough problems to trump the normal seasonal effect of falling prices. Occasionally hurricanes or geopolitical events will have a big enough impact on oil prices that the seasonal effect is diminished or eliminated.

But more often than not, falling leaves are accompanied by falling gasoline prices, and now you know why. Enjoy it while you can, though. Spring always brings an end to this perfect storm when the RVP specification steps back down on May 1st — increasing costs and decreasing supplies just in time for the start of the heavy demand summer driving season.

Link to Original Article: Why Gasoline Prices are Falling

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By Bob on October 8, 2013 at 12:15 pm

    typo: ” In cold water, gasoline can”

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    • By Robert Rapier on October 8, 2013 at 4:27 pm

      Thanks for letting me know about the typo. I am still amazed that I can read through something 3 times and have those things slip through.

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  2. By earlrichards on October 8, 2013 at 12:28 pm

    To break the gasoline price-fixing, price-gouging grip of Tesoro and Chevron on Hawaii, plug your Tesla S, electric car into your household, solar array.

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  3. By Trevor H on October 8, 2013 at 3:47 pm

    Thanks Robert. I’ve known for many years that summer gas was more expensive because of some blending magic that makes it less polluting. I’m glad to understand how and why now.

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  4. By OD on October 8, 2013 at 8:00 pm

    Robert,

    What do you think a default will do to gas prices and will it hinder the US ability to import oil? Thanks.

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    • By Robert Rapier on October 8, 2013 at 9:04 pm

      Not sure, but I have friends who think the impact will be so severe that it will actually cause oil prices to fall as people can no longer afford oil. I don’t think there’s any way that a default happens. There will be lots of noise, but no default.

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      • By OD on October 9, 2013 at 8:56 am

        I hope you’re right. It will be an interesting week, to say the least.

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      • By Tom G. on October 9, 2013 at 10:48 am

        I agree with Robert OD; no default. There is more than enough tax revenue to pay the interest on the debt, Medicare, Medicaid and other mandated programs.

        What many people will probably learn is that some of the functions our federal government performs are really not very essential. Our firefighters are still working and so are our teachers. Our Dr’s and hospitals are open as well as our grocery stores. Walmart, K-Mart, J.C. Penny and other stores are still open and selling stuff. Gas stations are still pumping gas and our highways and freeways are still crowded with people going to work. The electric lights are still on and natural gas is still flowing thru our meters. In short, life goes on regardless of the political nonsense.

        Get the picture? The government needs to get over itself.

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        • By OD on October 9, 2013 at 4:30 pm

          Wow Tom, I couldn’t disagree with you more. Just because the shutdown hasn’t affected you yet, doesn’t mean it’s no big deal.

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          • By Tom G. on October 9, 2013 at 4:43 pm

            True OD. Tens of thousands of individuals are probably being affected and I sincerely hope it ends soon.

            My only point was to show that life will go on for millions of American who will probably never feel any effects from the shutdown.

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  5. By Forrest on October 9, 2013 at 8:33 am

    Some interesting thoughts…winter formulation 2% less btu as compared to summer. Butane about 12% less energy as compared to regular gasoline. E10 blends suffer about the same 2% btu loss. This minimal change in btu impossible to track per mpg in vehicles. Tire pressure can influence the mpg about the same. E10 enjoys a RVP 1 psi EPA waiver as the splash blending methods utilized by the industry not very accurate. Ethanol blends quickly raise RVP upon E10 blends, about the same for E15, then gradually decrease being equal with gas at E50. Higher concentrations of ethanol; RVP drops quickly. E60 and higher no concern of RVP. So, the petrol industry could dump a lot of butane upon the higher ethanol blends. CBOT prices for ethanol often times $2/gallon and butane is $1/gallon cheaper than regular gasoline.

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    • By Robert Rapier on October 9, 2013 at 10:50 am

      I actually made this point a few years ago when gas stations were being threatened with “hot gas” lawsuits that said that because they don’t have temperature compensating equipment, that sometimes consumers are being ripped off by getting less energy than they pay for. I said “If they want to really see a case where they get less energy, look at the winter gasoline blends.”

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  6. By ben on October 9, 2013 at 9:53 pm

    And as Paul Harvey would always say, “And now you know……….” Thanks for running through the ABC’s of transport fuel supply/demand factors for ETI readers. No real mystery here, but few consumers no the details of a market segment that impacts all of us.
    There are, of course, macroeconomic factors here that bear significantly on both supply and demand with an obvious eye on the threat if major demand destruction. This is particularly acute given the impact of current government closure combining with the specter of a public debt default. There is little doubt that an erosion of confidence in the sustainability of the still-fledgling recovery only serves to undermine the smooth functioning of financial markets and commerce. Given that there is precious little room for error in the unwinding of the Fed’s current QE tight-rope act, the prospects of carrying off a monetary soft landing in the midst of fiscal anarchy is less than a sure thing. No, there is every reason to believe that the big shots in Washington with there reckless game of fiscal chicken may be biting off more than
    the US economy can chew.

    Who will be to blame? Well, the jury is still out on that one. From my vantage point, I dare say a pox on both sides of the aisle, as the average American has long past the point of discriminating between who has contributed the most to the current circus along the Potomac. Most voters seem to be of the opinion that it’s high time to move the circus along, as this old show has grown much too lame and predictable!
    It will be interesting to see how this plays out. There can be little doubt that the politicians will be scrambling to the ramparts as some of the restless natives begin slowing along the Beltway in the days just ahead. As they say on the news, “stay tuned, more at eleven!”
    Ben

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  7. By Marco on October 10, 2013 at 3:19 am

    Robert,

    Kindly I would like to ask if this happens also to european gasoline or only to the US gasoline.

    Thanks

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    • By Robert Rapier on October 10, 2013 at 11:52 am

      Yes, Europe has a summertime limit of 45 kPa (6.5 psi) and a wintertime limit of 90 kPa (13 psi). So a bit more restrictive than that US limits.

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  8. By GaelanClark on October 14, 2013 at 7:57 am

    Okay, so we understand that the EPA controls the gas price in this fashion on a yearly and continuing basis.

    Now, please inform us as to how and why when the price of a barrel of oil goes up today, why does my gas price go up tomorrow when that final product isnt delivered for over three months AND YET when the oil price falls that decline is not reflected in my gas price for months.
    Thank you in advance for any help on this matter.

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    • By Robert Rapier on October 14, 2013 at 8:23 am

      A lot of what controls the price of oil is fear. Demand in developing countries continues to grow, and there aren’t a lot of excess supplies. So traders bid up the price of oil any time there is an issue. The reason your gas prices go up immediately is that gas stations will raise the price when they can. But they are much slower to lower it. Google “Rockets and Feathers.”

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      • By GaelanClark on October 16, 2013 at 4:32 am

        Thank you for that google tip….I have been asking for years for this explanation and it seems a bit off. Let me explain…..

        Today the excited buyers crowd together at an exchange and bark to each other prices, or, a person wakes up amd shuffles their mouse and maoes a few clicks….and voila….without so much as a few percent of a deal they own a massive amount of crude. This crude takes time to move and fractionate for final delivery….what?….about three months from the well to the tank, yes?

        NOW, is the time for the rockets and feathers theory to begin…..NOT on day one out of the well.

        So when brent or saudi or whatever crude sees gains on price, my tank is still drinking the cheaper fuel. That is more than a rocket, that is a damned teleporter, a transremorgriphier, it takes on atom of oil and presupposes a cost that never existed for it…..and then it waites and and it waites until that drop of oil that really costs more to trickle into my tank.

        AND, those traders with no skin in the game.. .what do they get?

        It is not right and the pricing needs to reflect the reality of the day it was pumped and not some terrorist sitting on a field of oil today.

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        • By Robert Rapier on October 16, 2013 at 10:11 am

          But what lets “Rockets and Feathers” happen is consumer behavior. The core idea is that consumers are much more discerning of price on the way up, and will comparison shop. Not so much on the way back down, and so the supply chain is much slower to respond to upstream changes in the price of oil.

          It really has nothing to do with what happens to the price of oil. Remember, they are trying to make as much money as they can, but they have to respond to consumer behavior. So, yes, they will raise price every chance they get, and resist lowering prices when oil prices fall (which is when they can make really fat margins).

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