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.
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.
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
- For those who want an inside edge in the energy sector.
- Written by veteran energy analysts and insiders with a track record of accurately predicting trends.
- 100% FREE!
- And Much More...
Total Energy USA Conference and Exposition
November 19-21, 2013 - Houston, TX
Platts Global Energy Outlook Forum
December 12, 2013 - New York, NY