According to data from the Energy Information Administration, during the first week of January this year the average retail price of gasoline was $2.24/gal. By mid-April, the price had risen to $2.83/gal — an increase of 26%.
Although gasoline prices usually rise between January and April — for reasons I explain below — this year’s rise has been particularly steep. There are three primary factors behind this.
Transition to Summer Gasoline
Every spring, gasoline must transition from winter to summer blends. Winter blends are cheaper to produce. The difference is related to the evaporation rates of the gasoline.
Gasoline vapors contribute to smog, so the EPA seasonally regulates gasoline blends. They do so by placing 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 function of temperature. As the temperature increases, the vapor pressure of a liquid rises. Thus, in summer it is important to keep the RVP of gasoline at a lower level than in winter.
In September, leading up to winter, the RVP specifications can rise as high as 15 pounds per square inch (psi) in some locations. This has a big effect on the cost of producing gasoline. Butane blending is the key.
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Butane can be blended into gasoline, but it causes the blend to evaporate at a faster rate in summer. When the RVP limit increases for the winter, it becomes feasible to blend larger volumes of butane. Butane supplies are plentiful, and it generally trades at a significant discount to gasoline. Thus, winter gasoline blends are cheaper, and the ingredients are in greater supply.
This dynamic reverses in the spring when the RVP limit goes back down. By the start of summer driving season the RVP is back to summertime limits. Thus, the butane volumes have to be curtailed. Gasoline becomes more expensive to produce just when demand becomes highest. That almost always leads to rising gasoline prices in the spring.
In addition, this is all taking place during spring maintenance season for the refineries. Every spring, some refineries shut down units to do standard maintenance. This has the effect of reducing nationwide gasoline output for several weeks in the spring.
But this year, there are two other factors putting upward pressure on gasoline prices.
This year’s devastating Midwestern floods have also impacted gasoline prices. One of these recently affected me personally.
A couple of weeks ago, multiple gas stations in Phoenix ran completely out of several grades of gasoline. When I inquired about the reason, I learned that it was because the floods had disrupted ethanol deliveries. Ethanol is mandated in the fuel supply, but it is also used to boost the octane. The higher octane grades were the ones in short supply.
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But the temporary ethanol shortage also boosted ethanol prices. The overall impact was far less than the surge in oil prices (see below), but should the floods impact this year’s corn supplies, we may not have seen the last of the impact of the floods.
Rising Oil Prices
In addition to the RVP transition, oil prices have risen significantly since the start of the year. In fact, oil prices rose between the beginning of January and mid-April by 37%. That, alone, is more than enough to explain this year’s surge in gasoline prices.
Given the combination of factors that have taken place since the beginning of the year, it’s actually surprising that gasoline prices have only risen by 26%. With a 37% rise in the price of oil, the transition to summer gasoline, and the floods in the Midwest, we could have easily seen a 50% rise in gasoline prices this year.
But, we are still a month or so away from the traditional annual peak in gasoline prices. We could be in for more sharp increases in the weeks ahead.
By Robert Rapier
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