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.
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.
http://www.energytrendsinsider.com/2013/10/08/why-gasoline-prices-are-falling/
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