Common Tragedies

Thoughts on Environmental Economics

It’s summertime, and the gas is expensive

Posted by Evan Herrnstadt on April 17, 2008

I’m becoming more and more interested in the actual processes involved in crude oil refining and fuel blending. Oil Drum has a nice rundown of truths and misconceptions about the summertime gas price spike. Especially solid is the explanation of the switch from winter to summer gasoline blends:

As gasoline evaporates, volatile organic compounds (VOC’s) enter the atmosphere and contribute to ozone formation. Gasoline’s propensity to evaporate is measured by Reid vapor pressure (RVP). In order to control VOC emissions, the Federal Clean Air Act Amendments of 1990 require that all gasoline be limited to an RVP maximum of 9.0 psi during the summer high ozone season, which the Environmental Protection Agency (EPA) established as running from June 1 to September 15. The Act also authorized the EPA to set more stringent standards for nonattainment areas. As a result, EPA limits areas designated as “high volatility non-attainment” to a maximum RVP of 7.8 psi during the high ozone season. Some States elected to require even more stringent restrictions to achieve local clean air goals, and require 7.2- and 7.0-psi gasolines.

Basically, since it’s hotter in the summer, you need a lower RVP to prevent your gasoline from vaporizing before combustion. As OD explains, winter blends incorporate butane as a blending agent, which is cheap but has an extremely high RVP rating; thus, summer blends face a higher marginal cost. In addition, the overall supply of gasoline bulges in the winter as the butane’s volume is added to the market. Of course, there is also the matter of increased demand during travel season.

However, I think the most economically interesting part of this regulation is the consequence of the variation from region to region:

More congested areas and hotter areas will tend to have a limit of 7.0 psig, while cooler climates generally opt for 7.8 psig. Some cooler climates don’t even require a reduction, and have a 9.0 psig limit throughout the summer…One of the disadvantages of having different requirements for different areas is that summer gasoline is less fungible. This can cause price imbalances in different areas, and sometimes prevents product from flowing from one area into another to ease the shortage.

I suspect that this helps explain why California summer gas prices always seem so out of control, even relative to the nationwide seasonal price increase.

2 Responses to “It’s summertime, and the gas is expensive”

  1. David said

    OK but what’s the difference in cost between these different blends? Is it really very much?

  2. Evan Herrnstadt said

    Fair point, David.

    From Trilby Lundberg, head of fuel market research firm the Lundberg Survey via Reason (not my favorite source to quote):

    “Lundberg estimates that summer blends can cost between 3 to 15 cents more to make than winter blends, depending on the exact formulation, time and place.”

    That seems a little extreme to be a simple cost increase, but I think that the fungibility issue would potentially have a big impact as well as regional supply could get tight when combined with a demand surge. But then, that wasn’t really your question.

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