Are Summer Gas Prices Really Higher?

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Right around March or April every year U.S. gasoline prices usually start to rise in anticipation of what is called the ‘summer driving season.’ The phrase conjures up a nostalgic picture of a family in a station wagon, complete with dog and camper-trailer, driving off to see America. But is there really a spike in gasoline demand in summer, or is it just a myth?

The answer is: It depends. There is generally a seasonal uptick in gasoline demand and prices, but how much of one depends on the U.S. economy and external market forces.

Summer is more loosely defined today than it was in the days of station wagons; with all-weather tires and better roads people can easily travel much of the year. School holidays exacerbate the trend to go away in summer, but the economy can throw a pall over this. And high gasoline prices leading to summer driving season can ironically dampen automobile travel.

The Energy Information Administration (EIA) says that gasoline demand is typically about a million barrels per day higher at its summer peak than at its low point for the year, which is generally in January. Because domestic refinery production of gasoline is also seasonal, a somewhat larger portion of summer demand has to be satisfied by imports and withdrawals from inventories. Typically, after subtracting out crude oil prices, gasoline prices average about 10 cents per gallon higher at their summer high than their winter low, according to the EIA.

External factors that affect oil markets are also likely contributors to higher gasoline prices. This year in the lead-up to driving season we saw upward pressure on crude oil due to tensions over Iran’s nuclear program. Gasoline prices saw added buoyancy due to the closing of East Coast refineries because of unprofitable margins.

“Summer driving season is no myth.  There’s quite a reliable seasonal pattern to U.S. gasoline demand,” says Tim Evans, energy futures analyst at Citi. “What has changed over time is the larger secular trend in consumption.”

In short, people are driving less. As the American baby boomer population ages, the number of drivers continues to drop. There is evidence that younger Americans are driving less too, according to the Federal Highway Administration, preferring to move to larger cities where they can walk, take public transportation or cycle. They avoid both the expense of owning cars and the rising cost of gasoline. Sales of more fuel efficient vehicles and government mandated fuel efficiency standards have also reduced demand.

Another factor in the rise in summer gasoline prices is the change in specifications between winter and summer grade fuel. Summer grade fuel is heavier than winter grade in order to limit evaporation at higher summer temperatures, and it is more expensive to make, says Evans.

The summer spike will likely become less and less pronounced over time because of demand destruction. Analysts note that U.S. oil demand peaked in 2007, which was probably the end in annual growth.

One energy analyst says that with  the U.S. changing from a net importer to a net exporter of oil, and year-round demand growth coming from emerging nations such as Brazil, the seasonality of gasoline prices will dwindle.

Rather than the steady 1.5-2 percent demand growth that produced new record highs in gasoline demand through 2007, there has been a significant shift.  Four-week average demand through mid-June was down 1.9 percent from the same week last year, and year to date gasoline demand is down 4.8% from 2011.

As people increasingly get rid of their gas guzzlers and embrace fuel efficient cars, the seasonality of gasoline demand may diminish. This does not, however, mean that prices will be lower in general. As refineries on the East Coast continue to close, the New York harbor delivery market could well find itself short of supply, warns Evans.

About the Author

Melanie Wold is a freelance journalist specializing in U.S. and European financial markets and trading technology. She also covers energy markets, foreign exchange, technology market data and regulatory issues. In addition to OpenMarkets, Melanie is a regular contributor to Financial News, Institutional Investor, Inside Market Data and Profit & Loss. Melanie provides regular market commentary at www.thewoldreport.blogspot.com.

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