Summer Road Trip Ahead? Gasoline Supply Crunch Means You Should Beware at the Pump
Every month, Melissa Murray and her family go on a road trip.
Melissa and her husband, Mychal, are native Texans, now living in Houston. They’re used to driving, but during the years they lived in Kuwait, where Mychal was a geologist for Chevron, that wasn’t a possibility.
“Kuwait’s tiny, it’s the size of New Jersey, and it’s surrounded by Iraq and Saudi Arabia,” said Murray.
So when the family moved back to Texas three years ago, the couple were determined to show their kids, Brady, now 8, and Ruby, 7, the state: by car. Their first summer, they put in 10,000 miles, ticking off Texas’s 50 best barbecue joints.
The road trips have continued ever since, Murray said, with weekend camping trips, and drives to see family in Lubbock and San Antonio.
How important are gas prices in the equation? Pretty far down the list, she said.
“If [the trip] is important to us, we’ll do it.”
Driving tends to be important to Americans. In fact, Americans use more gasoline than anywhere else in the world: in 2018, that equated to 436 gallons of motor gasoline per person, according to the U.S. Energy Information Administration (EIA). That means the world’s gasoline market, to some extent, revolves around the time of year when Americans drive even more than usual: the “summer driving season,” as it’s known, a period that officially starts on Memorial Day Weekend, and continues until Labor Day.
But this summer, a sudden drop in gasoline stockpiles—the usual cushion going into that peak driving season—has put the gasoline market in a supply crunch, and that means American drivers could be facing higher prices at the pump this summer.
That’s notable because at the start of this year, the situation looked completely different. Stockpiles were at their highest in years, and prices were low. But a perfect storm of supply disruptions worldwide, from refinery maintenance in Asia to unplanned outages in California (not to mention $2.7 billion worth of tainted Russian oil), reversed the picture in only a few months, showing just how quickly the price of a summer road trip can change.
The summer starts with gasoline
For the world’s gasoline market, America’s summer driving season actually starts in March. That’s when refiners typically begin blending and storing “summer grade” gasoline. Because warmer temperatures mean liquids evaporate faster, summer grade gasoline is a different mix than the fuel used in the winter; it’s cleaner and less polluting. As a result, it’s harder to make, and typically more expensive.
Refiners build up critical stockpiles of summer gasoline ahead of time, much like any seasonal retailer—from swimsuit brands to ice cream sellers—might prep for the high season. That preparation happens worldwide: even in Europe, for example, which produces far more gasoline than the continent needs, the demand that comes with the summer driving season in the U.S. can make the difference between a good year and a bad one.
“This is the time of the year when [gasoline refiners] are going to make a lot of their profits,” says Robert Campbell, head of oil product research at Energy Aspects in New York.
At the start of 2019, the situation for those refiners was looking bleak. The fuel was facing a perfect storm: oil markets globally were oversupplied: there was simply too much gasoline and too little demand. At the start of January, gasoline reserves in the U.S. were at their highest level since at least 1990, according to data from the EIA. For refiners, the margins on producing gasoline were negative, which meant it actually cost money to turn crude into gasoline, and storage in many hubs was packed, with ships full of gasoline idling outside of harbors.
In the longer term, the market also looked oversupplied. As the U.S. has produced more and more of its own gasoline, fueled by the growth of shale production, imports have waned and the country has even become a major exporter. Meanwhile, refineries were traditionally designed to produce as much gasoline and diesel as possible, according to the International Energy Agency—historically, that’s where the money was—so it can be difficult to switch to producing significantly less gasoline, even when it doesn’t make financial sense.
Then came the supply shocks.
A series of both planned and unplanned refinery outages worldwide this spring have sharply reduced output. About 4 million barrels per day of crude are currently missing from the global oil market, around 5% of global production, according to Chris Midgley, global director of analytics at S&P Global Platts in London.
While some refinery maintenance happens every spring, this year has been different, he said.
“We’ve seen high shutdowns in Asia, belated shutdowns. That’s all tightening gasoline supply as we go into the summer period,” he said.
That’s because next year will bring a major change in the quality of fuel used in marine shipping, a shift known as IMO 2020 (it stands for the rules on fuel quality imposed by the International Maritime Organization). To make cleaner fuel on a mass scale, many companies have to tweak their refineries, bringing on a spate of maintenance work that has lasted longer and come later than in typical years, says Midgley.
The second factor is unplanned maintenance, including shutdowns at three California refineries due to a fire and air quality issues. In Europe, meanwhile, exports of at least five million tons of contaminated crude from Russia fouled a major pipeline and resulted in lower output from some refineries—a real “double whammy,” said Midgley. That meant markets that would have relied on Russian oil, particularly in Germany, bought up gasoline that otherwise would have gone into reserves or been exported to the U.S.
“We had to use a lot of that [summer gasoline] in the spring to meet refinery problems,” said Campbell.
The impact has been obvious in stockpile figures, which have dropped sharply. From that historic high in January, gasoline buildup nationwide in the week to May 17 was at its lowest since 2017 for that period, according to the EIA, while the week before it was at the lowest point since 2015. Meanwhile, stocks in the Amsterdam-Rotterdam-Antwerp region in western Europe, a major exporting hub, dropped to their lowest seasonal level since 2015, 16% below the five-year average, according to data from Insights Global in the Netherlands.
That has already helped push prices up: the New York Harbor RBOB gasoline contract—the main futures contract for gasoline in the U.S.—had gained 23% over the last three months by Thursday, while the average nationwide retail gasoline price—as tracked by gas tracking site GasBuddy—was just below $2.86/gallon going into the long weekend, up around 45 cents to the gallon over the same three-month period.
While a certain amount of price strengthening is normal going into the summer season, such a sharp drop in stockpiles is more unusual—and that means summer driving could be pricier than expected.
But even if the price jumps this summer, Americans will still be getting in their cars.
Murray, for one, already has at least one big drive planned out for this summer: she’s taking the kids on a road trip to New York City. Distance: 1,631 miles.
This article previously referred to 4 million barrels of missing gasoline from the global market, and five million barrels of Russian oil. It has now been corrected.
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