While the vernal equinox on March 20th marks the first official day of spring, the transition from winter-grade gasoline to spring-grade gasoline, an intermediate step in the shift to summer-grade gasoline, began much earlier. The transition occurs along the gasoline supply chain, from refineries to retail outlets, and affects spot, wholesale and retail gasoline prices because the cost to manufacture spring and summer-grade gasoline is higher than the cost to manufacture gasoline used in the winter.

Federal and state environmental regulations specify the properties of finished gasoline that can be sold at retail stations across the United States. Many specifications, like octane rating, remain constant from season to season. However, Reid Vapor Pressure (RVP), a measure of how easily petroleum liquids evaporate, changes to accommodate seasonal temperature variations that affect both the performance of gasoline in an internal combustion engine and emissions. In the winter, higher RVP ensures that gasoline combusts easily at very low temperatures; in the spring and summer, a lower-RVP gasoline prevents vapor lock, when too much vapor may prevent an engine from starting, and reduces evaporative emissions into the atmosphere that contribute to smog. For more information on Federal gasoline regulations and specifications see the Environmental Protection Agency.

The diverse specifications for finished gasoline create the need for different types of Blendstock for Oxygenate Blending (BOB), the petroleum component of gasoline that is produced by refineries and blended with ethanol to produce the finished gasoline that is sold at retail stations. BOBs include RBOB, which is used to make the reformulated gasoline that is required in regions with high smog levels, and is optional elsewhere. CBOB, the most common, is the basis for the conventional gasoline that is sold in regions that do not require reformulated gasoline. CARBOB is used to make gasoline that meets the specifications defined by the California Air Resources Board; and AZBOB is used to make gasoline that meets the specifications required by the state of Arizona.

The more stringent specifications for reformulated gasoline, as well as for gasoline sold in California and Arizona, increase the manufacturing cost compared with conventional gasoline. The cost increment increases as the RVP specification decreases, and during the spring and summer, the extra cost to produce RBOB causes its spot price to move higher than the spot price of CBOB (Figure 1).

The timing of the shifts from winter-grade to spring-grade gasoline and from spring to summer-grade gasoline vary by region. The transition happens earlier in areas of the country where temperatures warm earlier in the calendar year, like southern California. In addition, because of the length of the gasoline supply chain, refineries begin manufacturing spring and summer-grade gasoline well before the date by which regulations require it be available at retail stations.

U.S. Gulf Coast (USGC) refineries, which supply a substantial amount of gasoline to the U.S. Northeast, begin manufacturing the lower-RVP spring-grade gasoline needed in the Northeast well before the date by which that gasoline must be available at retail stations.

The lower-RVP gasoline blendstock must move through the distribution system (pipelines and terminals) to the retail station before the lower-RVP retail requirement deadline arrives. As a result, the spot prices for CBOB and RBOB in USGC reflect the more-costly spring gasoline sooner than RBOB and CBOB prices in New York Harbor.

Since petroleum product pipeline systems closely monitor and control the quality and composition of the products being shipped, pipelines play an important role in the RVP transition. Petroleum product pipelines have shipping calendars divided into cycles, and the pipelines determine the maximum RVP allowed into their system during a given cycle depending on individual system needs. Pipeline RVP transitions run ahead of deadlines for transitions at the retail level, allowing the supply chain to adjust.

Spot gasoline prices for a particular region are strongly linked to the predominant delivery system into the region. Thus, spot prices in most major markets will move in accordance with the pipeline RVP changes. Figure 2 illustrates the major pipelines and gasoline spot markets in the United States.