On October 6, 2016, as Hurricane Matthew hurtled toward Florida and the Southeastern United States, oil and gas producers braced for the worst. The category 4 storm threatened to disrupt supply to the region for weeks, in a worst-case scenario.
West Texas Intermediate oil futures finished the day above $50/barrel, after being as low as $43 the month before. Fortunately, from an energy standpoint, the effects of Matthew were minor and short-lived. By October 10th, almost all fuel terminals in southern Florida had reopened to tankers, which had been temporarily diverted.
Compare the above with Hurricane Rita in 2005, which bore down on the heart of offshore production in the Gulf of Mexico. That storm temporarily shut down most production in the Gulf and destroyed over 60 offshore platforms. In the wake of Rita, and Katrina a month earlier, retail fuel prices rose to nearly $3/gallon ($3.63 in 2017 dollars).
Among all price drivers, the weather can have one of the most notable impacts on fuel prices. Severe events can cause lasting damage to production and distribution, from hurricanes in summer to ice storms and blizzards in winter.
But for the weather to make an impact, it does not have to be severe. Seasonal changes in refinery capacity, fuel blends, and other factors can raise or lower the price of fuel. For shippers, all of these weather-related price changes influence their bottom line, adding complexity and uncertainty to the overall costs of moving goods to market.
Seasonal Fuel Blends
Fuel blends are adjusted for both diesel and gasoline on a seasonal basis. In the spring, refineries change over to a fuel mix that is less likely to vaporize to prepare for warmer weather. The U.S. Energy Information Administration requires summer gasoline that is less likely to vaporize as temperatures increase. This fuel is also somewhat more expensive to produce, raising prices by a few cents at a minimum.
In the fall, the gasoline blend is adjusted and diesel fuel is winterized with additives to prevent gelling at low temperatures.
Different diesel blends may be used depending on the regional climate and the severity of cold expected. Unfortunately, winterized diesel also reduces fuel economy by a small percentage. This can have a large impact on the billions of gallons consumed annually by the trucking industry.
Summer: Storm Dangers and More Expensive Fuel
Factors beyond hurricanes raise fuel costs in the summer. In the United States, peak driving season lasts from May through August, driving demand up as families take summer vacations and commuters fill highways.
Switching to summer fuel blends can also be costly for refineries, adding to the cost of production. Some estimates place the increased cost from switching to summer-blend fuels to be as high as fifteen cents per gallon.
Additionally, even just the threat of tropical storms can reduce production slightly, as oil rigs and platforms are evacuated temporarily in anticipation of their arrival. Storms that make landfall in the U.S. Gulf Coast can impact oil refineries, further exacerbating price impacts for refined products.
Winter: Heating Oil, Icy Roads, and Freeze-Offs
Since all refined products come from the same barrel of crude oil, refineries must adjust their operations to accommodate shifting demand for other fuel types. In the winter this adjustment makes room for increased demand for heating oil – which is similar in composition and formulation to diesel.
According to the EIA, around 20 percent of households in the Northeast region use heating oil as their main source of heat for their homes. Additionally, they report “in 2017, about 3 billion gallons of heating oil were sold to residential consumers in the Northeast,” adding “about 35 percent of total commercial sector consumption of heating oil was in the Northeast.”
Because there is a limited amount of refinery capacity available at any one time, this causes upward pressure on the price of over-the-road diesel in the Northeast. The converse is also true: a milder winter will generally ease prices on both heating oil and diesel.
On the supply side, production and distribution can also be reduced by wintry weather. For example, a 2011 spring blizzard halted oil production in North Dakota’s section of the Bakken oil field, knocking electrical transmission stations out of service. “The blackout abruptly stopped production at most oil wells in the region since all but the newest wells run on grid-generated electricity,” reported the Bismark Tribune.
Outside of fuel production, poor road conditions caused by snow and ice storms can slow last-mile distribution, reducing inventory at the pump.
Natural gas can also be affected by severe cold. Freeze-offs can restrict production when it is coldest. Low temperatures cause the water in natural gas wellheads to reduce or entirely shut off the flow, at least temporarily.
Gain Real Transparency Into the Cost of Fuel
Recognizing the regional and seasonal trends affecting your transportation network enables better planning and strategies to account for the costs of moving your goods to market. Regional fuel price premiums caused by extreme weather can disrupt planning and budgets when not accurately and precisely accounted for on a lane-by-lane basis.
Market-based fuel reimbursements and accounting allow shippers to separate the costs associated with individual events, so they do not influence your entire network. Why should a Chicago blizzard increase the cost of fuel in Atlanta?
The price shippers pay their carriers to move goods can be influenced by any number of seemingly unrelated events. Only with a sound understanding of market fundamentals and accurate management of them can shippers and carriers ensure they are planning for these costs.