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 oil terminals in southern Florida had reopened to oil tankers, which had been temporarily diverted.
Contrast 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). Clearly, weather has an impact on fuel prices. Severe events can cause lasting damage to production and distribution, from hurricanes in summer to ice storms and blizzards in winter.
Even without the effects of serious weather, seasonal changes in refinery capacity, fuel blends, and other factors can raise or lower the price of fuel. And for shippers, increases or decreases in fuel costs affect freight surcharges, adding complexity and uncertainty to the overall costs of moving goods to market.
Summer: Storm Dangers and More Expensive Fuel
Other 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. Changing over 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. And yes, even the threat of tropical storms can reduce production slightly, as oil rigs and platforms are evacuated temporarily in advance of their arrival.
Winter: Heating Oil, Icy Roads, and Freeze-Offs
As seasons and weather patterns change, refineries adjust production in expectation of demand for heating oil. Close to 6 million homes and some commercial businesses in the United States use heating oil in the winter months, mostly concentrated in the Northeast. In 2015, approximately 4 billion gallons of heating oil were used by homes in the U.S. 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, which is a similar refined product in terms of composition and formulation. 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. As an 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. As the Bismark Tribune reported at the time, “The blackout abruptly stopped production at most oil wells in the region, since all but the newest wells run on grid-generated electricity,” said Randy Samuelson, production superintendent for Brigham Oil and Gas of Williston. Outside of fuel production, poor road conditions caused by snow and ice storms can slow last-mile distribution, reducing inventory at the pump.
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Natural gas can also be affected by severe cold. Freeze-offs can restrict production during the coldest periods, when low temperatures cause the water in natural gas wellheads to reduce or entirely shut off the flow, at least temporarily.
Seasonal Fuel Blends
Fuels are adjusted for both diesel and gasoline on a seasonal basis. In the spring, refineries change over to a fuel mix with lower volatility in expectation of warmer weather. Volatility, as explained by the U.S. Energy Information Administration is “a measure of how easily a liquid (or solid) will change into a vapor. For gasoline, it is measured by Reid Vapor Pressure (RVP). The higher the RVP, the more volatile the gasoline. While the Environmental Protection Agency (EPA) requires lower-volatility summer gasoline, aside from any government regulation, gasoline’s RVP must be limited to ensure that the fuel does not vaporize in the fuel system. If it does, the engine can stop running.”
Fuel with lower volatility is also somewhat more expensive to produce, raising prices by a few cents at minimum. In the fall, in preparation for cooler months, the gasoline blend is adjusted again, 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 severity of cold expected. Unfortunately, winterized diesel also reduces fuel economy by a small percentage, which has a large impact on the billions of gallons consumed annually by the trucking industry.
Gain Real Transparency Into the Cost of Fuel
Shippers who work with Breakthrough®Fuel benefit from real-time, actual pricing on the fuel costs for moving their goods to market. By working with actuals and not averages, regional fuel price premiums caused by extreme weather are precisely accounted for when shipments use the impacted infrastructure, and not built into every shipment across the country by an index of averages. Why should a Chicago blizzard increase the cost of fuel in Atlanta? Using actuals, Shippers who work with Breakthrough®Fuel have been able to achieve savings on fuel and reductions in emissions across dozens of industries. One recent client reduced their fuel costs 34% in a single year, and we’ve helped clients increase use of intermodal at a rate twice the industry average.