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The Value of Premium

Changes in the marketplace have eroded premium gasoline’s sales, but premium still accounts for roughly 13% of all gasoline sales.


Published: February 13, 2018


There used to be a time when consumers could count on a simple price spread between different fuel grades. For example, mid-grade gasoline would be 10 cents more per gallon than regular gasoline, and premium gasoline would be 10 cents more per gallon than mid-grade.

However, this once-predictable formula has waned over the years. In late 2012, the spread between regular and premium fuel prices reached 30 cents per gallon and continued to increase throughout 2013, topping 50 cents per gallon in some markets. During 2013, the spread averaged 32 cents, and was even higher in 2014 (35 cents), 2015 (40 cents), and 2016 (47 cents) according to the U.S. Energy Information Administration. Some markets reported a price spread of more than 60 cents in 2016.

 

The change in this price relationship has been driven primarily by supply. The U.S. supply of regular unleaded has increased in the past several years, placing downward pressure on wholesale prices, while premium supplies have not increased similarly. At the same time, demand for premium fuel has increased with the introduction of more vehicles for which manufacturers recommend or require premium fuel. Overall, there has not been a significant shift in the volume of regular and unleaded delivered to the market since 2010; the price differential is due to shifts in available supply.

 

Premium’s Arrival
Only one grade of gasoline was sold at the early fueling stations. But in 1925, a second grade of premium was introduced by both Gulf and Esso. Over the next few decades, other options were offered but the octane level of these different fuel blends varied considerably at the wholesale and retail level. That changed in 1972, when the U.S. Federal Trade Commission required minimum octane ratings posted on all fueling dispensers. In most areas of the United States today, regular gasoline is 87 octane, mid-grade is 89 and premium is 91 to 93.

Contrary to popular opinion, octane ratings do not refer to a fuel’s potential power, nor is 100 octane the highest octane possible. Ethanol blends, for instance, can have an octane rating of 115. Instead, the octane rating refers to the fuel’s ability to resist pre-ignition, or knock. Engines operate by igniting via spark a compressed fuel-air mixture at the optimum point in a cylinder’s cycle. If a fuel does not have a high enough octane rating for the level of compression required by a particular engine, the fuel may combust before the spark, resulting in knock, which can damage the engine.

Consumers do not often hear an engine knocking today because most modern vehicles are equipped with knock sensors that will adjust spark timing to protect the engine from damage, but this further reduces performance and efficiency. Use of the fuels with an appropriate octane rating can prevent knock and enable engines to operate as designed.

Premium Pressure
Engine improvements and higher gas prices combined have cut into premium’s sales. In 1989, the earliest that the U.S. Energy Information Administration’s Refiner Motor Gasoline Volumes began tracking the three grades, higher octanes accounted for nearly one-third (31.5%) of all gallons produced: premium comprised 23.2% and midgrade added another 8.3%.

However, premium and mid-grade both saw dramatic declines in volume over the ensuing 25 years as prices zoomed past the $2, $3 and even $4 marks across the country and consumers often opted to trade down to lower priced, lower octane fuels. Mid-grade sales continue to decline but premium sales have increased slightly over the past year as more vehicle models “recommend” or “require” premium fuel. Premium volumes increased from 11.1% in 2016 to 11.4% in 2017, but mid-grade continued to decline and now accounts for only 1.8% of all gasoline gallons purchased.

Premium’s Future
Sales of premium and mid-grade have declined over the past decade because consumers traded down octane levels when prices increased. But they have stabilized and may actually see some continued increases as more high-performance vehicles require their higher octane fuel blends. One in seven (16%) of consumers say that they typically buy higher octane fuels, according to the 2017 NACS Consumer Fuels Survey (8% buy premium and 8% buy midgrade).

Premium fuel has also found a niche audience with consumers seeking ethanol-free fuel for small engines (boats, ATVs, leaf blowers, chainsaws, lawn mowers, etc.).

Availability of storage space may play a role in premium’s future. Retailers store fuel in underground storage tanks, and they often have two or three tanks: one for regular grade, one for premium and perhaps one for diesel fuel (mid-grade fuel is blended at the dispenser by mixing regular and premium). If demand for other fuel products (like diesel or specialty biofuel products) increases, retailers without sufficient underground storage space may decide to replace their supply of premium.

Auto manufacturers recommend that drivers whose cars require premium gasoline use it. While these vehicles can run on lower octanes on occasion, the short-term cost savings for fuel could be outweighed by much higher costs of engine repairs and overall reduced vehicle efficiency.

 

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