BOSTON -- With sales of regular gasoline accounting for roughly 86.9% of total gasoline sales, according to the Energy Information Administration (EIA), the average motorist may not have paid much attention to the price of premium.
But for the minority of motorists whose cars require premium gasoline, the recent spread between regular and premium has caused sticker shock. The spread has grown rapidly as of late, reaching a record high in February that hasn’t been matched in more than two decades.
From March 2002 to September 2014, the price of premium gasoline cost more than 15% of regular in only one brief period in late 2008, when the housing crisis sunk commodity prices. During that near 13-year period, premium gasoline cost only 9.2% more than regular. Over the past couple of years, the premium-to-regular spread had been building. This trend peaked two months ago in February, when premium gasoline cost 29.2% more than regular. With two decades of records erased, what has fundamentally changed to cause this new trend?
While the fact that premium-grade gasoline accounts for 11.2% of all gasoline sold may not sound very impressive, that figure represents improved demand from when sales bottomed out at 7.8% in June 2008. Before then, premium sales reached as high as almost 16% of total gasoline sales in 2000. From 2000 to late 2008, retail prices rose, and the retail monthly average for regular gasoline topped out at $4.04 per gallon in July 2008. These high prices forced many motorists to opt for the cheaper regular grade. During the recession, economic hardship hurt premium sales, and all other grades of gasoline saw sagging sales figures despite lower prices at the pump.
Blendstock Matters
Since the recession, premium gasoline sales have been increasing, even before retail gasoline prices began collapsing in late 2014. The EIA attributes the recent surge in premium sales to the gaining popularity of turbocharged engines. The Corporate Average Fuel Economy (CAFE) standards have forced automakers to meet more stringent vehicle fuel-economy requirements. Automakers turned to turbocharged engines to improve the fuel economy of vehicles and stay in compliance with government regulations. Turbocharged engines require higher-octane premium gasoline, which prevent knocking under the higher compression. As turbocharged engines have gained in popularity, the demand for premium gasoline has increased.
At a gas station, the only difference between regular, midgrade and premium grades of gasoline is the octane of the fuel. Typically, wholesalers have lower- and higher-octane base grades of gasoline blendstocks. Before arriving to the gas station, the two grades of blendstocks and ethanol, along with detergent additives, are blended to make a gas station’s final grade of gasoline for sale. Many would think to attribute higher premium-gasoline prices to a higher cost of the higher-octane blendstock that makes up a large portion of the premium gasoline grade. However, according to a Barclay’s report from June 2015, that logic is backwards. An overabundance of lower-octane blendstock has widened the spread, not the rising price of higher-octane blendstocks.
The shale oil revolution that started to ramp up around 2011 brought an abundance of domestic crude oil to the doorsteps of U.S. refiners. However, not all crude is created equally; the properties of different crude grades greatly affect what products a refiner can make with the barrel. Barclay’s argued that the crude refiners received from the largest shale play, the Eagle Ford in Texas, is almost half lease condensate, a lighter hydrocarbon byproduct. When Eagle Ford barrels are refined, the results are a high yield of naphtha, a lower-octane blendstock. The abundance of this easily accessible shale oil for refiners has added a surplus of lower-octane blendstock that, unless refined further, sits in storage where it can later be blended into regular gasoline. Houston, a city with vast refining resources and great access to Eagle Ford crude, has seen one of the highest jumps in premium-gasoline prices as a result.
Fight for Premium Consumers
Today, the shale oil production that caused the premium-to-regular spread to widen is reversing course. Low crude prices have discouraged further drilling, and so the once-abundant supply of lower-octane blendstock is now declining. Less domestic production could encourage refiners to import crude with yields that would be more beneficial to premium-gasoline supplies.
As the supply and demand dynamics for premium gasoline shift, so too has the market for gasoline additives. Last June, Shell Oil Co. announced it was rolling out a new ultrapremium gasoline to its branded stations. The new fuel, dubbed Shell V-Power NiTRO+ Premium Gasoline, promised the “best total engine protection,” but Shell did not change the octane of the fuel; it only retooled the additive. Despite only the additive being adjusted, the price of the premium gallon alone was expected to rise 15 to 25 cents at the time of the announcement. With nearly 11% of U.S. gas stations branded Shell, this is a large enough footprint to affect premium gasoline prices. And with BP recently announcing its new fuel line, it indicates growing competition among branded marketers to lure premium customers with shiny, new—yet more expensive—detergent additives.
With demand, shale oil yield and premium additive factors all contributing to the widening of the premium-to-regular gasoline spread, it’s almost if the stars aligned to drive this trend. Automakers turning more to turbocharged engines will compete with shale oil production declines to pull the spread in opposite directions. If shale production continues to decline, the future spread will be driven by which force wins out. But if shale production recovers, the spread could be even wider in the future.
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