OK, raise your hand if you have done one of these things, ever:
A) Bought premium gasoline to impress your date. (This one’s mainly for you, fellas. Why you didn’t fill up before you went out is entirely on you.)
B) Skimped on premium on a high-performance car because you’re short and payday is long.
C) Hit the high-octane button by mistake in a pre-coffee fog. Like this guy almost did just last weekend.
If you’ve done any of them, you’ve taken the starring role in a drama cast when Amoco’s predecessor American Oil started selling “premium” gasoline across the Midwest in the 1920s. (Back then, “premium” meant “no lead.” Motorists wondered about whether the extra expense for transportation was justified then, too.)
Just a 20-cent spread? Hey, get with the program! (Photo by the author)
In the latest installment, wholesale high-octane gasoline has risen in comparison with regular in just the last few weeks in two markets worthy of closer inspection.
The spread between unbranded regular and premium gasoline at the rack in Los Angeles has widened to 30 cts/gal or more on 12 of the last 18 days ending with the Wednesday morning rack report. The spread spent most of the summer in the 23- to 27-cent range.
The trend was matched in New Haven, Connecticut, a representative market on the East Coast. The spread there has topped 30 cts/gal for eight consecutive days through the overnight Tuesday rack report. That figure had held below 30 cts/gal all summer.
A wider spread points to a dearth of the stuff that makes an engine hum.
“What that tells you is octane is getting really, really tight,” one Midwest gasoline broker said. “It’s tough to make money with that stuff anymore.”
Blog entry continues below…
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Gasoline now receives more of its octane from ethanol, which by itself is 115 octane, the US Energy Information Administration says. (You knew ethanol had to figure into this. It’s everywhere. If you wanted to talk about the right or wrong way to light the sign out front of the gas station, someone would find a way to cite the influence of ethanol.)
Other octane comes from reformate, one of the building blocks of gasoline at the refinery. The EIA argues in this paper from earlier this year that using ethanol for octane actually keeps the spread between premium and regular in check. That’s probably no consolation for the person filling up his or her car in Los Angeles today.
This is not one of those debates about whether you should put premium in your car. You’ll probably get that from your father-in-law at Thanksgiving anyway.
What he probably doesn’t know — and it’s something you can now drop on him after you read this — is that the rack is generally the last stop for gasoline on the way to the station.
There’s a huge rack in Pasadena, Texas, serving the Houston market, site of the picture above. Platts publishes rack prices twice daily from Telvent/DNT. On the day that picture was taken, last Saturday, the rack price for regular was $2.5714/gal and premium was $2.9309/gal. There’s no telling what that merchant near Interstate 610 paid for his gasoline or where he got it, of course, but you can infer from that photo what happens to the gasoline price on the last step of the journey.
One real-life rack jobber on the Atlantic Coast works a market where the regular/premium spread at the rack has been more than 40 cts/gal nearly every day in the summer that just ended: Richmond, Virginia.
“It’s hard to get my hands on that product right now. There’s not enough to meet demand,” said Gagan Marwaha, a former commodities trader who is now manager of fuel pricing at Southside Oil in Richmond. He buys for convenience stores throughout Maryland and Delaware.
Right now, it’s in fashion to say the market for higher-octane gasolines is less liquid than the one for good ol’ regular. That doesn’t do you much good if you drive one of these cars on an Edmunds.com list where the manufacturer recommends higher-octane gas.
“Premium is just a very small part of the battle,” Marwaha said.
We’re about to drop a lot of numbers here, so grab an actuarial table you love and hold on tight.
A funny thing happens in Los Angeles when you check the regular-premium spread at the pump. It’s about 10 cents/gal less than the rack spread. It means retailers are boxing each other’s ears with discounts to try to get Californians to cough it up for premium. This battle was detailed earlier in a The Barrel blog post about the influence of Costco in the Golden State.
In contrast, the regular-premium spread at the pump in New Haven on Tuesday was 32.3 cents/gal, which is in line with the spread at the rack.
Nationwide, the regular-premium spread at the pump represents 10.3% of the price of regular according to Wednesday’s AAA Fuel Gauge Report, and that’s on the high end for that statistic during the last four years. US Energy Information Administration analyst Tom Hess said the US regular-premium spread has represented an average 8% of the regular gasoline price since 2009 through August with swings of 2 percentage points in either direction.
Richmond’s Marwaha says the price pressure on his premium supply should back off in about a month and attributed recent tightness to the Atlantic Coast shift from summer to fall RVP products. (Higher quality summer grades and the fall-RVP gasoline compete for pipeline space at this time of year.)
But trying to predict where rack and pump prices will go can be as maddening as trying to win at this online virtual gas pump challenge where you are supposed to ring the counter at an exact amount. (Try it. It’s pretty difficult. And it’s SFW.)
“There are market fundamentals that say gasoline should be racing to the bottom,” said Michael J. Fox, executive director of the Greenwich, Connecticut-based Gasoline and Automotive Service Dealers of America.
The race is on. Gasoline prices are dropping in many parts of the country with demand down and the United States well supplied with product. Just this week, Platts’ assessed spot price for 12.5 RVP premium gasoline in Seattle has fallen below $3, a level it has seen on only three trading days since late March.
“Look at past shortages,” Fox said. “We have twice as much inventory now, and prices are higher than when shortages were supposedly happening.”
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More on gasoline:
• Scientific American on whether you need premium.
• NPR’s Car Talk on the premium-regular debate
• Hartford Courant readers sound off: Are gas stations hitting customers up for more if credit is used?