Premium Plus - A High Octane Story

Why does it cost more to buy higher octane premium gasoline?  That question pops up from time to time, but this week it got some extra attention from a prominent blogger (Steven D. Levitt of Freakomics fame), a well-known Toronto Star columnist (Ellen Roseman)and a few others.  So let me wade in and try and offer my two cents.   Or 10-12 cents.

When you pull up to the pump, three buttons representing three grades of gasoline are usually staring you in the face.  Regular (87 octane), Mid-Grade (89 Octane) and Premium (91 Octane).  Which one to pick?  What's the difference?  Now let me be honest, the only time I open the hood of my vehicle is to dump in some windshield washer fluid.  And halfway through the jug I usually start worrying that I'm pouring it in the wrong spot. 

So I won't try and explain octane ratings.  I'll turn to the folks at howstuffworks.com.

The octane rating of gasoline tells you how much the fuel can be compressed before it spontaneously ignites. When gas ignites by compression rather than because of the spark from the spark plug, it causes knocking in the engine. Knocking can damage an engine, so it is not something you want to have happening. Lower-octane gas (like "regular" 87-octane gasoline) can handle the least amount of compression before igniting.

You can get more info on the site, but what octane level you need basically boils down to the compression ratio of your engine.   Think of it this way - high-performance engines have high-compression ratios, and therefore have a thirst for 91 octane fuel.   If that's too much, just read your owner's manual or the lid on your gas tank. 

So how many vehicles need the high-octane stuff?   Ken Bensinger at the LA Times summed it up:

The number of cars requiring or recommending premium has exploded in recent years. According to Kelley Blue Book, fully 279 current-year model trim levels fall in those categories, or 14% of all trim models for all models of cars available. That's up by two-thirds from 2002, when 167 cars and trucks, or 7% of the total industry fleet, called for the pricey petrol.

Now that we've established what it is and who needs it, why does it cost more?

Well, consider this. Compared to regular gasoline, the high-octane premium gasoline requires more processing, contains more additives (such as deposit control additives), has to be shipped in a seperate storage container and is stored in a seperate tank.   All of this adds costs.   Then consider the fact that the majority of customers purchase regular gasoline.   Premium gasoline is an important product with important benefits, but the inventory doesn't turn over as quickly as the regular stuff. 

As I said to Ellen Roseman, "most retailers charge more for their premium, low-turnover inventory than for their high volume mercandise...It's just basic business fundamentals at work."    So there is more at play than basic costs.   When you sell a lot of a given product, you can survive on a lower margin.  If you sell other premium products that don't move as quickly, more robust margins are often required.  There's a limited market for premium gasoline, so carving into the margin only punishes the retailer.

Check out the higher-end bottles of wine at the liquor store, the premium chocolate bar display at the grocery store or that to-die-for pair of shoes sitting on their own lighted display in the shoe store the next time you're out.  The price tag isn't just based on the cost of the grapes, the cocoa or the leather.  Few of each are sold, so it's unlikely you'll find them at bargain basement prices.    

So if you're looking at a new vehicle, be sure to ask what kind of fuel it needs.  Even Smart Cars and Vespas need Premium.  But if you are just looking for help filling the windshield washer fluid, I'm your guy.

Photo Credit: Brave Heart

 

Comments

[Wayne]

So why is diesel costing .80 above regular gas at a truck stop. Less refing, higher turn over?

[Tom]

Further diesel question. I read somewhere that it takes 25% more crude to produce a liter of new low-sulphur diesel than to produce a liter of gasoline. Is this true? That would help explain the price difference and negate diesel's mileage advantages...

[Anon]

Diesel requires a completely different refining and storage process, and inventories are managed separately. Demand for diesel fluctuates separately from gasoline as well.

"Even Smart Cars and Vespas need Premium."

Actually, Mercedes' Smart runs on diesel, and most Vespa's are two-strokes, and run on a mix of regular and oil.

[Anon2]

Further diesel comment:
Diesel refinery production is less complex and consequently diesel manufacturing cost is lower than any grade of gasoline (a more refined crude oil derivative). Diesel used to be cheaper than gasoline in the US. The higher cost of diesel is due to price control in the supply chain and a complete lack of competitive pressure. It is very odd that there has been no attempts at negotiating lower rates by US transportation industry representatives.

[roadtrippings]

The bottom line: If your car is designed to run on 86 or 88 octane fuel and you fill ‘er up with 93, it’s not going to make a damn bit of difference — except to your wallet. The same goes with aftermarket “octane boosters.”

[Bruce]

Why does premium command 13 cents per litre more in Ontario, and only 8 cents per litre in Quebec?

For sure there is more demand in Ontario, and refineries are nearby. I cant see any reason for the gouging in Ontario.

I think it is criminal for this difference. If is is just a "what price the market will pay" scenario, then it is high time to teach the market, maybe add this to highschool teachings.

[Jeff]

It is now 2011 and unless there has been a major refining development the cost to produce premium has not changed relative to the cost to produce regular.

Can someone explain to me why the price differential between premium and regular has continued to creep upwards in Ontario so that there is now a 15 cent difference.

I am curious as to the justification.