U.S. Markets closed
  • S&P 500

    3,768.25
    -27.29 (-0.72%)
     
  • Dow 30

    30,814.26
    -177.24 (-0.57%)
     
  • Nasdaq

    12,998.50
    -114.10 (-0.87%)
     
  • Russell 2000

    2,123.20
    -32.15 (-1.49%)
     
  • Crude Oil

    52.04
    -1.53 (-2.86%)
     
  • Gold

    1,827.70
    -23.70 (-1.28%)
     
  • Silver

    24.83
    -0.97 (-3.77%)
     
  • EUR/USD

    1.2085
    -0.0079 (-0.6526%)
     
  • 10-Yr Bond

    1.0970
    -0.0320 (-2.83%)
     
  • Vix

    24.34
    +1.09 (+4.69%)
     
  • GBP/USD

    1.3583
    -0.0057 (-0.4143%)
     
  • USD/JPY

    103.8000
    -0.0420 (-0.0404%)
     
  • BTC-USD

    37,331.69
    +1,225.84 (+3.40%)
     
  • CMC Crypto 200

    701.93
    -33.21 (-4.52%)
     
  • FTSE 100

    6,735.71
    -66.25 (-0.97%)
     
  • Nikkei 225

    28,519.18
    -179.12 (-0.62%)
     

As gas prices collapse, high-octane fuel fetches unusually fat premium

Michael Santoli
·Michael Santoli
As gas prices collapse, high-octane fuel fetches unusually fat premium

The oil-price crash has provided dramatic relief for pain at the pump. But drivers who like to fill up with premium-grade gasoline are feeling a twinge of discomfort as they’re asked to pay an unusually hefty added charge for the good stuff.

With U.S. crude-oil prices collapsing from near $100 per barrel last summer to below $45, the average national retail price for regular unleaded gasoline has tanked by 43% since June 30 to $2.07 per gallon this week, according to the U.S. Energy Information Agency. High-octane premium gas dropped, on average, by only 37% to $2.49 a gallon.

As a result, the price spread between premium and regular unleaded has spiked to a record high above 40 cents a gallon, as the chart below makes clear.


Price difference between premium & regular unleaded gasoline per gallon (1994-2015)
Price difference between premium & regular unleaded gasoline per gallon (1994-2015)

The fat premium that’s now being demanded for premium is one more reason for most drivers to stick to plain old 87-octane regular – which is perfectly fine for the vast majority of recent-model cars.

[Get the Latest Market Data and News with the Yahoo Finance App]

On a percentage basis, premium gas is now more expensive vs. regular than at virtually any time in the past two decades. The last time premium was priced more than 20% above regular was a brief stretch in 1998 – when regular unleaded cost just over $1 a gallon.

The reasons for the widening price between regular and what used to be known as “high test” involve demand, supply and chemistry.

Regular unleaded accounts for close to 90% of all gasoline sold in the U.S., which means that refineries are geared to maximize its production and retail outlets compete most directly based on its price.

Because premium-gasoline buyers -- mostly owners of expensive, high-performance cars – are already geared toward paying extra, gas stations feel less pressure to slash those prices as quickly. In this way, the market for gasoline reflects the broader consumer economy: There is some pricing power at the high end, while most retailers are aggressive in catering to the value buyer.

And because premium makes up such a small portion of the gas sold, retail inventories don’t turn over as quickly. This means retailers might have more high-octane fuel on hand that was bought when oil prices were higher, so premium grades don’t re-price as quickly as petroleum prices fall.

A widening gap

Even before excess global supply and OPEC’s refusal to curtail production crushed the oil market and drove pump prices down late last year, the gap between regular and premium grades had widened beyond the historical norm.

For this, car-pampering motorists can blame one of the same factors that has made energy cheaper for everyone: the boom in North American shale oil.

It turns out that the type of crude drawn from shale formations is rich in low-octane chemical components and therefore far easier to refine into regular unleaded. Foreign-sourced oil, such as the kind that OPEC producers supply, is easier to turn into high-octane premium.

There was an expectation in the industry last fall that once seasonal refinery maintenance was completed before year-end, the output of premium gas could catch up and close the price spread. But it seems the oil selloff has dragged regular unleaded prices lower so quickly that the spread has, in fact, grown a bit.

This need not be a concern for most drivers, of course. Most cars are built to run on regular gas, and using premium grades won't boost performance or fuel efficiency.

While some luxury and sports cars with high-compression engines still recommend the use of high-octane grades to avoid “knocking and pinging,” even many high-end models today have software to adjust ignition timing to suppress such noises.

More than ever, it pays to be cheap at the pump these days.