Why Is Premium Gas So Expensive?

CARS.COM — Drivers nationwide found collective relief as average gas prices hit a seven-year low in January, but those with luxury or high-performance cars may have scratched their heads at one nagging detail: What the heck was going on with premium gas prices?

Related: If My Car Recommends Regular Gas, Should I Ever Use Premium?

Regular gas averaged just $1.86 per gallon on Jan. 25 — a price we haven't seen since January 2009, according to the Energy Information Administration. Premium gas, however, averaged $2.34 per gallon. That's a whopping 48 cents more. Fill that luxury SUV with 18 gallons a few times a month, and the difference alone will cost you $311 this year.

It hasn't always been this way. The last time regular unleaded gas was this cheap — January 2009 — a gallon of premium averaged just 23 cents per gallon more. That held true until late 2012, when premium skyrocketed. In December 2014 when regular unleaded plunged below $3 a gallon for the first time in four years, premium stayed around 40 cents more. As regular gas tumbled toward $2 in 2015, the upcharge for premium didn't decrease. It grew.

From a percentage standpoint, that drove the upcharge for premium gas to an all-time high. As of Jan. 25, a gallon of premium gas cost 25.8 percent more than regular unleaded fuel. That's the highest percentage difference between premium fuel and average regular gas in more than 21 years of EIA records.

 

Why? Experts have a few reasons.

Premium Gas Faces Less Competition

"As prices are falling, you traditionally tend to see prices fall at a slower rate [for premium] than regular gasoline prices, and that's in part because of just the physical turnover," said Avery Ash, director of federal relations at AAA. By contrast, regular gasoline pricing is "highly competitive, and the stocks on hand move over quickly."

John Eichberger, executive director at the Fuels Institute, agrees.

"It wasn't so much premium became more expensive — it's just that regular became cheaper," said Eichberger, whose group functions as a policy institute for the National Association of Convenience Stores. "I've got 80 percent of my volume — 83 percent of my volume — is regular unleaded, so I need to be viscous on price. My premium customer, he doesn't really take time to shop around, so I can possibly make up some of my lost margins."

Eichberger says some of this happens at the production level, too, where premium fuel has somewhat higher margins. But the main push happens at gas stations.

Premium Gas Is Harder to Make Cheaply

The difference between the cheap stuff and premium, as you can see on any gas pump, is octane.

"The refiners will compensate for the octane in ethanol, so your regular gasoline, when it comes out of a refinery, will be something like 84 [or] 85 octane," said Mason Hamilton, a petroleum analyst at EIA. Spike it with ethanol, which is higher in octane, and you're up to 87-octane regular unleaded gas. After roughly doubling its ethanol content from 2007 to 2012, gasoline has stabilized since then at around 10 percent ethanol.

Why is higher-octane gasoline more difficult to produce? Hamilton suspects it's because certain crude blends, particularly the shale oil that's gained popularity in recent years, have lower octane to begin with.

There are other ways to boost octane rating. Alkylate is a prized octane-booster that Hamilton calls a "magic elixir," but it's expensive and would inevitably boost gas prices further.

More People Are Buying It

Premium gas usage is historically low, but it's made a recent comeback. With some notable exceptions, premium fuel is chiefly the domain of luxury vehicles and high-performance sports cars, and it could be Americans' love of luxury that's led to the increase. Luxury brands accounted for just 13.3 percent of all auto sales in 2015, according to Automotive News. But luxury-brand vehicle sales are up 43.4 percent since 2011, outpacing the overall industry over the same period.

Hamilton also suspects that cheaper gas is enticing some shoppers to splurge on a tank of premium, even though it's totally unnecessary.

"One of the things that commonly happens when the price of gasoline goes down is that more people say, why not, I'll put in premium," he said. "The premium price now is much lower than I used to pay for regular, so people say, sure, why not."

The increase is noticeable. From April through November 2015, higher-octane premium gas accounted for more than 11 percent of U.S. gasoline supply. (November is the latest month of EIA data.) It hasn't been that high in more than a decade.

 

Combine the increased demand with lower supply and you get today's price volatility, said Jeff Lenard, vice president of strategic industry initiatives at NACS.

What's Ahead

Cautioning that the increase in premium gas is a "complex subject that we're just scratching the surface of right now," Hamilton said he thinks production constraints and higher demand are responsible for the spike in premium gas prices. Higher prices for premium could stick around, however.

"Retailers without sufficient underground storage space may decide to replace their supply of premium with diesel fuel — or another fuel like ethanol," Lenard wrote in an email. "This will continue to put pressure on premium over the coming years."

Still, there's a possibility they won't.

Ethanol proponents point out that many more automakers now approve 15 percent ethanol gasoline, or E15, in their 2016 cars, which could signal a new era of higher ethanol as a cheap way to boost octane. That could bring some relief to premium gas prices.

Of course, you'd pay for it in reduced fuel economy. But that's a whole other topic.

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