The Price of Premium Gas

According to U.S.A. Today‘s “Weekend Gas Gauge,” the current average price of regular gasoline is $4.026 per gallon. A year ago the price was $2.945.

What I hadn’t realized was that the gap between regular gas and premium gas has also increased. Right now, premium gas is 38.5 cents per gallon more expensive than regular gas. A year ago, that gap was 29.5 cents. (In percentage terms the gap hasn’t grown, but it seems to me absolute differences — rather than percentage terms — are the right way to think about this problem.)

Why should premium gas be relatively more expensive today?

One simple explanation is that the additives that are put into premium gas have gotten more expensive.

A more interesting economic story is the following:

As gas prices have gone up generally, I suspect that many of the people who used to buy premium gas have shifted back to regular gas. The only people who still buy premium gas (Is there actually a good reason to buy premium gas?) are those who are wholly committed to premium gas. These folks are less price sensitive than the ones who used to buy premium gas. Consequently, the profit maximizing reaction of gas stations is to increase the gap in price between regular and premium gas.

Perhaps there are other explanations as well.

Does anybody out there know what the actual explanation is?

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  1. Dan Erickson says:

    Would that make it a giffen good?

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  2. Chris says:

    Why is the absolute gap more relevant than the relative gap? I don’t get it…

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  3. Robert Newton says:

    There’s nothing really premium about “premium” gas. Octane is simply a measurement of the gasoline’s ability to withstand spontaneous detonation under compression. Cars that are designed to run premium have higher compression, thus have more power generated per detonation than a lower compression car. Those that run premium when their car is designed for regular risk poorer fuel economy and less due to incomplete burn of “premium” gasoline. Cars that run regular when they are designed for premium could have much more serious issues like spontaneous pre-spark combustion causing engines to knock. Given all of that, I don’t understand the price differential increase at all. If less people are buying premium, it stands to reason that the differential should go down or stay the same as gasoline has a somewhat short shelf life, especially when blended with alcohol. With seemlingly less people buying premium fuel, it stands to reason that the price should go down to deplete stocks before the gasoline “goes bad”.

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  4. Jan D. says:

    Some cars – VWs, BMWs and some other premium brands – “require” premium gas – that is, they’re tuned to be used with premium gas, and the manufacturers either recommend premium gas or even suggest that it’s required. People driving such cars are more likely to be able to afford premium gas too in many cases.

    But I would think that, since premium gas has more of the premium ingredients in it (else why would it cost more in the first place?), the price would have risen for that reason alone too (not that I’m an expert on the composition of gasoline products)

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  5. Jim C says:

    Some engines do require higher octane to prevent engine damage. If your car doesn’t require it, you don’t need it – it won’t help at all.

    http://www.straightdope.com/columns/041008.html

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  6. Erik says:

    There is actually a very good reason to buy premium gas, depending on your car. Different engines are tuned to different octanes for maximum efficiency. For those with engines that are tuned to higher octanes, going with a lower octane will be pretty inefficient (lower fuel economy, more pollution, potential engine damage over time). In my case, my car looks for 89 octane, but my options are 85-87-91. Thus, between better fuel economy, less long term damage, and reduced pollution (though that is an external cost), it is rational for me to pay extra for the higher octane.

    Tied to this, I would not expect the type of gas used to be highly elastic at least among those who know something about their cars.

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  7. CADavis says:

    Many engines require high octane (i.e. premium) gasoline to produce maximum power, though virtually all modern motors will run on low or mid-grade. For enthusiasts, more power is a good reason; we expect this group to be less sensitive to increases in cost because they treasure benefits such as speed and acceleration. Yours might not be the only explanation, but it certainly accounts for my own behavior.

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  8. DJH says:

    Levitt asks parenthetically, “Is there actually a good reason to buy premium gas?” The answer is: “Yes, but not nearly as often as some would have you believe.”

    The only reason to buy premium is if the car’s manufacturer recommends it. Look in your owner’s manual and see what the recommended grade is. Only a relatively small number of cars have this requirement. Having said that, even these engines will likely run just fine on regular gasoline. The only way to know is to try it and find out the results.

    The bottom line is that there may be a very small number of cars out there that truly need premium to run well. But while these cars definitely do exist, they are very few.

    The Car Talk guys have a page of questions-&-answers on the “premium vs. regular” question: http://www.cartalk.com/content/features/premium/questions.html

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