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?


dnm

Your car will run no better on any grade of gas higher than WHAT THE ENGINE REQUIRES.

Is your compression ratio

Gianluca

Aren't gas taxes in the USA calculated as a percentage on top of the price, rather than as a fixed amount ?

This would explain why the expensive good (premium gas) does not mantain the same absolute gap with the less expensive good.

Zach

To #55, read the latest issue of Playboy. There is an awesome thing that makes its own ethanol with 14 lbs of sugar or so. The gizmo costs 10k, but looks fun.

Marty lerch

I have a 1994 F 350 Ford crew cab dually pickup that uses premium, and premium only. I used to pull a trailer with it and it has literally been driven 1500 miles in 3 years. The problem I have is that it "pings" so badly on mid grade that the "good stuff" is all that I use.

So, for the question as to why anyone would use premium gas, here is mine.

aaron

Why aren't more people buying scooters and motorcycles in response to higher gas prices?

My primary motorized vehicle is a scooter. A Suzuki Burgman 650, to be precise. It tops out at 110 miles per hour, gets 42 to 50 mpg, and carries a laptop and a weekend bag, a case of wine, or a week's worth of groceries for a couple. It is better than a car for at least 90% of all my trips in and around LA: Lane-splitting saves me time and money (because I never get stuck idling in standstill or bumper-to-bumper traffic).

It has an automatic transmission, which makes it ideal for commuters who have to wear nice shoes to work (no clutch to manipulate, no shoes to ruin!).

It holds four gallons of premium gas (required per warranty and as so many others have written, for a clean-running engine). I get 180 miles on a tank that costs me about $18. I use my Citibank MasterCard to fill up, so I get 5% cash back (almost a buck a tank).

I'm price-insensitive about the rise in premium gas prices, but not because I'm "rich." I'm price-insensitive because the rising prices have a negligible effect on my lifestyle, rate of savings, overall happiness, ability to put food on the table, or to take long drives up the Pacific Coast Highway.

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Imad Qureshi

@Aaron: When the price for a barrel of oil goes up a buck or two, the prices at the pump immediately jump. But when the prices of oil goes down, the prices at the pump barely budge. I know of one station that had gas at 3.99 at oil’s peak…now it’s 3.98. Gouging?

Price Elasticity.

dev

Traditionally the rule of thumb about the relationship between gas and oil prices was that gas prices lagged behind the price of oil at least a week or two. The prices don't always correlate as expected though, as gasoline has several additional factors that affect price (refining capacity, speculation, consumer pressure, etc.).

Lucas Novaes

I agree with Chris, from the second comment. The relative gap has actually decreased. I think it means nothing fancy but simple economic theory is in play.

John Squire

Levitt is probably correct that "The only people who still buy premium gas are those who are wholly committed to premium gas."

The one fact we don't have is the proportion of premium buyers who have valid reasons for buying it (high compression engines labeled for 89+ or 91+, knocking problems) to those with malleable reasons ("nothing but the best for my baby"). Based on my reading of car and motorcycle forums on the 'net, there are many more in the latter category than you'd assume, but the former category is growing over time.

doug

#32 - BT. It doesn't suck to be rich. It sucks to be unhappy, but you already knew that.

Andrew Laurence

My credit card gives me a 5% rebate on the following month's statement for all purchases at gas stations. The cheapest stations in my area (Costco, ARCO) don't take credit cards at all, and ARCO even surcharges debit card users. However, the stations that DO take credit cards are cheaper for me when I factor in the discount, so I always go there and avoid the long lines and the beggars who congregate at the cheap stations.

Mike P

Does premium gas require more corn-based ethanol?

Gary

Another trend I am seeing is that many stations in my area have returned to the old days of setting two different prices for cash and credit cards, with the price for using a credit card 8 or 9 cents more a gallon for the same grade of gas. They prominently advertise the cash price and then the careful price shopper with a credit card ends up paying more and not even noticing it when he signs his receipt.

— Posted by Blue Sun

I'm not sure of the specific details, but I know Visa and Mastercard have pretty specific rules which a member must follow to continue to accept their cards as payment. Among them, they cannot set a minimum or maximum amount that can be charged on a card, and they can't charge a transaction fee for using a card (as opposed to cash) without a variance from Visa or Mastercard. However, Mastercard does allow a cash discount.

I'm unsure if Visa allows the same, though I suspect they do.

Bottom line - if you walk into a business and they tell you they have a $10 credit card minimum, they're violating their terms of use agreement with Visa or Mastercard.

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AaronS

While you're all at it, perhaps you can answer two other questions:

1) When the price for a barrel of oil goes up a buck or two, the prices at the pump immediately jump. But when the prices of oil goes down, the prices at the pump barely budge. I know of one station that had gas at 3.99 at oil's peak...now it's 3.98. Gouging?

2) Why is it that diesel, which I am under the impression is not at refined a product as gasoline has LOWER emissions, from what I see on various charts? Why are we paying MORE for fuel that is even worse for the environment?

Of course, I could be wrong in my understanding of these things, and I stand open to correction.

Gary

1) When the price for a barrel of oil goes up a buck or two, the prices at the pump immediately jump. But when the prices of oil goes down, the prices at the pump barely budge. I know of one station that had gas at 3.99 at oil’s peak…now it’s 3.98. Gouging?

Intro to microeconomics, first class of my first day of my freshman year of college. 8 AM. Prices are "sticky down." That is, a retailer will pass along his higher costs to a consumer faster than he will be forced to pass along lower costs through competition. Its incentives. He MUST raise his price in order to continue to profit. He need only lower his price when his competitors lower their prices, taking business away from him (or, he lowers his price to steal market share from his competitors, increasing profit through moving higher volume at a lower marginal profit).

Alex

Most modern cars, even sports/luxury cars come with knock sensors now and can run on any grade above 87. The only exception is ultra premium ones. For example, most modern Mercedes will run on regular, but the AMG's need premium.

The other common cars that need only premium (usually at least 91 octane because it is available nationally, even in CA) is turbo engines, for example VW/Audi's 2.0T or older 1.8T.

Many manufactures of luxury cars recommend premium, but the cars come with sensors so the car will run on regular, albeit usually wasting more gas, ironic for those who switch to regular. Also they may run rough when the car first starts before the sensors detect the fuel type. Long term use of regular can lead to occasional misfires. Something the older 3.0 V6 Audi engine (now replaced with the 3.2) was prone to for example. It can also damage catalytic converters as more unburned fuel leaves the cylinder, heating them up more and faster.

I have worked for Mercedes and owned Mercedes and Audi's and those are my experiences with them.

As for the price. starting in 2006, Ethanol is used as an additive replacing MTBE in a lot of states. Most gas in the US is in effect E10. Depending on which state you live in, this can hurt or help the price of gas. Once they start to lower tariffs and trade barriers on sugar we can start making E85 out of that instead of corn (which is pushing up food prices a lot). The world price for sugar is closer to 10-15 cents a pound, vs. 40 cents in the US.

Once that price goes down we can use that to make E85, which most cars can be easily converted to run on. It gets even cheaper if we import raw, in-edible sugar. You need about 10-20 pounds of sugar for a gallon of ethanol. Do the math and we could have sub $2.5 fuel again!

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Thomas Brownback

Usually prices rise as a result of rising demand. Could demand for premium actually be rising with higher gas prices?

If the absolute difference between premium and regular was fixed, and premium conferred any advantage to purchasers, then increased regular prices wouldn't drive people away from premium, but towards it.

Imagine you are facing a choice between two cars, one of which is more efficient, but requires premium fuel. At higher gas prices, the advantage of the more efficient vehicle will increase. If gas were only 40 cents a gallon (through some miracle), then premium would almost double your gas expenditures. The efficient premium car would need to be twice as efficient to make sense as a purchase. At $4/gallon, the efficient car only needs to be 10% more efficient to make sense.

Any possibility it's rising demand after all? It'd make economics go back to normal, no Giffen explanations necessary.

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Layla

The great majority of cars work just fine with regular, but some do require premium to stay in working order. My brother's car is a classic, and if he doesn't use premium, the engine develops a whole host of problems (something he learned first hand.)

I wonder if the people switching from premium to regular were previously pumping premium into cars that didn't require it, and just wised up, or if they switched from cars that require premium to cars that don't, akin to trading in for a hybrid.

BT

It must suck to be rich these days. The cost of premium gas for your luxury cars is increasing disproportionately. Those lofty bonuses are becoming rare. The next president threatens to close your undeserved/unwarranted tax breaks.

Mike

#6 Erik - Since you have 85-87-91 available, I'm assuming you're in Colorado, or some other high-altitude state. For you 87 is equivalent to 89 at sea level. As a bunch of other commenters already stated, octane is a measure of the resistance to predetonation which occurs when cylinder pressure are high. At high altitude, there is less absolute air pressure, so there is less air in the cylinders to get compressed thus the maximum pressure is also lower. So a car designed to run on 89 at sea level will have cylinder pressures to run 87 at high altitude.