The AAA checks in: premium gasoline is mostly a waste of money
I posted this on The Barrel, Platts blog. You can see the blog at https://blogs.platts.com/2016/10/19/premium-gasoline/
Looking for a pop from premium gasoline? Look again
It may not change human behavior, but if it did, a recent AAA report on the benefits of premium gasoline might cut into what on paper looks like a pretty profitable business.
In the study, released in the middle of last month, AAA — the long-standing interest group that looks at automobile issues through the lens of the car owner and driver — doesn’t mince words.
The amount of money the average American spends on premium gasoline in cars that don’t need it is “wasted.” In the last year, it puts that figure at $2.1 billion. “Today, many motorists believe that premium grade gasoline will give engines designed to run on regular a variety of benefits, including more power, lower tailpipe emissions, and better fuel economy.”
The paper spells out in detail the testing methods used by AAA, and the answers are pretty unambiguous in its “Key Findings” section. Verbatim…
- Does an engine designed to operate on Regular gasoline produce more horsepower when operated on Premium? No consistent differences in maximum horsepower were recorded.
- Does an engine designed to operate on Regular gasoline get better fuel economy when operated on Premium? No significant differences in fuel economy were recorded.
- Does an engine designed to operate on Regular gasoline produce fewer tailpipe emissions when operated on Premium? No consistent differences were recorded.
The report is more verbose than that, but once you make those points so bluntly, there isn’t too much more that’s needed to be said.
Yet, marketing of premium continues. Why? Numbers tell a pretty straightforward story. According to AAA, premium is on average 23% more than the cost of regular at the pump. Specifically, on October 12, the daily AAA survey of retail gasoline prices showed a nationwide price for retail gasoline of about $2.25/gallon. For premium, it was about $2.75/gallon, almost 23% exactly.
Compare that 50-cent spread to some other numbers. On October 11, the Platts daily assessments for New York harbor unleaded RBOB vs. premium RBOB showed a spread of about 10 cents. But get to the wholesale level — the rack — and the spread starts to blow out, but not at any sort of consistent level. In Houston, the Platts range of rack prices for unleaded was about 21 cents on the low, but about 47 cents on the high. In Philadelphia, it was 16 cents on the low, and about 36 cents on the high.
Note that rack prices are affected by numerous factors, many of them regional in nature for which no broader conclusion can be reached. So it’s not surprising that the road from a 10-cent spot market spread to a 50-cent retail spread isn’t exactly consistent.
Premium looks like a profitable business, but long-time wholesale and retail marketing consultant Gary Bevers of Beversco says despite those apparent profits, premium isn’t that great a deal for retailers.
First, premium sales might be only 1,200 gallons per month at an average station; those stations might be doing 20,000 gallons of regular in a week. “So premium sits in the tank and just doesn’t turn as fast,” he said. Additionally, the trucking cost is the same as regular, but a station might not even use the full capacity of the truck. “It’s a business based on volume,” Gary said. And premium doesn’t provide a lot of that.
The AAA report on premium gasoline contrasts sharply with a report that came out a few weeks earlier touting the advantages of gasolines that have a TOP TIER designation. These are the ones you see touted by name-brand oil companies, that the additives in their fuel — which you will almost never find at non-name brand retailers — are worth the extra few cents per gallon. The additives are just one of the reason why a company like BP will sell its fuel at the rack to its branded customers for a few cents more than the non-additive gasoline it will sell at the same rack to other retailers — Sheetz, Liberty, Racetrac — for a few cents less. It isn’t just that; the industry believes there is a value to a brand like Exxon that needs to be captured in the wholesale price.
“Among brands tested, non-TOP TIER gasolines caused 19 times more engine deposits than TOP TIER brands after just 4,000 miles of simulated driving,” the report said. “Such carbon deposits are known to reduce fuel economy, increase emissions and negatively impact vehicle performance, particularly on newer vehicles. To protect vehicle investments, AAA urges drivers to use a gasoline that meets TOP TIER standards for engine cleanliness and performance.” But the report goes on to say those considerations are important to only 12% of drivers.
So you’ve got some buyers paying 50 cents more for premium gasoline that does almost nothing, and only 12% paying a few cents more for gasoline that actually does something.
An interesting side issue is being tracked by the JP Morgan Chase Institute, which has now put out its latest report on what Americans are doing with their gasoline savings. JP Morgan Chase — drawing on banking data — said retail gasoline prices were down 25% in 2015 from 2014, but spending at gas stations only declined 19%.
Why? The report cited several factors: lower prices encourages more driving, which means more gasoline consumption; savings at the pump can translate into greater purchases at the convenience stores, as the extra cash goes into buying beef jerky and a Sizzli for breakfast at Wawa; and possibly — but not definitely — buyers consumed more expensive gasoline.
“While there is historical evidence that people switched to less expensive gas when gas prices increased, it is unclear whether people purchase more expensive gas in a low gas price environment,” the report said.
It’s no wonder Americans get so manic when gasoline prices go up, because for a lot of them, the buying habits when prices are low are already pretty hard to figure out.