The Value of Premium

Source: By NACS • Posted: Friday, June 30, 2017

ALEXANDRIA, Va. – There used to be a time when consumers could count on a simple price spread between different fuel grades. For example, mid-grade gasoline would be 10 cents more per gallon than regular gasoline, and premium gasoline would be 10 cents more per gallon than mid-grade.

However, this once-predictable formula has waned over the years. In late 2012, the spread between regular and premium fuel prices reached 30 cents per gallon and continued to increase throughout 2013, topping 50 cents per gallon in some markets. During 2013, the spread averaged 32 cents, and was even higher in 2014 (35 cents), 2015 (40 cents), and 2016 (47 cents), according to the U.S. Energy Information Administration. Some markets reported a price spread of more than 60 cents in 2016.

The Value of Premium” was released today as part of the 2017 NACS Fuels Resource Center, which examines conditions and trends that could impact gasoline prices. The online resource is annually published to help demystify the retail fueling industry by exploring, among other topics, how fuel is sold, how prices affect consumer sentiment, why prices historically increase in the spring and which new fuels are likely to gain traction in the marketplace.

The change in this price relationship has been driven primarily by supply. The U.S. supply of regular unleaded has increased in the past several years, placing downward pressure on wholesale prices, while premium supplies have not increased similarly. At the same time, demand for premium fuel has increased with the introduction of more vehicles for which manufacturers recommend or require premium fuel. Overall, there has not been a significant shift in the volume of regular and unleaded delivered to the market since 2010; the price differential is due to shifts in available supply.

Sales of premium and mid-grade have declined over the past decade because consumers traded down octane levels when gas prices increased. But prices have stabilized and may actually see some continued increases as more high-performance vehicles require their higher octane fuel blends. Premium fuel has also found a niche audience with consumers seeking ethanol-free fuel for small engines (boats, ATVs, leaf blowers, chainsaws, lawn mowers, etc.).

“Availability of storage space may play a role in premium’s future,” said NACS Vice President of Strategic Industry Initiatives Jeff Lenard. “Retailers store fuel in underground storage tanks, and they often have two or three tanks: one for regular grade, one for premium and perhaps one for diesel fuel (mid-grade fuel is blended underground as a mix of regular and premium). As diesel demand grows, retailers without sufficient underground storage space may decide to replace their supply of premium with diesel fuel, or another fuel like ethanol.”