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As anyone who drives a car that requires premium gasoline will surely tell you, the large difference between the prices of regular and premium grades — now averaging nearly $1/gal at the pump — shows no signs of going away. While U.S. retailers once priced those grades much closer together as a matter of routine, those days appear to be long gone. In today’s RBN blog, we look at how regular and premium gasoline were once priced, how that relationship has diverged over time, and what it likely means for future prices.
In the U.S., retail gasoline is usually classified by its octane rating: regular gasoline with a typical octane rating of 87 is the least-expensive option, with premium gasoline with an octane rating of 91 to 93 the most expensive option. The posted octane rating is the average of two different measurements, the Research Octane Number (RON) and the Motor Octane Number (MON). (Both are used to measure gasoline’s resistance to engine knock, but they are determined under different conditions.) That average is called the Anti-Knock Index (AKI), which is the octane number posted on the pump. And as all drivers know, higher octane means a higher price per gallon.
If you pulled up to the pump in the 1990s, posted prices usually showed premium gasoline at about 20 cents/gal above regular gasoline, with a midgrade option half way between the two, a result of long-standing retail pricing strategies. That pricing convention carried over into the early 2000s, as the premium-regular spread at the retail level (blue line in Figure 1 below) showed little fluctuation, regardless of changes in actual pump prices, and remained well above the premium-regular spread seen at the wholesale level (orange line), which represents the actual difference in refining costs and the prices refiners receive for their product. (We closely track the U.S. and global gasoline market in our semiannual Future of Fuels report; the next edition will be published in July.)
