Here’s some bad news for luxury and performance car drivers who are pumping top grade gas: The premium they pay over regular fuel is getting more expensive.
American and European refiners are struggling to get enough octane to make high-quality gasoline. There are several potential reasons for the shortfall, including the fallout from Russia’s war in Ukraine, the impact of US environmental regulations and a lack of refining capacity.
The net effect is that it makes the fuel even more expensive than usual, compared to regular unleaded. In the United States, the price gap is about 75 cents a gallon, up 15 percent from the same period last year, data from automotive group AAA shows. In the UK, the premium has expanded by 25% year-on-year, the latest monthly figures show.
“The current record seasonal strength in octane prices does not bode well for a smooth transition to summer-spec gasoline,” said Goldman Sachs Group Inc. analyst Callum Bruce.
Refineries are in the process of switching to summer gasoline. Winter fuel contains more butane from natural gas processing to increase octane.
Gasoline production
Octane itself is a hydrocarbon, produced in the refining of crude oil, although consumers generally know it through the so-called gasoline octane. A higher value means the fuel is more stable and less likely to cause engine knock. Vehicle manufacturers often recommend high-octane gasoline (the premium grades at the pump) for maximum performance from turbocharged or high-compression engines.
Even regular gasoline contains octane. However, the shortfall should not be a problem because there are more low-octane components available for making regular gasoline than high-octane fuel.
The European Union and the United Kingdom last month banned most seaborne imports of Russian oil products, cutting the region’s supply of naphtha, a key component in making gasoline. Meanwhile, Europe’s petrochemical industry has cut supplies of octane-boosting additives as high energy costs and weak demand slowed operations.
The loss of these Russian raw materials is critical for gasoline markets this year, according to consultancy Energy Aspects Ltd.
“Explosive” price gains.
Separately, US “Tier 3” environmental regulations, which require lower sulfur content in gasoline, have created complications.
Compliance with the standards requires more severe hydrotreatment of naphtha and gasoline during refining. The process destroys octane, thus contributing to the shortage and helping to extend the value of premium gasoline to regular grade.
The gasoline sulfur standard for the rules came into effect in 2017. In 2020, demand for fuel fell due to pandemic-related travel restrictions. The true effects of the regulations began to become apparent last year as gasoline consumption recovered, according to analysts at Bank of America Corp.
“Meeting the lower sulfur requirements comes at the expense of octane levels, which likely contributed to higher prices for high-octane blend components,” they said in a recent note. “This dynamic should continue into 2023 and may lead to a similar explosive increase in gasoline prices this summer.”
To be sure, there is some debate as to what is behind the octane deficit. According to Robert Auers, manager of Refined Fuels Analytics, a division of RBN Energy, the wide octane spreads (the price difference between the wholesale prices of premium and regular grade gasoline) were primarily driven by the ‘scarcity of refining capacity.
Because of the loss of capacity, there are not enough reformer units to upgrade low-octane naphtha, to raise its octane levels for use in making premium gasoline. That may change over time as new refinery capacity comes on stream this year. “However, we have octane distributions that remain moderately wide,” Auers added.
