Value of octane hits all-time high

The value of octane in the United States just hit an all time high of 12.6 cents per octane-gallon:

For decades, premium gasoline cost 3 cents/octane-gallon more than regular, meaning we paid 18 cents/gallon for a 6 octane difference (93 octane premium – 87 octane regular), on average, at the pump.

That has now quadrupled to an all-time high of 12.6 cents/octane-gallon, or 75.6 cents/gallon.

The chart shows this is not a temporary spike. The value of octane has increased relentlessly in recent years. The reason is supply and demand. More modern vehicles demand higher octane gasoline. And octane, in its chemical form, can only be produced at refineries (gasoline blenders can blend and supply octane but cannot produce it).

What’s behind the octane supply/demand squeeze?

Despite the push toward renewables, the demand for octane continues increasing because more modern internal combustion engines need premium for performance and fuel economy. Also, pressure is building to move to a 95 RON (Research Octane Number) gasoline standard in the USA.

Meanwhile, the supply of octane has decreased. A big reason is the new Tier 3 gasoline sulfur specification which is causing many US refiners to destroy lots of precious octane gallons in gasoline desulfurizers. This Tier 3 octane/sulfur squeeze and its remedies are explained in many blog posts on this web site and in our multi-client reports.

Increasing demand and shrinking supply means higher price per octane-gallon, which is what the chart shows.

The political winds and industry happenings have not been pushing refiners to improve their octane-barrel production economics.

But consumer demand, Tier 3 gasoline, and the laws of economics are pushing the other way.

Don’t worry that we’ll run out of octane. The octane-gallons (or octane-barrels in common commercial parlance) will be produced by those refineries in the US and elsewhere who have the best octane-barrel production economics. This, plus a higher price per octane-barrel, means lucrative margin growth for them at the expense of the others.

I believe the Tier 3 octane/sulfur squeeze has already shown up in the refining margins and stock price trends of US refining companies since Tier 3 kicked in last year, and this will continue for quite a while.

Recommendation

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