Economics of Refinery Octane Part 1 – U.S. Octane Values 2016-2025
The last ten years have seen historic changes in the U.S. octane market. The retail value of octane, the primary yardstick of gasoline quality and price, has increased 5-fold. The wholesale value of octane has increased in the last 3 years, spiking threefold in July 2022, followed by another year of high values in 2023. The wholesale numbers for 2024 and (so far) 2025 have been more stable, but still historically high. In this blog series, we examine how octane values, costs and economics have changed in recent years, look at the impact of seasonal factors, and set the stage for a detailed, quantitative analysis of the octane market, which is at the heart of gasoline economics.
See other posts in this series, Economics of Refinery Octane:
- Part 1 – U.S. Octane Values 2016-2025
- Part 2 – Today’s High Octane Values Mean Opportunities For Refiners
Experienced fuel consumers who pay close attention to gasoline prices know that the retail pump price differential between premium gasoline (typically 93 octane) and regular gasoline (typically 87 octane) has increased from a long-term historical value below $0.20/gal to about $0.90/gal today.
We can think of this premium-regular price differential (also known as the “grade differential”) as the retail value of octane; that is, the current differential of 90 cents/gal is the value the end consumer is willing to pay for the extra six (93-87) octane numbers that come with premium versus regular gasoline.
The steady increase in the retail octane value is explained, in broad terms, as steadily increasing octane demand and decreasing octane supply. (For more detail on octane and the octane supply/demand picture, see Breaking The Chains.)
We should note that refiners don’t capture the full 90-cent retail value on the octane they produce. In fact, the portion of the octane value they capture is surprisingly small (we’ll put some numbers to that below).
The portion of the octane value refiners capture is surprisingly small.
But first, to quantify and break down who captures what on octane value, we will picture the gasoline market as a three-stage supply chain:
- In the first stage, pure refiners make refinery gasoline that is later blended with ethanol downstream to make the 10% ethanol blend (commonly called E10) sold at retail pumps. The refiner’s octane margin depends on the prices received for their refined gasoline products (before ethanol blending), which are commonly called blendstocks for oxygenate blending (BOBs).
- Next, BOBs are sold by refiners into a gasoline supply chain. Spot supply points transact bulk volumes of BOBs near refinery hubs. Rack supply points transact smaller volumes of BOB, often off a pipeline. (The ethanol added to create E10 is mostly done at the rack level.)
- Finally, retail supply points deliver blended E10 into our cars, SUVs and trucks at retail filling stations.
In this high-level picture of the octane market, we consider two grades of BOB — regular BOB and premium BOB. The octane difference between the two corresponds to the octane ratings of the regular and premium retail E10 products.
With this picture of a three-level supply chain (spot, rack and retail levels) and two different grades (regular and premium) of BOB and E10, we can start breaking down the market value of octane by computing the price differentials between the premium and regular product at each point in the chain. That difference is our measure of the market value, or price of octane, at that point.
Retail and wholesale octane values 2016-2025
To see how this works in practice, let’s look at the Chicago spot trading hub. Figure 1 below shows the historical U.S. average retail octane value (blue line) and the Chicago spot octane value (green line).
The retail value of octane, captured at the retail station, is several times higher than the spot octane value, captured by a refiner at the Chicago spot hub. The retail value trended steadily up from 45 cents/gal to 90 cents/gal over 10 years.
By comparison, the Chicago spot value was relatively steady from 2016 until 2022; then in July-2022, it spiked up to 30 cents/gal and has been at 25 cents/gal (plus-or-minus 10 cents/gal) since then.
This indicates a Midwest refiner was capturing roughly 20% of the total consumer octane value before July 2022 and roughly 35% after that.
The retail value of octane, captured at the retail station, is several times higher than the spot octane value.
As shown in Figure 2 below, the Atlantic (New York) spot market is very different than the Chicago market, being relatively short of refining and pipeline capacity and strongly influenced by cross-Atlantic trade. Despite these differences, the pattern of the octane margin results is the same. The green line in Figure 2 shows the spot value of octane in New York was relatively steady until 2022. It has moved up about 15% since then, with occasional spikes higher.
Applying this method of analysis to other spot supply points In the U.S. gives a consistent picture, with refiners capturing 10% to 20% of the total retail margin from 2016 to 2022, then increasing to 15% to 35%.
Why?
This raises important questions:
Why are the much simpler, highly competitive segments downstream of the refinery — which produce no octane (they only redistribute and distribute it) — capturing such a large percentage of the octane margin?
And why did the spot price increase in a step-wise fashion, while the retail price has been increasing in an almost linear trend for over 10 years?
Before offering possible explanations let’s consider three factors at play in the octane market that are distinct from the gasoline market itself:
The Seasonality Factor
The seasonality factor is about how octane economics affect gasoline prices in summer versus winter.
This seasonality is best seen in the gasoline futures market, which reflects anticipated future gasoline prices given the information available today. Figure 3 below shows the current forward curve for New York RBOB (Reformulated Blendstock for Oxygenate Blending) futures for the next two years.
We see a cyclic pattern of the expected future gasoline price with an amplitude that’s about 20 cents/gal higher in the summer than in the winter. This cyclic pattern reflects the market’s anticipation of known historical seasonal trends in U.S. gasoline prices. It is consistent from year to year and is commonly perceived to be caused by high gasoline volume demand during summer driving season.
But in fact, today, these cycles are caused not by high summer gasoline demand but by low summer octane supply — and that low octane supply is caused by a single chemical compound, butane.
These cycles are caused not by high summer gasoline demand but by low summer octane supply
How does butane cause this cycling? Butane is a cheap, high-octane gasoline component that is an abundant source of low-cost octane in the winter but can generally not be used in gasoline in summer because it evaporates into the air, causing smog in summer months. In gasoline lingo, butane is too high in RVP for summer gasoline. Reid Vapor Pressure, or RVP, is a measure of gasoline volatility.
Without the aid of the high-octane butane molecules, the summer gasoline octane specification is much more difficult and costly to meet, and that is true for all octane grades.
Today, low octane supply, not high gasoline demand, is the main underlying cause of high U.S. gasoline prices in summer months.
Today, low octane supply, not high gasoline demand, is the main underlying cause of high U.S. gasoline prices in summer months
And the cyclic pattern seen in Figure 3 is an indicator of the strong impact of octane supply on gasoline price. The pattern can also be seen, though less conspicuously, in Figures 1 and 2.
The cyclic pattern seen in Figure 3 is an indicator of the strong impact of octane supply on gasoline price.
The Petrochemicals Factor
The petrochemicals factor is about the alternative use of some gasoline components, especially the aromatic compounds called xylenes, as highly valued feedstocks for the petrochemical industry.
Xylenes are great high-octane molecules that are abundant in refined gasoline and are also the primary building blocks for fibers and polymers used in clothes, carpets and food packaging, making xylenes prized feedstocks for the petrochemicals industry.
Xylenes are pulled in both directions depending on their value as high-octane gasoline components and high-value petrochemical feedstocks. (We’ll look at this competition for gasoline-range aromatics in a future blog.)
The Octane Accounting Factor
The octane accounting factor is about differentiating between octane as a measure of gasoline quality and octane as a measure of quantity. When doing quantitative octane economics, it is essential to differentiate between the two meanings of the word.
When we refer to 87-octane gasoline, we are referring to the octane quality rating, a measure of that gasoline’s tendency to reduce engine knock. When we refer to octane supply or octane demand, we are referring to octane as a quantity, as we would refer to a number of gallons of gasoline or number of bushels of corn.
For doing quantitative octane economics, the proper unit of measure for octane quantity is the octane-gallon, which is the product of a quantity of gasoline times its octane quality rating.
For example, if a refinery takes three gallons of gasoline and increases its octane quality by one unit from 87 to 88, it has produced three additional octane-gallons of octane. If it has one gallon of octane and increases its octane quality by three units from 87 to 90, it has also produced three octane-gallons of octane.
For more detailed background on how this concept is applied in fundamental economic analysis of the octane market, see this report.
Because the octane-gallon is a less-tangible quantity than a gallon or a bushel, the conflating of these two meanings is a constant source of confusion when discussing octane economics. But to do economic analysis on any commodity, we need a proper measure of the quantity, and for octane, the octane-gallon is that measure.
To do economic analysis on any commodity, we need a proper measure of the quantity, and for octane, the octane-gallon is that measure.
Octane Economics
Octane economics has not been headline news in the past decade, having been overshadowed by more popular topics, like electric vehicles and renewable fuels.
Octane values are still followed closely by gasoline traders. Most traders tend to focus on short-term price moves and follow weekly or monthly supply, demand and inventory trends and risks like refinery outages, hurricanes and regulatory changes.
Only a few traders and octane market analysts have focused on long-term, fundamental economic trends in terms of octane-gallon supply and demand. They know there have been big changes in octane economics in the last 10-years. These octane market analysts and traders have puzzled over the cause of the steady increase in retail octane value, and this blog has raised two related questions — why do refiners capture only a small fraction of the total octane margin today, and why did the spot price respond in a step-wise fashion in 2022, while the retail price has been increasing in an almost linear fashion for over 10 years?
In the next blog in this series, we’ll provide more hard data and analysis of the factors involved and theories that might answer these questions.
Recommendation
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