More Octane Means More Pain If You Need Very Best Gasoline

(Bloomberg) -- Premium gasoline for your luxury ride is set to cost even more in the coming months as the U.S. transitions to cleaner fuel.

With change it will get harder for refiners to keep the octane high enough to meet the needs of high-performance engines. That's boosting demand for a key ingredient, known as alkylate, and threatening to add to the cost of filling up a Mercedes or Lamborghini.

“We believe we're seeing octane get more and more expensive,” Lane Riggs, chief operating officer at Valero Energy Corp., told analysts during the company's second quarter earnings call.

About one in seven cars sold in the U.S. is a luxury model, according to auto analyst Kevin Tynan of Bloomberg Intelligence. Drivers of those cars could be paying as much as 72 cents more per gallon for premium gasoline than regular next year. AAA has the current spread between regular and premium at 57.6 cents per gallon.

“The average driver could be faced with higher costs for premium but more so east of the Rockies than California,” said Patrick DeHaan, head of oil analysis at GasBuddy. “The gap between the price of regular and premium could jump 10% to 25% in the months ahead, depending on how bad it gets.”

The new gasoline specifications, known as Tier 3, technically went into effect in 2017 but many refiners received a three-year waiver to the requirement to reduce sulfur and remove all but 10 parts per million of sulfur from fuel.

“In 2017 and 2018, approximately five of every six gallons of gasoline sold in the U.S. had over 10 ppm of sulfur in it,” Roger Read, senior analyst at Wells Fargo wrote in a research note. “We attribute the non-compliance to the extensive use of valuable Tier 2 credits, small refinery exemptions and avoiding the negative effects and costs of full compliance under a profit maximization approach.”

Sales of premium gasoline at U.S. retailers declined from the mid-1990s through 2015 before leveling around 2.4 million barrels per day, U.S. Energy Information Administration data show.

New York Draws High-Octane Gasoline Ships From Across the Globe

Efforts to remove sulfur from fuel could also reduce octane that would have to be replaced for all grades of gasoline, likely with alkylate, Tudor Pickering refining research director Matthew Blair said.

Most U.S. alkylate has 92 to 93 octane. It trades at a premium to 87-unleaded gasoline year round and it meets most summer specifications.

Blair said he is not ready to go as far as to say the shortages of octane will be dire because refiners seem to be prepared, but he acknowledged that the market will be tighter for blendstocks.

The extra capacity, and imports from faraway refineries that have extra octanes, should help ease the pain for those that need the octane, Blair said.

“Alkylate is an amazing blendstock,” Blair said. “And in a 10 ppm sulfur environment, it is eventually going to be in short supply.”

To contact the reporter on this story: Jeffrey Bair in Houston at jbair4@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Mike Jeffers

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