The Gasoline That Nobody Really Needs

The cyclical spikes in gasoline prices could be alleviated to a large degree if the California Legislature acted upon a proposal presented over the years by independent industry study groups. Gasoline refiner/marketers produce and sell three grades of gasoline: 87 octane, 89 octane and 91 octane. Only 5% of vehicles sold in the United States require 91-octane fuel; 95% require only 87-octane fuel. Though automakers suggest 89-octane fuel for a few models, no vehicle requires it.

You might ask why all refiner/marketers would produce and market a product that has no rational use.

Well, much like other products that have no rational consumer use, 89-octane fuel fills a niche perceived by consumers as either an upgrade from 87-octane fuel that will improve performance or as a cheaper alternative when their vehicle requires 91-octane fuel.

Neither choice is a good one. Using 89-octane fuel when only 87-octane fuel is required does nothing for performance. Conversely, substituting 89-octane fuel for 91-octane fuel can damage a high-performance engine. This marketing strategy might fit the “free market” model, which calls for consumer-driven offerings, except for the factors surrounding the production/refining/marketing control exerted by the major players.

With no new refineries built in California since 1935, the major players control the entire California fuel stream. They tell us that they run all facilities at close to 95% capacity. What this tells us is that the entire available supply of crude stock is being refined into fuel.

The hidden trick to this strategy is the finite supply/capacity in California.

California refiners will produce about 17 billion gallons of gasoline in 2005. With 20% of this supply/capacity dedicated to unneeded 89-octane fuel, the supply of the actual fuel needed by consumers -- 87 octane -- is artificially restricted. This “shortage” of 87-octane fuel causes price spikes in the wholesale market, which drives up the price of all fuel grades.

California air-quality rules require “boutique” fuel blends, which prohibit independent retailers from importing gasoline from other states and countries; therefore, we live in an “island economy” where fuel supply is concerned.

This situation forces all small independent retailers to comply with the major players’ rules about offering three grades of gasoline or risk being frozen out of the supply chain.

Several very large retailers, such as Costco, have figured out this strategy and no longer offer 89-octane fuel, but their fuel stations are always crowded and offer the lowest prices in town. This tactic reduces their sales costs and provides additional on-site tank capacity for the fuel that their customers want.

The Legislature has the power to regulate the production and marketing of this vital commodity, as it does for all other energy products. With this power it should prohibit the production and sale of 89-octane gasoline.

It can also conform California air-quality rules to the federal rules to permit importation of fuel to California, thereby promoting a free market. All previous attempts by the independent consumer and industry groups to make this change, or even to study it, have failed in the face of the massive lobbying force of the major oil companies.

The only avenues left for consumers are the media and the initiative process.