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Are Oil Markets Becoming Immune To Geopolitical Risk?

Are Oil Markets Becoming Immune To Geopolitical Risk?

The geopolitical risk premium in…

As Fuel Prices Drop, Consumers Spend Savings On – More Fuel

As Fuel Prices Drop, Consumers Spend Savings On – More Fuel

It’s not news that the drop in oil prices has had a double-edged effect; hurting energy companies’ bottom lines but blessing motorists with less-expensive gasoline. What’s odd – some would say senseless – is what these consumers do with the money they’ve saved.

First, they spent about 80 percent of the savings, rather than putting it in a bank. Most of this spending is on food, household goods and entertainment. But one study by Professors Justine Hastings of Brown University and Jesse Shapiro of the University of Chicago found that a fair amount of the savings goes to buying higher-grade gas for their vehicles.

The study gathered “microdata from a retailer covering over 10.5 million transactions from 61,494 households” in the autumn of 2008, when gas prices fell because of the global economic collapse known as the Great Recession. Evidently that behavior holds today, and rings true in the ears of Chuck Mai, a fuel analyst at the Oklahoma branch of the American Automobile Association (AAA).

Related: SPR To Be Used To Raise Cash For US Gov

“The common mentality is that there’s three grades of gasoline – regular, mid-grade and premium – and they correspond to good, better and best,” Mai told the Tulsa World. “Some drivers who really love their cars feel that when gasoline prices go down, they can reward their autos for their faithful service by buying them a higher grade of fuel. Actually, nothing could be further from the truth.”

Mai says most vehicles on the road today need nothing more than regular unleaded gasoline to ensure the best performance from their engines. And the Federal Trade Commission (FTC) agrees. It says premium or “high-test” gasoline is meant only for high-performance engines, and using it in a vehicle that doesn’t need it is “a waste of money.”

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The FTC recommends that any motorist who isn’t sure about the grade of gasoline needed for a given car should consult the manufacturer. Mai, very sarcastically, put it this way: “People need to go to their glove box and get this little book out. It’s called an owner’s manual. There’s all sorts of helpful information in there, including what grade of fuel is recommended by the manufacturer.”

Benyamin Appelbaum, a reporter and columnist for The New York Times, called unnecessary upgrades to premium gasoline “irrational” in a column he wrote for the paper that was published Oct. 19.

It seems especially irrational when you consider that a prime cause for the drop in energy prices – increased production, particularly in the United States – is flooding the market with oil that’s good only for low-octane gasoline. There isn’t such an abundance of the additives needed to make premium fuel.

As a result, the price gap between regular and premium gasoline is widening to more than 50 cents per gallon, the largest difference on record.

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“A lot of the gasoline blending components that have been piling up over the last few years are generally low in octane,” Patrick DeHaan, an analyst at GasBuddy Organization in Chicago, told Bloomberg News. “It’s much harder and more difficult to put together a premium fuel.”

AAA reports that an average gallon of regular gasoline at the pump in the United States cost $2.218 a gallon on Oct. 22. A gallon of premium cost 49.6 cents more. The difference has risen as high as 51.5 cents on Sept. 12.

So what do you save by upgrading to premium gasoline when the price of regular is low? Nothing. In fact you end up spending more, at least until premium fuel additives become more abundant. And even then, your vehicle won’t run any better than it does on regular fuel.

“Irrational” indeed.

By Andy Tully of Oilprice.com

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