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Midgrade Gasoline: Worst Deal on the NJ Turnpike February 24, 2017

Posted by federalist in Energy, Government Regulation, Markets, Transportation.
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The New Jersey Turnpike is an interesting study in government price regulation. In order to avoid price gouging by the gas vendors at Turnpike rest stops, the NJTA requires prices to be set competitively with regional gas retailers.

Furthermore, the NJTA contract allows only one price change per week. A familiar consequence of this has been that during spikes in gas prices people flood the Turnpike to fill up at the old prices during the few days before the Turnpike vendors are allowed to raise their prices to the market level.

Another strange pricing quirk has persisted for years: Sunoco, which has the contract for most of the rest stops, offers four grades of gasoline. A recent offering was:


  • 93 octane: $2.83 (“Ultra”)

  • 91 octane: $2.81 (“Premium”)

  • 89 octane: $2.70 (“Plus”)

  • 87 octane: $2.37 (“Regular”)


The weird thing is that 91 octane is always priced 2 cents per gallon lower than 93 octane. It turns out that this 93-91 price spread is specified in the NJTA contract, because most competitors used in the survey to set prices only sell three grades of gas.

This makes 91 octane the worst deal on the NJ Turnpike. Why? Gasoline octane is a linear function of blending. I.e., you can get a tank of 91 octane gas by mixing two parts 93 octane with one part 87 octane. (In fact, most gas stations only store two grades, and the pumps blend them to produce the mid grades.) At these prices, one could buy a tank of 91 octane by blending 93 and 87 at a cost of just $2.68/gallon – that’s lower even than the listed price for 89 octane!

I suspect Sunoco is exploiting this in two ways. First, NJ still does not allow customers to pump their own fuel. So blending a tank requires explaining the process to the attendant, who rarely seems that attentive. Second is the fact that Sunoco labels the overpriced 91 octane blend as “Premium.” The manuals and stickers in cars designed for high-octane gas typically specify “premium” fuel. Depending on the season and location the highest grade available might be 91, 92, or 93 octane, so drivers are likewise accustomed to asking for “premium.” On the Turnpike, “premium” gets you a tank of 91 octane. You have to explicitly request “Ultra” or “93” to get the highest grade.

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Comments»

1. Kevin Scott - June 20, 2017

Its all retail gasoline stations that do it. The plus or Mid Grade gas has always been the money makers for the dealers. I am sure the cost of the octane level boost, is still low, 87 89 91 and 93 octane levels used to be only a few cents, or so more for each level of octane. Now the gasoline companies have increased the cost of octane as much as 50 cents a gallon, from 87 to 93 octane levels. The multiple blends tend to draw less attention to the wide cost of gas pump pricing. If your car runs on reg 87 gas use it. If you think you need something more every once in a while fill it with a tank of premium, super, ultra, high test, 93 octane or whatever they want to call it.

federalist - June 20, 2017

This post is calling out a particularly egregious mispricing that resulted from a sloppy contract by the NJTA.

If your car needs higher octane, it’s not just a matter of “every once in a while.” You need it every tank.

Car and Driver has a good analysis of how the cost of higher octane blends has increased in recent years. It probably is true that sellers get a higher margin on high octane because the buyers of that are less price sensitive. But it is also definitely true that it costs more to manufacture higher octanes of gasoline. The very interested reader can learn all about the production costs in this excellent technical review. (tl;dr: Straight-run distilled gasoline typically measures about 80 octane. Producing higher octane requires extra refining steps of varying costs.)


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