High-grade gas passed over as fuel costs remain higher

Despite the downturn, oil companies are advertising the premium brands.
WASHINGTON POST
WASHINGTON -- If it weren't for a small but loyal group of customers, Channara Keam would stop selling premium gasoline at his College Park, Md., station. Sales of the high-octane fuel are down almost 25 percent over the past year, he said, and it no longer produces the kind of profit margins that dwarf those of lower-grade fuels.
"People are still buying it, but not much at all," said Keam, 42. In contrast, sales of regular unleaded gas increased 25 percent during the same period. "People don't want to pay the high price."
Gasoline sales figures show that drivers are forsaking the higher price in unprecedented numbers. After years of decline, the market share for premium gas dwindled to the single digits last year. Some analysts expect the drop to be more pronounced this summer, as the gap widens between the prices of regular and premium gasoline.
Regular gas is averaging about $2.98 a gallon in the Washington region, up 80 cents from the comparable time last year. Premium fuel is selling for $3.25 a gallon, up 87 cents.
"Prices have increased substantially -- even though demand is sharply lower," said Tom Kloza, chief analyst with the Oil Price Information Service in New Jersey. "Premium has seen its best days. ... You would almost describe it as a dying grade."
Decreasing market share
The demand for the top-grade fuel has steadily declined over the past two decades. In the 1980s, premium gas regularly captured market shares of more than 25 percent, according to the Energy Information Administration. But as prices steadily rose and automotive technology improved, the market share of premium gas fell to about 15 percent by the late 1990s. Premium grades account for only 9.6 percent of gasoline sales from August 2005 to March 2006, the latest figures available.
"Our suspicion is that a number of people found that their cars ran just fine" on regular gasoline, said Mark Routt, senior consultant at Energy Security Analysis Inc. in Wakefield, Mass. "And they never went back."
Premium gas can prevent an engine from knocking, but fewer cars need it because newer vehicles are equipped with sensors that adjust the engine to the grade of octane in the gasoline, automotive experts said. Higher-octane gas can increase performance in some cars under certain conditions but will make no discernible difference in most cars, they said.
Feeding premium gas to cars that don't need it "probably is a waste of money," said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.
Based on the proportion of the premium-only vehicles on the road today, the gas should account for about 15 percent of all sales, Routt said. However, EIA figures show that the last time premium had such a high market share was in early 2000, indicating that many motorists are ignoring the "Premium Fuel Only" reminders etched by auto manufacturers on the gas-tank caps.
It is not uncommon, Kloza said, for premium fuel to be sold for 40 cents a gallon above the price of regular gasoline at the wholesale level. But it's "very difficult to price it up the pump that aggressively," he said.
Industry still pushing
Although the public appetite for higher-octane fuels has waned, some oil companies have been aggressively pushing premium brands.
In 2004, Shell launched a $30 million advertising campaign in what it called "one of the company's most significant marketing investments" since it began selling fuel in the United States nearly a century ago. Through television, print, radio and Internet ads, direct-mail promotions and displays at its stations, Shell touted the virtues of its V-Power gasoline, which the company said has five times the amount of cleaning agents required by the federal government. The company followed up with a $25 million campaign in 2005.
BP this summer launched touring exhibits to promote its Amoco Ultimate premium fuel. Among them is a car with a split engine, one side filled with regular gas and the other with Amoco Ultimate.