Mercedes Drivers Stung by Shale Boom’s Quirks at the Pump

By Lynn Doan and Dan Murtaugh

Photographer: Daniel Acker/Bloomberg

The gap between premium and regular swelled to 40 cents a gallon last week, according... Read More

The shale oil boom is proving far less kind to Mercedes-Benz drivers than it is to those sitting behind the wheel of a Toyota Camry or Chevrolet Impala.
While regular gasoline-chugging drivers are paying just $3.03 a gallon in the U.S., the lowest in four years, those cruising around in luxury cars and demanding only the finest of grades, known as premium, have seen smaller declines. The price gap between the two grades swelled last week to the widest since 2008.
Shale drilling is one of the main reasons behind the growing divergence. The record oil being pumped at U.S. shale formations tends to be more easily turned into low-octane gasoline. That’s helping push its price down more than the cost of premium fuel as benchmark U.S. crude oil sank below $80 a barrel for the first time since 2012.

“You’re at their mercy; if you want to keep rolling, you gotta pay the price,” Joe Uzeta, an executive driver for Levi Strauss & Co., said while filling up a corporate car at a San Francisco gas station earlier this month. While the company car was getting premium, Uzeta said he’d been filling up his own 2001 BMW 5 Series and 2005 Lexus RX 330 with mid-grade gasoline recently to cut costs.
The gap between premium and regular swelled to 40 cents a gallon last week, according to Heathrow, Florida-based motoring club AAA. The difference was as small as 13 cents in January 2009.

Shale Oil

It’s all the low-octane naphtha in shale oil that makes it more compatible for blending into regular gasoline. Foreign oils, which the U.S. is depending less on as domestic output grows, tend to produce high-octane fuel better, said John Auers, vice president at at Turner Mason & Co., a Dallas-based consultant.
Companies using new drilling technologies to reach shale-oil deposits boosted U.S. production by 66 percent in the past five years, helping create a supply glut that’s driven WTI crude down 23 percent in the past four months. The average cost for retail gasoline in the U.S. will fall below $3 sometime in the next couple weeks and could eventually drop to below $2.90 given current oil prices, said Patrick DeHaan, a senior petroleum analyst for GasBuddy Organization LLC in Chicago.
Seasonal refinery maintenance is also exacerbating the regular-premium differential. Maintenance on refinery units that make alkylate, used in high-octane gasoline, will peak this month, data compiled by Bloomberg show.

Cutting Prices

Gasoline for November delivery rose 0.7 percent to $2.1847 a gallon in electronic trading on the New York Mercantile Exchange at 11:27 a.m. London time.
Gas station owners are more focused on being competitive with regular prices since they make up the bulk of sales, Michael Green, a Washington-based spokesman for AAA, said by telephone Oct. 13. Premium fuel represents only 10 percent of U.S. sales, according to the Energy Information Administration.
In a fast-falling market, station owners are going to be more aggressive about cutting prices for regular while “they may be a little less inclined to drop premium,” especially if they’re still holding old inventory bought at higher prices, Green said.
It’s not like premium gasoline users have seen zero relief at the pump. The average price has dropped by 60 cents a gallon, or 15 percent, since the beginning of July, to $3.426 a gallon. Regular grade dropped 64 cents during that period. Mid-grade fell 61 cents.

Premium Gas

And some drivers, like Nand Ramchandani, a 45-year-old economist sporting a gray suit and a pair of Ray-Bans on a recent weekday morning, are going to keep reaching for the premium handle regardless of price difference.
“I have a degree in engineering so I know what premium does -- it’s high-octane so it’s giving me a greater burn,” Ramchandani said as he pumped 91-octane gasoline into his black Mercedes GL450 at a station in San Francisco. “For 40 cents extra, I’m getting better mileage. Do I want to pay more? No. But you know what? I’ll do what I have to do.”
As maintenance work at refineries comes to an end, the price gap between premium and regular gasoline should return to normal, JBC Energy said in an Oct. 10 research note.
For Uzeta, the Levi Strauss driver, the sooner the better.