Gas Arbitrage

When I bought my Miata the dealer told me to use premium gas, but my wife recently suggested I try regular.  At which point I considered midgrade gas, and noticed: one is better off mixing regular and premium than buying midgrade!  For regular, midgrade, premium, the $/gal. prices were 1.77, 1.92, 2.02 , while the octane ratings were 87, 89, 93.  So the first jump gives you 2 octane points for $0.15, while the second jump gives you 4 octane points for only $0.10.  Since mixing gas averages the octane ratings, if you mix 2/3 regular with 1/3 premium, you make your own midgrade gas for only 1.85, saving 0.07.  I then went searching and found this Feb ’08 paper:

Regular octane remains the product of choice for most consumers with an 82.2% market share in 2006.  Midgrade is a mature product with a 2006 market share of 9.3%. Premium’s market share ranks last at 8.4% in 2006. … Midgrade is a redundant product offering, easily and almost costlessly replicated by mixing existing regular and premium products. Indeed, this redundancy is widely known and exploited by … just-in-time mixing at the retail pump from separate underground regular and premium storage tanks. … It is rare to see a consumer create a midgrade by buying from two retail feedstocks at a single retail gas station. This is true despite the overwhelming evidence that consumer midgrade mixing is almost uniformly the least costly way to buy retail midgrade. …


Consider a midgrade buyer making a 17-gallon purchase.  With a 3.13 cents per gallon spread between the posted midgrade price and the cost of an equivalent mixture of premium and regular, the 17-gallon consumer saves 53.21 cents per fill-up. Assuming that scanning the same credit card a second time and changing hoses takes an additional 30 seconds, the savings would accrue at $63.85 per hour of mixing time. As this is an after tax savings, the before tax implied wage for a mixing buyer in a 40% combined marginal tax bracket would be $106.42 per hour risk free. While this savings reflects the nationwide average, it doesn’t necessarily indicate how lucrative mixing can be. A recent observation in the Los Angeles metropolitan area indicated a 20-cent spread from regular to midgrade and a 10-cent spread from midgrade to premium. The effective before-tax wage rate for a 17-gallon buyer’s mixing at this station is $340 per hour risk free.

Even with lower gas prices you’ll still make a handsome wage.  You can even avoid the extra changing costs if you alternate between filling half-empty tanks with regular and premium; you’ll alternate between midgrade and a gas halfway between midgrade and premium, and you’ll pay less than the midgrade price.  The amazing thing here is how eagerly people monitor gas station prices to save a few cents, and yet completely ignore grade rate savings.

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  • http://profile.typekey.com/aroneus/ Aron

    The alternating scheme of course only saves times if you planned on filling up at half-tank anyway (which always struck me as a bizarre behavior itself.)

    Also, the conventional machinery might be executing a 50/50 merge and rounding down the octane result or factoring in a bit of conservatism into the estimate so you might be looking at something closer to 90 octane.

    thirdly, the amount of ethanol blend is becoming relevent since the energy content and mpg is lower.

  • Ken Hirsch

    There used to be dial-your-octane pumps at some gas stations. I don’t know how it was priced, though.

  • http://silasx.blogspot.com Silas

    -Casual mention of sports car ownership? Check.

    -Accidental revelation of midlife crisis? Check.

    -Detailed, time consuming advice on how to save a trivial amount on gasoline? Check.

    -Hinting about own wisdom being superior to the rabble? Check.

    Yep, this post calls for an *Epic Facepalm*.

  • Abigail

    I am not sure about the figures over here (in UK), but saving 50c a week takes 120 weeks to make that one hour’s wage. I use a lot less than 17 gallons a week, I use about 17-20 litres a week. I am fortunate that my income is high enough not to notice 50c, or 33 pence, a week. I would not necessarily pick up a 50p that I saw fallen in the street.

    OTOH, a feeling of superiority is a pleasant experience, and I am happy to call seeking that “rational” if you are.

    How much do the additional octane points increase your mileage per gallon? If you save 50c as opposed to buying midgrade gas (petrol, we call it) what is your saving over the same number of miles over buying regular? If regular gives more miles per dollar than premium, then you save money by buying regular….

    unless it affects your performance, and your need for repairs or servicing….

    And while you take the time to work out how to gain 50c a week on your gas/petrol purchase, could you spend that time more productively?

  • http://hanson.gmu.edu Robin Hanson

    It would be interesting to see expected return calculations for reading most other blog posts. Is a tenth of readers learning how to save a dollar a week really such a low return compared to most other blog posts?

  • Micael

    You only need premium if your car was designed to use it. A car not designed for it will see no benefit from using premium gas. If you use lower octane for a car designed for higher octane, you’ll see a decrease in power and possibly efficiency. You should consider if these decreases are equal or of less value than the money saved on cheaper gas.

  • billswift

    Octane has nothing to do with mileage or power. Higher octane reduces knocking (usually only extreme knocking is noticeable to the driver). Even minor knocking with more delicate or higher precision engines can significantly reduce engine life.

  • http://www.knowledgeproblem.com/archives/002760.html Knowledge Problem

    You, too, can arbitrage the premium-midgrade-regular gasoline price spread

    Michael Giberson At Overcoming Bias, Robin Hanson discovers he can save money by mixing premium and regular gasoline rather than buying the mid-grade product, and if you buy mid-grade gasoline for your car then you may be able to save…

  • Gordon

    Your Dad Was Wrong
    A lot of traditional automotive wisdom just doesn’t hold up.
    By Jim Dunne
    Photograph by Peter Mason/Getty Images
    Published in the January 2007 issue

    DAD SAID: “Fill up with premium every few tankfuls.”
    BUT: Unless your owner’s manual recommends it, you’re wasting money. Regular-grade gas has the additives to keep your engine clean. In fact, modern engines rated for premium will run relatively well on regular — you’ll lose a little zip, but you’ll save a few bucks.

    http://www.origin.popularmechanics.com/automotive/how_to/4205233.html

  • Greg Martin

    Since mixing gas averages the octane ratings….

    This reasonable-sounding assumption turns out to be incorrect. The octane rating of a gasoline is a measure of how well the gasoline resists detonation (engine knocking). An octane rating of 87 (for example) means that the gasoline resists detonation just as well as a mixture of 87% pure octane and 13% pure heptane – but it says nothing about the actual composition of the gasoline. Calculating the octane rating of a mixture of two gasolines is actually complicated enough for whole research papers to have been written on the subject.

  • http://don.geddis.org/ Don Geddis

    @ Greg: You are right that, in general, you can’t take two gasolines, mix them, and get an octane that the average of the octanes of the two gasolines. The chemistry doesn’t work like that. In general.

    But in the specific case of consumer-grade retail gasoline, with octanes from 87 to 93, the simplifying assumption is close enough to reality to let Robin’s point stand. A tank of half regular and half premium gas really will wind up with an octane close to 90.

  • Fred

    The comparisons here are based on cost per gallon, which is the way we buy fuel. However, the way we use fuel is by the mile. Cost per mile is the relevant measure.

    My home state of Wisconsin mandates 10% ethanol in the regular and mid grade gasoline. Premium is still ethanol free.

    Ethanol degrades mileage so badly that premium ends up being cheaper on a per mile basis.

  • StreetWalker

    @Robin

    use premium gas

    This is such a big question it deserves deep consideration. Because cars are beautiful and important. I’m not at all an expert on cars – I don’t own one, don’t even drive! – but here is how I’d think about it.

    First, I assume this is a newish Miata with a knock sensor, an electronic ignition and variable valve timing – modern electronic engine management. (If your car doesn’t have all this, then to use less-than-premium gas is penny-wise and pound-foolish, full stop.)

    Second, that you own the car, you do not lease it. Third, that you are concerned with its resale value. Fourth, that you are concerned with reducing longer-term repair and maintenance costs.

    As others have said, the issue is knock & ping. You may not necessarily hear “minor” knocking. Modern Miatas have all the groovy features above that would allow the car to run fairly safely – with little damage, since the electronics can dial back the timing.

    This is probably why your owners’ manual may suggest premium instead of requiring it. However, as others here have noted, to use regular just robs the car of zip. So why have a Miata?

    That aside, it could be argued that power and maneuverability are not just fun but are also important safety considerations if you are a good driver; they allow you to avoid accidents. So you are in essence compromising safety at the very moment you might need it for minor $$ savings in the gas price.

    I don’t know how to calculate the rationality of such small gas savings in terms of the likelihood of the extra power saving you and the person with you in the face of a possible crash.

    The use of midgrade with an additive to boost octane could be an ok compromise, I suppose, but again, you are still compromising car performance. And good performance is part of the hedonics (product quality, right?) of the car, which must have a calculable economic value in itself. But again, I’m not an expert here at all.

    What seems irrational to me is to buy a gorgeous functional machine, pay strong $$$$ for its high performance, and then hobble it. But maybe that’s really just aesthetics.

  • bambi

    Interesting. Everybody seems to have quite strong opinions on this topic (strong enough to bother posting them or links to them, mostly with authoritative language posturing) — and they are all completely incompatible.

    Love them humans.

  • StreetWalker

    @bambi:

    they are all completely incompatible

    Forgive me, I think this statement is untrue. My comment seems in substantial agreement with gordon, micael, & billswift. Of the 12, I would say 30% of us largely agree, with some small differences in emphasis.

    If Robin’s Miata doesn’t have modern features, he’s reducing engine life and resale value with ill-advised gas substitution.

    Even if it does, I wonder if he may not in fact be saving money due to the safety compromise and lost hedonics, but I admit I don’t know how to correctly calculate these.

    I don’t see how you get complete incompatibly out of this.

  • mikesol

    One thing to keep in mind with cars and premium gas is that while you can run a car that wants premium on regular gas instead, it will actually get worse mileage and therefore require more gas and run less efficient in dollars/distance compared to just giving it proper fuel.

    Think about it – if the car retards its timing to defeat pre-detonation of the gasoline, it will then be putting out less power at any given RPM than it would otherwise. This will require you to push on the pedal harder to get up to speed, meaning you’re using more gas to get up to speed.

    Find out what your car is built for and feed it the gas it asks for – no more, no less.

    (Unless you drive a rotary engine, of course, in which case you feed it shitty gas when you’re feeling cheap and good gas when the prices are lower and always drive it like you stole it.)

  • Ray G

    There was a couple of good technical explanations of octane above, but allow me to clarify a bit for the non-gear heads.

    Think of it like this:

    Detonation and pre-ignition are instances where the gas combusts unevenly and/or too soon. This is caused by higher compression ratios.

    Most cars don’t typically run at significantly high compression ratios.

    Some do however.

    So if anyone is really concerned about saving a few cents at a time over the life of their car, and of course prolonging the life of their vehicle, they should find out more about their particular car.

    If your car has a turbocharger, you need higher octane. If your car is a high revving vehicle, you need high octane. And so on.

    I’m skeptical about many of the cars though that I hear to be premium only. I drive a mid-90s Lexus LS400 that I absolutely love, it’s a bullet proof car, and I’m convinced that it’s the best car ever produced. However, the manual calls out for premium gas. I bought it used, and have always used premium because the previous owner was an elderly person that did everything the manual suggested. My own wisdom tells me to not to change anything on a used car such as this, but I’m not convinced that it ever needed premium to begin with. (And I know the arguments for it, but I’m still skeptical.)

  • David

    Re modern timing features – I used to have ’95 miata and the thing would knock like crazy on CA 87 octane accelerating up a steep hill from 15 mph (a frequent necessity due to some not-particularly-interesting topographical features surrounding my then residence). I’m frugal and hate paying for premium. But I also generally sell my old vehicles to faimly/friends, so I really do care whether it makes it 250k miles. Manual said regular, I put in premium. Haven’t put premium in anything since I sold that miata.

  • ShardPhoenix

    Bring on the electric motors, I say.

  • Ames

    hear hear

  • frelkins

    @David

    “accelerating up a steep hill”

    True! The modern electronic engine management pushes back the timing best under certain conditions: generally flat roads, generally even weather, and little-old-lady-from-Pasadena driving. Let’s say DC pretty much has the first two, for argument’s sake. As for the third. . .not.

    @mikesol

    it will actually get worse mileage and therefore require more gas and run less efficient in dollars/distance compared to just giving it proper fuel.

    oh yeah: here.