It is a well known fact that branded fuel is more expensive than unbranded fuel. It works the same way as brand Kleenex vs. Generic Tissue Paper. The reason why Kleenex costs more than normal Generic Tissue Paper, is because Kleenex pays a lot of money in advertising and marketing and trying to sell the supposed premium product and quality. While the unbranded tissue paper can charge less for a similar product, because they do not have the additional cost of marketing and advertising, thus becoming a discounted product.
In the same way, unbranded fuel is discounted from branded fuel. Branded suppliers like BP, Chevron, Shell, spend money advertising the fuel, while the unbranded stations will get the same fuel with no additive, thus able to sell the fuel at a discounted price. Sometimes as high as 10-20 cent discount off of branded prices. But rarely, every once in a while, there is an anomaly; there is what is called a “Market Inversion” or “Price Inversion”, where branded gas prices are less expensive than Unbranded gas prices. The following is a discussion of this phenomena.
Why are Branded Gas Prices Sometimes (But Rarely) Lower than Unbranded Gas Prices:
Supply and demand. There really has to be a perfect storm of supply and demand. Here is what would need to happen for a unbranded merket inversion where the unbranded prices are higher than branded prices.
- Restriction in unbranded supply from unbranded only suppliers (terminals, refineries or pipelines going down or in turnaround).
- Because of the restricted supply, unbranded fuel is purchased from branded suppliers.
- Once massive amounts of unbranded fuel are purchased from branded suppliers, branded suppliers restrict allocation.
- Then if the branded suppliers are the only suppliers for fuel, with strict allocation on unbranded fuel, unbranded prices go up, because of limited supply, and branded prices remain the same; thus causing the market inversion.
This is not the best news for unbranded gas stations, but let’s talk about how often this happens?
When / How Often?
In the past 8 years that I have been in the fuel industry, I have seen the market inversion happen twice.
Market Inversion of 2006:
- lasted a total of 6 weeks.
Market Inversion of 2011:
Here is what happened to cause the market inversion of 2011:
- A major unbranded supplier in New Mexico, Western Refining started selling fuel at an extremely discounted price.
- That forced the other major unbranded supplier in New Mexico, HollyFrontier to have to discount their prices in order to stay competitive, so much so they were losing money.
- Western refinery then had unplanned down time in their El Paso refinery. This caused supply shortages in New Mexico. Then the Western Cineza terminal in New Mexico went down, followed by planned downtime for the EL Paso refinery. This put a lot of supply pressure on the New mexico market.
- HollyFrontier (Formerly Navajo Refining) had transitioned to a type of crude oil that had less gasoline output and more diesel, at the same time the Western issues occurred. Also, HollyFrontier was finally in a position where they could sell the gasoline for a higher price, in order to make up for the months of losing money in order to compete with Western.
- With one of the suppliers down, restricted gasoline output from HollyFrontier and a desire to make up losses in fuel price, limited unbranded supply from branded terminals, and supply restrictions from surrounding terminals in other states, the situation was prime for the extremely rare unbranded market inversion. The total time for the inversion was 5-6 weeks.