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Octane Rating

May 9th, 2011

Octane Rating

Measurement methods

Research Octane Number (RON)

The most common type of octane rating worldwide is the Research Octane Number (RON). RON is determined by running the fuel in a test engine with a variable compression ratio under controlled conditions, and comparing the results with those for mixtures of iso-octane and n-heptane.

Motor Octane Number (MON)

There is another type of octane rating, called Motor Octane Number (MON), or the aviation lean octane rating, which is a better measure of how the fuel behaves when under load as it is done at 900 rpm instead of the 600 rpm of the RON. MON testing uses a similar test engine to that used in RON testing, but with a preheated fuel mixture, a higher engine speed, and variable ignition timing to further stress the fuel’s knock resistance. Depending on the composition of the fuel, the MON of a modern gasoline will be about 8 to 10 points lower than the RON. Normally, fuel specifications require both a minimum RON and a minimum MON.[citation needed]

Anti-Knock Index (AKI)

In most countries, including all of those of Australia and Europe the “headline” octane rating shown on the pump is the RON, but in Canada, the United States and some other countries,[which?] the headline number is the average of the RON and the MON, called the Anti-Knock Index (AKI). It may also sometimes be called the Road Octane Number (RdON), Pump Octane Number (PON), or (R+M)/2.

Difference between RON and AKI

Because of the 8 to 10 point difference noted above, the octane rating shown in the United States is 4 to 5 points lower than the rating shown elsewhere in the world for the same fuel. See the table in the following section for a comparison.

Examples of octane ratings

The MON of n-heptane and iso-octane are exactly 0 and 100, by definition. The following table lists octane ratings for various other fuels.

Fuel

RON

MON

AKI

hexadecane

< -30

n-octane

-10

n-heptane (MON 0 by definition)

0

diesel fuel

1525

2-methylheptane

23

n-hexane

25

2-methylhexane

44

1-heptene

60

n-pentane

62

requirement for a typical two-stroke outboard engine

69

65

67

1-pentene

84

n-butanol

87

n-butane

91

“regular” gasoline in Canada and the US

9192

8283

87

“EuroSuper” or “EuroPremium”

95

8586

9091

“premium” gasoline in Indonesia

88

“premium” gasoline in the US

97-98

8889

93

“SuperPlus” in Germany, Great Britain and Slovenia

98

8990

9394

iso-octane (MON 100 by definition)

100

benzene

101

“BP Ultimate 102″

102

9394

9798

t-butanol

103

91

97

ethane

108

propane

110

toluene

111

95

103

E85 gasoline

100-105

xylene

117

isopropanol

118

98

108

ethanol

129

102

116

methanol

133

105

119

methane

135

122

129

hydrogen*

> 130

very low

*Hydrogen does not fit well into the normal definitions of octane number. It has a very high RON and a low MON, so that it has low knock resistance in practice, due to its low ignition energy (primarily due to its low dissociation energy) and extremely high flame speed. These traits are highly desirable in rocket engines, but undesirable in Otto-cycle engines. However, as a minor blending component (e.g. in a bi-fuel vehicle), hydrogen raises overall knock resistance. Flame speed is limited by the rest of the component species; hydrogen may reduce knock by contributing its high thermal conductivity[citation needed]

Effects of octane rating

It needs additional references or sources for verification. Tagged since August 2007.

It may require general cleanup to meet Wikipedia’s quality standards. Tagged since August 2008.

Higher octane ratings correlate to higher activation energies. Activation energy is the amount of energy necessary to start a chemical reaction. Since higher octane fuels have higher activation energies, it is less likely that a given compression will cause autoignition.

It might seem odd that fuels with higher octane ratings are used in more powerful engines, since such fuels ignite less easily. However, an uncontrolled ignition is not desired in an internal combustion engine. The fuel must be fired at a precise time. An ignition too early will cause the resulting forces to try to turn the crankshaft in the reverse direction. This will not cause the engine to rotate in the reverse direction because of the kinetic energy in the rotating assemblies and the flywheel, but will strain the crankshaft. This strain is the source of the characteristic ‘ping’ noise heard during detonation. This reduces power output, because much of the energy is absorbed as strain and heat in parts of the engine,[citation needed] rather than being converted to torque at the crankshaft.

A fuel with a higher octane rating can be run at a higher compression ratio without causing detonation. Compression is directly related to power (see engine tuning), so engines that require higher octane usually deliver more motive power. Engine power is a function of the fuel, as well as the engine design, and is related to octane rating of the fuel. Power is limited by the maximum amount of fuel-air mixture that can be forced into the combustion chamber. When the throttle is partially open, only a small fraction of the total available power is produced because the manifold is operating at pressures far below atmospheric. In this case, the octane requirement is far lower than when the throttle is opened fully and the manifold pressure increases to atmospheric pressure, or higher in the case of supercharged or turbocharged engines.

Many high-performance engines are designed to operate with a high maximum compression, and thus demand high-octane premium gasoline. A common misconception is that power output or fuel mileage can be improved by burning higher octane fuel than a particular engine was designed for. The power output of an engine depends in part on the energy density of its fuel, but similar fuels with different octane ratings have similar density. Since switching to a higher octane fuel does not add any more hydrocarbon content or oxygen, the engine cannot produce more power.

However, burning fuel with a lower octane rating than required by the engine often reduces power output and efficiency one way or another. If the engine begins to detonate (knock), that reduces power and efficiency for the reasons stated above. Many modern car engines feature a knock sensor a small piezoelectric microphone which detects knock, and then sends a signal to the engine control unit to retard the ignition timing. Retarding the ignition timing reduces the tendency to detonate, but also reduces power output and fuel efficiency.

Most fuel stations have two storage tanks (even those offering 3 or 4 octane levels), and you are given a mixture of the higher and lower octane fuel. Purchasing premium simply means more fuel from the higher octane tank. The detergents in the fuel are the same.

The octane rating was developed by chemist Russell Marker at the Ethyl Corporation c1926. The selection of n-heptane as the zero point of the scale was due to the availability of very high purity n-heptane, not mixed with other isomers of heptane or octane, distilled from the resin of the Jeffrey Pine. Other sources of heptane produced from crude oil contain a mixture of different isomers with greatly differing ratings, which would not give a precise zero point.

Regional variations

The selection of octane ratings available at the pump can vary greatly from region to region.

Australia, “regular” unleaded fuel is 91 RON, “premium” unleaded with 95 RON is widely available, and 98 RON fuel is also reasonably common. Shell used to sell 100 RON petrol from a small number of service stations, most of which are located in capital cities (stopped in August 2008).

Germany, big suppliers like Shell or Aral offer 100 RON gasoline (Shell V-Power, Aral Ultimate) at almost every fuel station.

Italy, 95 RON is the only compulsory gasoline offered (verde), only few fuel stations (Agip, IP, IES, OMV) offer 98 RON as the premium type, many Shell and Tamoil stations close to the cities offer also V-Power Gasoline rated at 100 RON

Indonesia Indonesia’s “premium” petrol has 88 RON which is the most consumed petrol as it is cheap (around 50 cents each liter). Other choices are “Pertamax” with RON 92 and the “Pertamax Plus” variant has RON 95, which is the highest octane in Indonesia.

Malaysia, the “regular” unleaded fuel is 95 RON, “premium” fuel is rated at 97 RON, and Shell’s V-Power is rated at 97 RON.

Netherlands, Shell V-Power is a 97 RON (labelled as 95 due to the legalities of only using 95 or 98 labelling), whereas in neighbouring Germany Shell V-Power consists of the regular 100 RON fuel.

New Zealand; 91 RON “Regular” and 95 RON “Premium” are both widely available. 98 RON is available instead of 95 RON at some service stations in larger urban areas.

Ireland, 95 RON “unleaded” is the only petrol type available through stations, although E5 (99 RON) is becoming more commonplace.

Russia and CIS countries, 80 RON (76 MON) is the minimum available, the standard is 92 RON, however, the most used type is 95 RON.[citation needed]

South Africa, “regular” unleaded fuel is 95 RON in coastal areas with most fuel stations optionally offering 97 RON. Inland (higher altitude) “regular” unleaded fuel is 93 RON, once again most fuel stations optionally offer 95 RON.

United Kingdom, ‘regular’ petrol has an octane rating of 95 RON, with 97 RON fuel being widely available as the Super Unleaded. Tesco and Shell both offer 99 RON fuel. BP is currently trialling the public selling of the super-high octane petrol BP Ultimate Unleaded 102, which as the name suggests, has an octane rating of 102 RON. Although BP Ultimate Unleaded (with an octane rating of 97 RON) and BP Ultimate Diesel are both widely available throughout the UK, BP Ultimate Unleaded 102 is (as of October 2007) only available throughout the UK in 10 filling stations, and is priced at about two and half times more than their 97 RON fuel. Also offered Shell V-Power, but in a 99 RON octane rating, and Tesco fuel stations also supply the Greenergy produced 99 RON “Tesco 99″.

United States, in the Rocky Mountain (high altitude) states, 85 AKI is the minimum octane, and 91 AKI is the maximum octane available in fuel. The reason for this is that in higher-altitude areas, a typical naturally-aspirated engine draws in less air mass per cycle due to the reduced density of the atmosphere. This directly translates to less fuel and reduced absolute compression in the cylinder, therefore deterring knock. It is safe to fill up a carbureted car that normally takes 87 AKI fuel at sea level with 85 AKI fuel in the mountains, but at sea level the fuel may cause damage to the engine. A disadvantage to this strategy is that most turbocharged vehicles are unable to produce full power, even when using the “premium” 91 AKI fuel. In some east coast states, up to 94 AKI is available . In parts of the Midwest (primarily Minnesota, Iowa, Illinois and Missouri) ethanol based E-85 fuel with 105 AKI is available . Often, filling stations near US racing tracks will offer higher octane levels such as 100 AKI. California fuel stations will offer 87, 89, and 91 AKI octane fuels, and at some stations, 100 AKI or higher octane, sold as racing fuel. Until summer 2001 before the phase-out of methyl tert-butyl ether aka MTBE as an octane enhancer additive, 92 AKI was offered in lieu of 91.

Generally, octane ratings are higher in Europe than they are in North America and most other parts of the world. This is especially true when comparing the lowest available octane level in each country. In many parts of Europe, 95 RON (90-91 AKI) is the minimum available standard, with 97/98 RON being higher specification (being called Super Unleaded). The higher rating seen in Europe is an artifact of a different underlying measuring procedure. In most countries (including all of Europe and Australia) the “headline” octane that would be shown on the pump is the RON, but in Canada, the United States and some other countries the headline number is the average of the RON and the MON, sometimes called the Anti-Knock Index (AKI), Road Octane Number (RdON), Pump Octane Number (PON), or (R+M)/2. Because of the 8 to 10 point difference noted above, this means that the octane in the United States will be about 4 to 5 points lower than the same fuel elsewhere: 87 octane fuel, the “regular” gasoline in Canada and the US, would be 91-92 in Europe. However most European pumps deliver 95 (RON) as “regular”, equivalent to 9091 US AKI=(R+M)/2, and deliver 98, 99 or 100 (RON) (93-94 AKI) labeled as Super Unleaded – thus regular petrol sold in much of Europe corresponds to premium sold in the United States.

In other countries “regular” unleaded gasoline, when available, is sometimes as low as 85 RON (still with the more regular fuel, 95, and premium, around 98, available).

Credit Rating Agencies – Need for Reform

February 2nd, 2011

Credit Rating Agencies – Need for Reform

Credit Rating Agencies – Need for Reform

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Home Page > Business > Credit Rating Agencies – Need for Reform

Credit Rating Agencies – Need for Reform

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Posted: Oct 19, 2007 |Comments: 0
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Credit Rating Agencies (CRAs) – Need for Reform

1. Crisis – Spotlight on CRAs

“Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market ” – US Congressman Gary Ackerman

The smooth functioning of global financial markets depends in part upon reliable assessments of investment risks, and CRAs play a significant role in boosting investor confidence in those markets.

The above rhetoric although harsh beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles as enunciated below make it all the more important to scrutinize the claim of CRAs as fair assessors.

i) Sub-Prime Crisis: In the recent sub-prime crisis, CRAs have come under increasing fire for their covert collusion in favorably rating junk CDOs in the sub-prime mortgage business, a crisis which is currently having world-wide implications. To give some background, loan originators were guilty of packaging sub-prime mortgages as securitizations, and marketing them as collateralized debt obligations on the secondary mortgage market. CRAs failed in their duty to warn the financial world of this malpractice through a fair and transparent assessment. Shockingly, they gave favorable ratings to the CDOs for reasons that need to be examined.

ii) Enron and WorldCom: These companies were rated investment grade by Moody’s and Standard & Poor’s three days before they went bankrupt. CRAs were alleged to have favorably rated risky products, and in some instances put these risky products together for a fat fee.

There may be other over-rated Enron’s and WorldComs waiting to go bust. CRAs need to be reformed to enable them pin-point such cancer well-in-advance thereby increasing security in the financial markets.

2. Credit Ratings and CRAs

i) Credit rating: is a structured methodology to rank the creditworthiness of, broadly speaking an entity, or a credit commitment (e.g. a product), or a debt or debt-like security as also of an Issuer of an obligation.

ii) Credit Rating Agency (CRA): is an institution specialized in the job of rating the above. Ratings by CRAs are not recommendations to purchase or sell any security but just an indicator.

Ratings can further be divided into

i) Solicited Rating: where the rating is based on a request say of a bank or company and which also participates in the rating process.

ii) Unsolicited Rating: where rating agencies claim to rate an organisation in the public interest.

CRAs help to achieve economies of scale as they help avoid investments in internal tools and credit analysis. It thereby enables market intermediaries and end investors to focus on their core competencies leaving the complex rating jobs to dependable specialized agencies.

3. CRAs of note

Agencies that assign credit ratings for corporations include

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Fitch Ratings (U.S.)

Moody’s (U.S.)

Standard & Poor’s (U.S.)

Pacific Credit Rating (Peru)

4. CRAs – Power and Influence

Various market participants that use and/or are affected by credit ratings are as follows

a) Issuers: A good credit rating improves the marketability of issuers as also pricing which in turn satisfies investors, lenders or other interested counterparties.

b) Buy-Side Firms : Buy side firms such as mutual funds, pension funds and insurance companies use credit ratings as one of several important inputs to their own internal credit assessments and investment analysis which helps them identify pricing discrepancies, the riskiness of the security, regulatory compliance requiring them to park funds in investment grade assets etc. Many restrict their funds to higher ratings which makes them more attractive to risk-averse investors.

c) Sell-Side Firms : Like buy-side firms many sell side firms like broker-dealers use ratings for risk management and trading purposes.

d) Regulators: Regulators mandate usage of credit ratings in various forms for e.g. The Basel Committee on banking supervision allowed banks to use external credit ratings to determine capital allocation. Or to quote another example, restrictions are placed on civil service or public employee pension funds by local or national governments.

e) Tax Payers and Investors: Depending on the direction of the change in value, credit rating changes can benefit or harm investors in securities through erosion of value and it also affects taxpayers through the cost of government debt.

f) Private Contracts: Ratings have known to significantly affect the balance of power between contracting parties as the rating is inadvertently applied to the organisation as a whole and not just to its debts.

Rating downgrade – A Death spiral:

A rating downgrade can be a vicious cycle. Let us visualise this in steps. First a rating downgrade happens. Banks now want full repayment anticipating bankruptcy. Company may not be in a position to pay leading to a further rating downgrade. This initiates a death spiral leading to the companys’ ultimate collapse and closure.

Enron faced this spiral where a loan clause stipulated full repayment in the event of a downgrade. When downgrade did take place, this clause added to the financial woes of Enron pushing it into deep financial trouble.

Pacific Gas and Electric Company is another case in point which was pressurised by aggrieved counterparties and lenders demanding repayment thanks to a rating downgrade. PG&E was unable to raise funds to repay its short term obligations which aggravated its slide into the death spiral.

5. CRAs as victims

CRAs face the following challenges

a) Inadequate Information: One complaint which CRAs have is their inability to access accurate and reliable information from issuers. CRAs cry that issuers deliberately withhold information not found in the public domain for instance undisclosed contingencies which may adversely affect the issuers’ liquidity.

b) System of compensation: CRAs act on behalf of investors but they are in most cases paid by the issuers. There lies a potential for conflict of interest. As rating agencies are paid by those they rate and not by the investor, the market view is that they are under pressure to give their clients a favourable rating – else the client will move to another obliging agency. CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. There are conflicting noises with some CRAs admitting that if they depend on investors for compensation, they would go out of business. Others strongly deny conflicts of interest defending that fees received from individual issuers are a very small percentage of their total revenues so that no single issuer has any material influence with a rating agency.

c) Market Pressure : Allegations that ratings are expediency and not logic-based and that they would resort to unfair practices due to the inherent conflict of interest are dismissed by CRAs as malicious because the rating business is reputation based and incorrect ratings may lower the standing of the agency in the market. In short reputational concerns are sufficient to ensure that they exercise appropriate levels of diligence in the ratings process.

d) Ratings over-emphasised: Allegations float that CRAs actively promote an over-emphasis of their ratings and encourage corporations to do like-wise. CRAs counter saying that credit ratings are used out of context through no fault of their own. They are applied to the organizations per se and not just the organizations’ debts. A favourable credit rating is unfortunately used by companies as seals of approval for marketing purposes of unrelated products. A user needs to bear in mind that the rating was provided against the stricter scope of the investment being rated.

6. CRAs as Perpetrators

a) Arbitrary adjustments without accountability or transparency: CRAs can downgrade and upgrade and can cite lack of information from the rated party, or on the product as a possible defence. Unclear reasons for downgrade may adversely affect the issuer, as the market would assume that the agency is privy to certain information which is not in the public domain. This may render the issuers security volatile due to speculation.

Sometimes eextraneous considerations determine when an adjustment would occur. Credit rating agencies do not downgrade companies when they ought to. For example, Enron’s rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company’s problems for months.

b) Due diligence not performed: There are certain glaring inconsistencies which CRAs are reluctant to resolve due to the conflicts of interest as mentioned above. For instance if we focus on Moody’s ratings we find the following inconsistencies.

All three of the above have the same capital allocation forcing banks to move towards riskier investments.

c) Cozying up to management: Business logic has compelled CRAs to develop close bonds with the management of companies being rated and allowing this relationship to affect the rating process. They were found to act as advisors to companies’ pre-rating activities and suggesting measures which would have beneficial effects on the companys’ rating. Exactly on the other extreme are agencies which are accused of unilaterally adjusting the ratings while denying a company an opportunity to explain its actions.

e) Creating High Barriers to entry : Agencies are sometimes accused of being oligopolists, because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). All agencies consistently reap high profits (Moody’s for instance is greater than 50% gross margin), which indicate monopolistic pricing.

f) Promoting Ancillary Businesses: CRAs have developed ancillary businesses like pre-rating assessment and corporate consulting services to complement their core ratings business. Issuers may be forced to purchase the ancillary service in lieu of a favorable rating. To compound it all, except for Moody’s all other CRAs are privately held and their financial results do not separate revenues from their ancillary businesses.

7. Some Recommendations

a) Public Disclosures: The extent and the quality of the disclosures in the financial statements and the balance sheets need to be improved. More importantly the management discussion and analysis should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Shortening the time period between the end of issuers’ quarter or fiscal year and the date of submission of the quarterly or annual report will enable CRAs to obtain information early. These measures will improve the ability of CRAs to rate issuers. If CRAs conclude that important information is unavailable, or an issuer is less than forthcoming, the agency may lower a rating, refuse to issue a rating or even withdraw an existing rating.

b) Due Diligence and competency of CRAs Analysts: Analysts should not rely solely on the words of the management but also perform their own due diligence by scrutinising various public filings, probing opaque disclosures, reviewing proxy statements etc. There needs to be a tighter (or broader) qualification to be a rating agency employee.

c) Abolition of Barriers to Entry: Increase in the number of players may not completely curtail the oligopolistic powers of the well-entrenched few but at best it would keep them on their toes by subjecting them to some level of competition and allowing market forces to determine which rating truly reflects the financial market best.

d) Rating Cost: As far as possible, the rating cost needs to be published. If revealing such sensitive information raises issues of commercial confidence, then the agencies must at least be subject to intense financial regulation. The analyst compensation should be merit-based based on the demonstrated accuracy of their ratings and not on issuer fees.

e) Transparent rating Process: The agencies must make public the basis for their ratings including performance measurement statistics historical downgrades and default rates. This will protect investors and enhance the reliability of credit ratings. The regulators should oblige CRAs to disclose their procedures and methodologies for assigning ratings. The rating agencies should conduct an internal audit of their rating methodologies.

f) Ancillary Business to be independent: Although the ancillary business is a small part of the total revenue, CRAs still need to establish extensive policies and procedures to firewall ratings from the ancillary business. Separate staff and not the rating analysts should be employed for marketing the ancillary business.

g) Risk Disclosure: Rating agencies should disclose material risks they uncover during the risk rating process or any risk that seems to be inadequately addressed in public disclosures, to the concerned regulatory authority for further action. CRAs need to be more proactive and conduct formal audits of issuer information to search for fraud not just restricting their role to assessing credit-worthiness of issuers. Rating triggers (for instance full loan repayment in the event of a downgrade) should be discouraged wherever possible and should be disclosed if it exists.

These measures if implemented can improve market confidence in CRAs, and their ratings may become a key tool for boosting investor confidence by enhancing the security of the financial markets in the broadest sense.

List of resources

i) http://www.zyen.com/Knowledge/Articles/assessing_credit_rating_agencies.htm

ii) http://www.chasecooper.com/News-Regulatory-Basel-II-2007-10-01.php

iii) http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0491.2005.00284.x?cookieSet=1&journalCode=gove

iv) http://www.house.gov/apps/list/speech/ny05_ackerman/WGS_092707.html

v) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2373869.ece

vi) http://www.cfo.com/article.cfm/9861731/c_9866478?f=home_todayinfinance

vii) http://en.wikipedia.org/wiki/Credit_rating_agency

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Nagraj Gummala -
About the Author:

Nagraj Gummala has been in the Banking & Financial services domain for almost 6 years and is currently working in Cognizant Technology Solutions (Switzerland) as a Senior Business Analyst in the Basel II Risk Management division. He has written several papers on credit risk, his current area of interest being credit derivatives with specific focus on pricing of options and futures. Nagraj is a mechanical engineering graduate from IIT, Mumbai and a management post-graduate from IIM, Bangalore.

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