There's a lot of misunderstanding surrounding octane ratings and automotive fuels in general... I'm going to make a slight attempt at clearing things up, from what I actually know to be true.
First, what is an octane rating? (wikipedia)
Octane rating or octane number is a standard measure of the performance of an engine or aviation fuel. The higher the octane number, the more compression the fuel can withstand before detonating (igniting). Gasoline engines rely on ignition of air and fuel compressed together as a mixture without ignition, which is then ignited at the end of the compression stroke using spark plugs. Use of gasoline with lower octane numbers may lead to the problem of engine knocking.
Source: https://en.wikipedia.org/wiki/Octane_rating
So octane rating is nothing more than the rating of a fuels resistance to spontaneously ignite under compression. But that's not the end of the story.
Here in the US, regular pump grade fuels range from as low as 85 octane (I've only seen this in high altitude areas, like Colorado) to 93 octane. The most common is three options at pumps in the continental United States: 87, 89, and 91 or 93; Regular, mid-grade and premium.
In other parts of the world, there are much higher octane options available.
Typically 100+ octane is considered racing fuel, here in the US.
What's the point of different octane ratings?
Different engine designs perform differently, and it's not a one size fits all. Performance engines are generally designed with higher compression ratios -- the amount an air/fuel charge is compressed from BDC (bottom dead center) to TDC (top dead center). performance engines also typically run more ignition advance (actually delaying the spark point to get the most bang so as not to ignite before the top or even slightly after TDC), and more aggressive cam timing (allowing the engine to take in more air and fuel for a given cycle).
Thus enters the knock sensor.
Engine knock is when fuel has prematurely been ignited in the cylinder... this can happen two ways.
The most commonly understood way is too much compression, and too little resistance to ignite. It actually sounds like tiny jack hammers coming from the engine, and most commonly is only heard while the engine is under a load... you wont hear any difference at idle.
The knock sensor picks up the tiny jack hammer sounds, which the engine control computer uses to adjust the engine and compensate.
In the olden days, before adjustable cam and ignition timing, this meant dumping more fuel in the cylinders to dilute the air/fuel charge (fuel injected engines increased injector duty cycle, carburetors were adjusted to run richer) . This resulted in not so great fuel mileage from lower octane fuels.
Modern engines can do more than that... They can actually dial back the available power from the engine. By switching to a more conservative cam timing profile, adjusting injector volume and timing, and adjusting ignition timing, the fuel mileage can stay relatively the same, but the engine produces less power.... the most modern engines can actually actively switch back and forth between Otto Cycle and Atkinson Cycle ( https://en.wikipedia.org/wiki/Otto_cycle and https://en.wikipedia.org/wiki/Atkinson_cycle ) --- layman's terms; Otto Cycle is the typical way more conventional gasoline engines run. Atkinson Cycle is a way of running the engine that reduces the theoretical displacement of the engine... in a sense, the engine runs like a smaller, less powerful, but more efficient engine.
Octane ratings play much less on fuel efficiency in modern engines. Still, that doesn't mean you should give up on premium fuels.
Regular, Mid-grade, Premium
Any car can run on regular gas (whatever regular may be in your area). Aside from the obvious octane ratings, there are other differences in gasoline grades.
Regular is most often just fuel, with the least additional additives.
Premium is frequently mixed with additive chemicals and detergents, for the benefit of your engine... most well known in United States is probably Techron.
The additional detergents in top tier, premium fuels help reduce carbon build-up in the combustion chamber and on the valves. Some also help keep your fuel system cleaner.
Carbon. What the hell?
This brings me to the second way in which engines can knock.
Gasoline is a hydrocarbon. Carbon doesn't just go out the tailpipe with heat and noise. It deposits just like soot from an old locomotive, on any parts of your engine it can get to. With the help of oil that it will mix with, it can become a sticky paste, or hard as a rock and build up layer upon layer. --This is especially a problem for newer direct injected engines, but that's another subject.
Carbon deposits inside the engine cylinders retain heat, and can act like tiny hot coals. These hot coals can cause premature ignition of the air/fuel mix.
Premium fuels, most often, contain the most detergent additives to break down the carbon and keep your engine running cleaner and better for a longer period of time.
Now, there are only two fuel tanks in the ground at most gas stations. Mid-grade fuel, is about a 50/50 ratio mixed at the pump, of Regular and Premium grades.
Yes, there are plenty of fuel additives you can buy and add yourself, that will remove the carbon buildup and some even claim to boost the octane ratings of your lower grade fuels... but you have to actually remember to regularly add them when you fill up. And most places, they're more expensive than just fill up with premium from the start... at least, that's my experience. I personally aways use premium fuels, unless I'm in a car that specifically states not to (Toyota Prius for example).
On E85
E85 has been a real failure, in the United States. I can't even tell you where there's a fueling station anywhere near my house or business, with E85 at the pump.
Why has E85 failed here?
Although heavily subsidized, the price at the pumps is still higher than conventional gasoline. Add to that, people finding out that their flex fuel vehicles get half the mileage out of a full tank while running on E85. Hits especially hard, when the most popular vehicles here in the US are SUV's and trucks, which get somewhere in the neighborhood of 15-20mpg on gasoline.. that puts them at about 7-10mpg on E85.
Why is mileage worse on E85?
There's about 40% less available power in a gallon of E85, compared to E10 --- E10 is conventional gasoline in the US. 10%
Ethanol was substituted for other additive chemicals which were more harmful to the environment. This has actually caused other unforseen problems
First, ethanol doesn't like to mix well with gasoline, and other dangerous chemicals have to be added to the mix to keep the ethanol adequately mixed together. And
Second, ethanol under pressure is very corrosive to aluminum, which most modern engines are made almost entirely of. This lead to massive recalls of high pressure fuel system components by various manufacturers. Very few issues with this, 10 years on though.
So E85 you literally get less bang for your buck.
Racers and engine builders like E85, because they can squeeze a lot more horse power out of a given engine configuration, but only from turbocharged or supercharged engines configured to run on it.
The performance engines can run more aggressively on it. So much additional volume of fuel goes into the engine, the heat normally produced, which can make a race engine unstable, is smothered by the cooler fuel volume.
But the mileage sucks even more.
Engines with factory turbocharger or supercharger systems are not going to see the same benefit, because they weren't designed for that kind of performance.
The Real Fuel of the Future, in my opinion...
Hydrogen. Pure, clean, and not burned either.
Big money is on hydrogen fuel cells. Toyota, Honda, BMW, etc... all are in a race to create the best hydrogen fuel cell vehicles.
HFC's produce electricity to charge batteries, and run electric motors, to propel vehicles.
I think the big public fear about hydrogen is associated with hydrogen bombs, or the Hindenburg... neither of which are related to HFC vehicles or their safety. The hydrogen tanks Toyota and Honda have been using are both figuratively and literally bullet proof.
The Exhaust from a HFC vehicle is pure water.
Hydrogen for HFC vehicles is currently produced (at least in the US) by separating the hydrogen off from natural gas, but in the future may be separated directly from water.
I'd love to go into more detail on HFC vehicles, but I don't have any direct training on them yet. Maybe in a few years, I'll be able to do a more technical write-up.
https://en.wikipedia.org/wiki/Fuel_cell
Wow... that was a lot. If anyone catches any typos or bad information, let me know. I'm no chemist. Just an experienced master automotive technician and geek.