No Relief in Sight

DALLAS — At the Armbrust Aviation Group’s 2008 Jet Fuel Conference & Exposition held here in late February, the story was focused around high fuel prices and their causes. But despite being asked for 2008 forecasts, some presenters tried ducking out of making any firm predictions — a testament to the current volatility of the market. Looking forward, officials updated attendees on ongoing synthetic fuel initiatives.

“A year ago ... I made a prediction that came true, and I want to take credit for it,” says Ben Brockwell, director of data, pricing, and information services at OPIS, a comprehensive source for petroleum pricing and news. “When Britney Spears shaved her head, I predicted her hair would grow back. And indeed, her hair did grow back.

“I’m not in the business of trying to predict oil prices, but I am in the business of trying to help you understand where it may be.”

Brockwell takes a sunnier view of fuel pricing than some of the other panelists.

“I take a longer term view with oil prices,” Brockwell says. “A lot of times we get caught up in the moment and forget about the lessons of the past. Since 1973, we’ve had three important down cycles that have taken the price of crude oil to a dollar a gallon. The latest was 1999, and before that it was 1986, and before that it was in the early ‘70s. These cycles have lasted about 13 years.

“If that remains true for our current market, I would look at a period of 2010 to 2012 where we may see another correction. And so my view of the market is, sometimes we don’t look at subtle changes. We live in the moment. And the moment right now is ... it’s $100 crude oil, and people are saying it’s going to go up to $120 and $150.”

But Brockwell says it should get better. “I suspect we’re going to have cheaper prices on the horizon.

“My view of 2008 to 2009 is that transitions are underway. I think these are transitions that most people are not looking at.”

Brockwell says current pricing is primarily being driven by speculators, and the federal government’s habit of reducing interest rates, which makes speculating cheaper.

“Oil speculation is a cheap … game to keep playing, and frankly it’s been a very profitable game over the last five years,” Brockwell notes.

He says that in 2004, many people said that the oil price increase was caused by demand exceeding supply in the United States, India, and China. But that equation is shifting.

“If you look at the difference between demand growth worldwide and capacity growth worldwide, capacity has started to grow at a faster rate than demand,” Brockwell says. “I think that is going to change even more in the next two years, despite all the infrastructure issues, because there’s a lot of money being invested in the capacity.”

Brockwell comments that demand growth is flat in industrialized countries and slowing in other areas, due to high prices.

“There’s also a transition taking place in transportation,” Brockwell says. “Americans are now demanding fuel efficient vehicles. They are tired of paying $3 a gallon for gasoline. This is a transition, it doesn’t show up right away in terms of market dynamics.”

Meanwhile, speculators are turning their attention to other markets.

“Just looking at some of the numbers, a lot more speculative money is now going into other commodities like soybean, corn, agricultural products,” Brockwell says. “It’s happening with some of that being driven also by energy, but don’t misread this statement. There’s still a lot of money going into crude oil. It just doesn’t look to be as sustained as it has been in the past.”

Speculators’ shifting attentions may be caused by the change in fuel composition, particularly from government-driven demands for biofuel, which is changing the complexion of diesel, Brockwell says. “This definitely creates infrastructure problems; ultimately it produces hydrocarbon and petroleum demand.”

He says looking at local gas stations for pricing trends is fair. “I look at gasoline because 40 percent of all consumption in the U.S. is gasoline. It has the potential to drive jet fuel and diesel fuel prices.”

Carl Larry, vice president at Citi Energy, agrees that pricing is cyclical. “I do think that we do see a correction,” he says. “But if we do see a 30 percent correction from $150, it’s still going to be $100.”

Larry notes that in the face of high fuel pricing, aviation is the place to be. “Since this is about jet fuel and aviation, I think you’re on the right side of it,” he says. “You’re going to see that lower class that doesn’t travel a lot on airlines start to move away. Maybe you’ll get some budget carriers carrying those people, but you’re always going to see the upper class. It may not be as small as it was and grow bigger, but there will still be a lot of airline transportation travel because of that.”

Louise Burke, business developer at Argus Media, an independent energy news and price reporting firm headquartered in Houston and London, says there are many reasons for oil price volatility.

“We’ve seen the impact of credit markets,” Burke says. “There’s constant worry about our economy, about our U.S. dollar, and so that’s affecting prices. In the last few months we’ve had issues with Turkey and the Kurdish, and even last week oil closed just over $100 due to the assassination of a rebel Nigerian leader.”

Burke cites unexpected refinery outages and weather as other factors. “So these are all geopolitical tensions and facts that need to be analyzed in order to understand where prices are going.

“These create situations that are unavoidable that need to be monitored and analyzed.”

Burke says the good news is that some airlines are beginning to get proactive in understanding energy markets.

“At this stage of the game, as airline operating margins continue to get squeezed, we know that some airlines are accepting accountability,” Burke says.

“I mean that airlines — some of them, not all of them — are not playing the blame game of blaming market conditions, and are really working on strategy and drilling down deeper and understanding fundamentals.”
She says this approach is helping airlines predict future impacts on their businesses, just as they can predict seasonal surges and drops in travel on the demand side.

“This all contributes to a better understanding of issues that now represent 30 percent of their costs,” she says. “We think leaders in an industry do change in response to changing market conditions. And these really are survivors and are more likely to succeed.”

When John Armbrust, founder and chairman of Armbrust Aviation Group, asked panelists outright for a prediction of oil price per barrel next year, responses ranged from as high as $112 to the lowest at $78.48.

Meanwhile, the jet fuel alternatives market is making progress, though it’s not yet seen as commercially viable. In an interview, Ramin Abhari, M.S. Ch.E., P.E., senior process engineer at Syntroleum Corp. relates that synthetic jet fuel has been around for some time ­— South African company Sasol has manufactured it since the 1950s. Abhari says Syntroleum got into the synthetic jet fuel business when it was contacted in 2001 by the U.S. Air Force to make 1,000 gallons of the same type of synthetic fuel as what Sasol manufactures, using the Fischer-Trope process.

Since 2004, Syntroleum has produced more than 115,000 gallons of synthetic fuel at a refinery plant outside of Tulsa, OK. Abhari says the plant, which primarily produces diesel, made the jet fuel specifically for the Air Force.

He explains that Syntroleum’s synthetic fuel portfolio is growing. “Last year we announced a joint venture with Tyson Foods to build a renewable synthetic fuels plant to produce the same kind of isoparaffinic jet fuel and diesel by 2010,” Abhari says.

The partnership with Tyson Foods will collect low-grade waste fats and greases [think used fryer oil] and convert them into fuel. The plant will produce some 5,000 barrels a day.

“In the U.S., because the prices of those feedstocks have gone way up as a result of the biodiesel industry, at least in part, we’re using waste fats and greases,” Abhari says. “There is a pecking order in the animal fats and what they use them for. Close to the bottom is pet food use and whatever the pets don’t eat, that’s the kind that they essentially throw away. And that’s the kind that we use for this process.”

Abhari says that though the market for these fats is larger than some might expect, it won’t be enough to solve any larger issues.

“We’ve estimated that there’s easily enough of these to supply about the equivalent of 100,000 barrels a day, which is like a large petroleum refinery,” Abhari says.

“There’s not enough of it out there to really make a big impact in the big picture of petroleum products demand.”

He says the next generation of synthetic fuel his company is focusing on will use biomass from wood chips and paper mill wastes, which will provide much more feedstock for converting into fuel — “enough to get more than a third of all the petroleum that is made in the U.S. So now we’re talking something that makes a big impact.

“The reason that we’re excited about this process is that it’s relatively low-capital and it’s something that, we’re not talking billions of dollars to build a large plant. We’re talking just millions, about $100 million to build a plant. It’s significantly less expensive.”

But in spite of these advances and the U.S. Air Force’s push for synthetic jet fuel, the outlook for commercial synthetic jet fuel is much dimmer. The market, he says, just isn’t lucrative enough.

“Commercial aviation is very cost-driven,” Abhari says. “It seems to me it’s not as performance driven as military aviation. The lowest-cost jet fuel the airlines can get their hands on, they’ll use. Because of that we don’t think that we will be competitive unless there are significant government subsidies, like there is for diesel. Since today there is no subsidy for commercial aviation, at least to my knowledge; we just don’t think we’ll be cost-competitive.”

“The reality is that the [companies] that are making synthetics, with the exception of South Africa, they are more interested in diesel because it seems that the production costs are a little bit lower for diesel.”
Abhari cites Shell’s synthetic fuel plant in Malaysia as another example of this practice. He notes that both the demand and selling price of diesel is higher than jet fuel. “It’s much more economical for any fuel producer, synthetic or non synthetic, to produce and sell diesel than jet fuel.

“Nobody really wants to get into the jet fuel business.”