Supply and Demand

Supply & Demand Analysts look at the market for jet-A, avgas BY John Boyce, Contributing Editor June 1999 Many oil industry veterans will tell you that oil is one of the few commodities left whose price is as close to pure...


Supply & Demand

Analysts look at the market for jet-A, avgas

BY John Boyce, Contributing Editor

June 1999

Many oil industry veterans will tell you that oil is one of the few commodities left whose price is as close to pure dependence on supply and demand forces as you can get in today's global marketplace.

As one oil company executive puts it, "Simply put, as the cost of crude oil goes up, the finished product (price) goes up. As the supply of crude oil becomes abundant the price goes down and the price of finished product goes down. It's a direct relationship. True supply and demand."

Says another veteran, "The oil industry is probably one of the purest supply and demand markets in the world because you have one common product that is being sold."

In point of fact, only in the very early stages of the oil business did the marketplace operate completely unfettered as envisioned by Scottish philosopher/economist Adam Smith. And it certainly doesn't now with government oversight and alliances such as OPEC manipulating the amount of crude available on the world market.

But with all that, basically, if there is abundant supply of crude oil, as there has been over the past year or two, the wholesale prices fall, and that fall is reflected in the price to the consumer. When that supply constricts or is perceived to constrict, the price all along the pipeline increases.

"Crude prices have been extremely low for the past year or two," one executive says. "Because of that everybody has been enjoying a pretty low product price. You've been able to buy motor gasoline at a low level, aviation fuel at a pretty low level.... What was happening was that the price was so low that their (oil companies) cost base was getting eaten into, and they have been suffering."

OPEC AND CONSOLIDATION
With OPEC's recent announcement that it would cut back on crude production, the price of crude has slowly increased, based on the perception that supply would tighten. That has forced the price of the refined product to rise.

"Physically," says one oilman, "there is no change in the amount of oil in the world right now; it's just the perception that there is going to be less oil and that will increase the price.... Now, if it turns out in the next month or two that there isn't, indeed, significantly less product to sell, then the price of that crude is going to be bid lower and lower. In the long run, what will determine this, is if there is less crude being chased by the same number of buyers." The price will go up or down based on that factor.

Of course, nothing is that simple.

There are many factors weighing on oil supply and price. All oil producers have the option of capping some wells until the price begins to rise, for instance. Among other current factors, in addition to the presumed cutback in crude oil production by OPEC, are the the Asian and South American financial crises, which have stunted consumer purchasing generally and aviation fuel purchasing, specifically; refinery shutdowns on the West Coast, which have shortened supply and forced prices up; world affairs crises that call for greater consumption of military aviation jet fuel; mild winters that reduce the consumption of heating oil; and, the seasonal nature of driving and flying.

Consolidation among oil companies also will have a significant impact on fuel prices in the long term, according to many analysts. "I think it's like anything else out there," says one industry insider. "I think it has to make the price go up. I don't see any way around it. We've seen it in the airline business — consolidation and de-regulation. Any time you start pulling players out of the market, prices usually go up...."

Consolidation, analysts say, is a function of the low crude oil prices of recent years. Companies have to get their unit cost down to keep margins up.

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